Importance of SMSEs in developing countries

The private sector in developing countries is often the main provider of social services, such as health, education, water supply or housing. For example in India 78% of healthcare expenditure is private, 30% of urban children and 50% of rural children go to private schools. Please see Appendix 4 for details of how the private sector supplies social services to poor in developing countries (education and health in India).

This is not surprising.  Developing and developed economies spend approximately the same proportion of income on vital services - for example India spends 6.1% of GDP on health services while the UK spends 7.7%[i]. Yet since the tax take is much lower in developing countries than in developed countries. Public spend on the social sector is 20% of GDP in the UK[ii] compared to 7% of GDP in India[iii]. The difference is made up by the private sector. Private individuals account for 78% of health expenditure in India and only 17% in the UK.

More surprisingly, in developing countries public social expenditure is typically focused on the rich, not the poor. For example in India 32% of public health money goes to the richest fifth, while only 12% goes to the poorest[iv]. The rich are better at demanding their rights, both at the hospital door and at the ballot box, and governments often prefer to spend money on high-end services used by the rich, such as heart by-passes and university education, even when there are serious gaps in basic medicine and primary education. The consequence is that the poor in developing countries rely more on the private sector for basic services than anyone else.

The private sector also provides many services vital to the welfare of the poor, in sectors usually not considered 'social'. For example, the private sector provides agricultural inputs, determining farmers' productivity. The efficiency of (private) agricultural product markets determines the farmer's wages.

Most enterprises used by the poor in developing countries are small and part of the informal economy. This survey tries to understand these enterprises and identify how they can be supported.

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