In the first article of a two-part series, Yangon-based economist Andrea Smurra explains why a small- and medium-sized enterprise law is vital for development

The draft Small and Medium Enterprise Law, which will be debated during the current session of parliament, has the potential to transform almost 90 percent of Myanmar’s businesses by encouraging competitiveness and investment.

If it is effective, the legislation could ensure that Myanmar SMEs can meet the challenges posed by the opening of the domestic market and spur vibrant entrepreneurial activity that will generate growth, employment and innovation.

Little has been disclosed about the law’s most recent draft, the fifth since late last year, but several ministries, including the Ministry of Industry and the Ministry of Finance and Revenue, provided input. The drafting committee also received advice from foreign advisors and business associations on a law that fills a gap in the existing legal framework and will affect the entire economic landscape in Myanmar.

International experience underscores several key features that make such a law successful: it has to clearly identify the enterprises in need of support, avoid generating an excessive burden for the state’s finances and should prioritise incentives and promotion over subsidies.

Three questions provide a starting point for debate in parliament and society as a whole: Why does Myanmar need an SME Law? What should its objectives be? How can they be accomplished?

SMEs are a principal source of employment globally. Research has also shown that they have been immensely creative and innovative, increasing a country’s ability to produce a diverse range of goods and services and making its economy more resilient to global commodity price fluctuations and macro-economic shocks.

In Myanmar, SMEs account for 88pc of all businesses. They face, however, several barriers – mainly fixed costs. For example, complying with tax requirements demands resources. Health and safety regulations also often require large financial investments that have to be paid upfront.

Firms also need collateral to access credit, as well as experience with financial institutions and, again, complex accounting systems. Labour regulations might also be too stringent for such small and dynamic enterprises. More generally, lack of experience and managerial skills can pose considerable obstacles to success. SMEs are also generally more reliant on publicly provided services and infrastructure, because private alternatives are too costly relative to their size.

Beside helping SMEs overcome obstacles, effective SME laws are vital for harnessing the sector’s developmental benefits and opportunities.

The need for such a law in Myanmar has been made more urgent by last November’s Foreign Direct Investment Law, which grants considerable tax exemptions to increase the inflow of FDI. More FDI will deliver important gains for Myanmar, including capital for investment and jobs, and transfers of technology and managerial expertise that could increase productivity. However, the incentive structure created by the FDI Law is set to fundamentally alter Myanmar’s business environment.

Because they have more financial and human capital, as well as better access to international markets and information, foreign investors already possess significant advantages over local ones. The tax holidays granted to foreign joint-ventures under the Foreign Investment Law will make it even harder for domestic SMEs to compete with them.

Recognising the need to level the economic playing field, the government has devoted a considerable amount of effort into the drafting of the new SME law. The law aims to prevent small businesses from being crushed by bigger competitors and allows them to deploy their creative potential and generate valuable job opportunities. To accomplish this, the government has a number of options in terms of incentives and policies.