The small and medium manufacturing sector is the most important component of informal economy all over the world. It is comprised of heterogeneous types of activities but its components can be found in all sectors of the economy.

However, sectors like trade, transport and small enterprises tend to have by far the largest share of informal sector owing to the limited absorption of workers in the large scale manufacturing and corporate sectors and the fact that the majority of workers seeking employment are unskilled.

With the diminishing role of the public sector in employment generation and the limited capacity of the formal private sector to absorb the growing labour force in most developing countries, a large proportion of labour force turns to the informal sector for employment.

For example, the share of the informal sector in urban employment was estimated at 72 percent in Indonesia, 57 percent in Myanmar, 79 percent in Pakistan and 62 percent in Thailand.

Informal sector is characterized by low productivity, lower wages, long working hours and lack of protection from exploitation. There are many factors which are responsible for enormous growth of informal sector in developing countries including Pakistan.Some of these factors are :

* Improved infrastructural and transportation facilities have made the mobility of workers even more easier, adding pressure on labour markets in the urban areas.

* Growth in the formal sector also provides impetus to the growth of the informal sector owing to complementary linkages between the two sectors. At the same time, the SME's has found its own niche markets where it can provide goods and services cheaply and thus meet the demands mainly of the lower income groups.

* The inward looking policies coupled with fiscal incentives mostly provided to large-scale manufacturing in developing countries resulted into allocation of resources towards capital intensive activities, which generate relatively less employment opportunities. Therefore, a large proportion of labour force turns to the SME's segment of informal sector for employment.

Most of the enterprises in the small and medium establishments operate as single-individual enterprises, with the family orientation of these enterprises being pervasive.

A large number of these enterprises are housed in the residence of owner or located in open areas with no permanent structures. The small and medium entrepreneurs often subcontract to both operating in the formal sector. The

small and medium sector contributes positively in skill acquisition in the economy through a system of the informal apprenticeship, which is beneficial to both the employer and the apprentice.

The employer gets low paid worker and the worker acquires skills, which are otherwise unaffordable for him. With respect to the characteristics of informal workers, the proportion of migrant workers (that is those not born in the city) tends to be larger in the informal sector than in the rest of the economy.

According to one study, 70 per cent of the informal labour force in Dhaka and in Thailand workers has migrated from rural areas in search of better jobs and a higher income.

Another important characteristic of participants in the informal sector is the low level of education. In addition, children, the elderly and females tend to be over-represented in the informal sector compared with the formal sector.

The major source of funds in all the activities of the informal sector is family savings. There is therefore a need to channel more credit through formal financial institutions. It is generally agreed that access of credit, not the cost to credit, from financial institutions is the problem to be addressed.

Credit should therefore be provided at market interest rates with no subsidization as experience shows that most of the subsidized credit is expropriated by influential persons.

Innovative approaches to circumvent the main hurdle of collateral in obtaining credit are also required. One approach, the group guarantee system, is being used by the Grameen Bank of Bangladesh.

The same or a similar approach has been replicated in many other countries, including Bhutan, India, Indonesia, Malaysia, Nepal, Pakistan, the Philippines and Sri Lanka.

Non-governmental organizations can also provide assistance in identifying the needy small and medium entrepreneurs and in helping them in the process of loan application and approval. Procedures for obtaining loans should be simplified.

The regulatory mechanism for the SME's is very poor in most of the developing countries. Informal enterprises are regularly harassed under the pretext of the prevailing rules and regulations.

Many of the small & medium units do not have fixed workplaces and often work on the footpath. Such harassment negatively impacts on the development of the SME's. There is a need to abolish excessive regulations; fewer regulations would make compliance easier.

The unity of the traders and formal sector often put pressure on the government to seek concessions but heterogeneity of the SME's makes the establishment of business associations or groups a difficult task.

However, it is possible for the SMEs with similar problems or from the same sub-sectors to form associations or self-help groups, such as artisan associations, occupational associations and area-based organizations, with the aim of addressing many of the problems being faced by the small & medium sector.

Through these organizations, they can better articulate their problems and needs. Non-governmental organizations can and do help in forming these associations efficiently.

The SMEs in the developing countries are both large and growing. Considering its potential in generating employment opportunities; the government should promote the SME's by enhancing availability of formal credit, imparting education and training to increase productivity and augment earnings of the informal work-force.

More emphasis should be placed on the development of working skills than on entrepreneurship, priority should be given to the provision of basic education which makes the acquisition of vocational training easier and also enhances the mobility and flexibility of workers.

Governments all over the world including Pakistan recognize the important role of the informal sector in an economy. One of the major component of informal sector is SME's which is regarded as the breeding ground for new entrepreneurs and instruments of employment promotion. There are various advantages associated with SMEs.

They are relatively more labour-intensive and therefore create more jobs which help mitigate poverty. They encourage personal savings, contribute to exports and create new industries. They are also more innovative and flexible.

It is in this background that the Government has selected the SMEs as one of the major drivers of growth along with agriculture, oil and gas, construction and information technology. This is essential for providing initial impetus to industrialization.

The experience around the world suggests that the SMEs have played an important role in industrialization of the country. For example, Japan's industrialization in the 19th century and East Asian miracle of the 20th century are typical examples of the role that the SMEs have played in that part of the world.

SMEs have played an important role in the development of Singapore as well. Despite the image of a thriving economy of large enterprises, it is interesting to note that SMEs account for 90 percent of the total establishments, 44 percent of employment, 24 percent of value-added and 16 percent of direct exports in Singapore. If the government is serious in implementing various policies to assist the development of SMEs, the assistance can take different forms.

For example, the government has been revitalizing the SMEDA to provide consultancy and advisory services to SMEs on business opportunities and international trading possibilities on the areas of gems, jewellry, marble, fisheries, and other non-traditional exports in particular and informal sector in general for the last four years. However, SMEDA has failed to make an impact in promoting small businesses in Pakistan in spite of immense resources on its disposal.

The government has also committed to provide financial assistance to SMEs and in this connection adequate flow of credit to this sector has been assured through specialized micro finance banks. The performance of micro-credit banks is not up to the mark-up till now and they had not shown any prospects to play instrumental role in promotion of SME sector.

The key strategy for the future development of the SMEs should be in linkages between the SMEs, vertical linkages with large firms, and linkages with regional and global firms. With government-support, sub-contracting arrangements between large firms and SMEs have been successfully implemented in East and South-East Asian countries.

There is a need to encourage such types of endeavour in Pakistan. Indeed, the promotion of inter-firm linkages can be a major form of marketing assistance to SMEs, although marketing is not the only component of such linkage schemes.

The commercial banks are hesitant in extending credit to small entrepreneurs because of host of problems like transaction cost and risk factor. But the banking system should capitalize on excess liquidity available with them. The banks in this way will serve the national cause of industrial development and this will augment their incomes.

Pakistan is the country with immense SME potential. The prospective investors are rich in ideas but the only things lacking is adequate financing and to spark the ideas. The idea behind SMEDA was thus commendable but the performance of the institution can be termed lacklustre at best.

The government should form a task force with a mandate to assess the problems being faced by small entrepreneurs and identify the areas of strength. This will not only generate employment opportunities all over the country but also produce exportable surplus to sell in the international market. SME is the area which is crucially important to alleviate poverty and kick-start the industrialization in the country.