Thursday, 28 January 2010

The best hope for the economy

John Mangun
Outside the Box
Business Mirror
http://www.businessmirror.com.ph/home/opinion/21432-the-best-hope-for-the-economy.html

Answer a hypothetical question. Would you rather have the potential of you being wealthy in the future held in the hands of Henry Sy and Bill Gates or depend on Barack Obama and Gloria Arroyo?

Nothing particular against Presidents Obama and Arroyo, but they do represent and embody “the government,” whereas Sy and Gates represent and embody “private enterprise.”

In fact, Sy and Gates symbolize more than just the private sector. They are, or at least were, small and medium enterprises (SMEs).

SMEs are the heart, soul and economic driver of every capitalist (as opposed to socialist) economy. And SMEs do a fantastic job of wealth creation and raising the standard of living of the people, no matter what the moron leftists and liberals proclaim. In the handful of countries that do everything they can to control if not destroy SMEs, the rich, meaning government officials, get richer and the people stay stuck or fall lower. Even in those countries that proclaim to be socialist, the SMEs are still the economic engines.

When the SMEs do not function properly, even in a free economy, things turn for the worse and stay bad very quickly. Notice the US economy right now.

Even after more than $1 trillion has been pumped into that economy, it is still dead. Public-works projects are not self-sustaining. Nor do they generate enough bang for the buck compared with that money going to SMEs. In one major US city, the government spent a few billions building a state-of-the-art light-rail transportation system. Yet, the government money spent to build and operate it could have literally bought every annual passenger a brand-new car. And spending that money on brand- new cars would have been self-sustaining and created wealth because of all the jobs created building those cars. Further, some smart guys would have taken their new free cars and turned them into taxis, creating more wealth. See how it goes?

The problem in the US, vis-à-vis the SMEs, is that the government there gave the banks billions and the banks acted like they were a government corporation. From CCNMoney:

“The nation’s biggest banks cut their collective small business-lending balance by another $1 billion in November. The 22 banks that got the most help from the Treasury’s bailout programs have cut their small business-loan balances $12.5 billion since April. Small business owners are still reporting difficulty finding banks willing to extend the credit they need to launch, run and grow their ventures.”

Without SMEs, no economy can prosper no matter how much money the government throws into the system. It is like buying P1,000 worth of gasoline and pouring it onto the street. No matter how much you spent, it is not going to run anything.

Banks in the US are starting to act like banks in the Philippines when it comes to SME lending; they do not lend logically and efficiently to the SMEs.

The Philippine economy absolutely depends on SMEs. In fact, as in the US, 90 percent of all businesses in the Philippines are classified as SMEs. And banks hate SMEs or at least act as if they do.

The “small” of the SME is classified as a business with a capitalization of between P3 million and 15 million. Medium is between P15 million and P100 million. Forget the “mediums” for a moment and let’s concentrate on the “smalls” because that is where 90 percent of all businesses begin.

Virtually all of the household business names in the Philippines started small. Jollibee, Max’s Chicken, Shoemart and most of the others you can name started as a “small.” And notice also that most of these household names started many years ago. Granted, walk the corridors of the Mall of Asia and you will find hundreds of companies that made their mark, but most did it with private capital, meaning, money raised not from the banks or the government.

Local banks won’t even consider a loan unless the SME has been profitable for three years and has collateral assets equal to or greater than the value of the loan. It is during the start-up phase that these companies should be supported.

Now here is where the government can play a huge and important role. Instead of dumping P300 billion into the Philippine economy in stimulus money, the government should have set that aside for start-up and SME businesses. From the beginning, the government should write off P30 million or even P100 billion of those funds as worthless loans for those businesses that fail. But I guarantee you that the rest of the money would have created potentially tens of thousands of successful businesses that, in turn, would have created hundreds of thousands of direct and indirect employment, lasting years, not months, as in the case of government infrastructure projects.

Poverty will never be ended through government giveaways. Wealth will never be created through government spending. And how much can a Filipino SME expect from the banking system? The International Finance Corp. says SMEs get between 11 percent and 21 percent of their total funding from the banks, with start-ups receiving much less. By law, banks are required to set aside at least 8 percent of their loan portfolio to SMEs. But through their lending restrictions, the banks fail at reaching that 8 percent.

It is time the government took over properly by establishing a reasonable and generous lending facility to make up for the private-banking sector shortfall of nearly P200 billion per year. Then you would see this economy boom dramatically as Filipino entrepreneurship kicks into high gear.


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1 comment:

  1. The economy is rough and lenders really need to start lending out to these small businesses that need small business loans in order to maintain their business.

    ReplyDelete