SBA's direct loans should be confined entirely to special purpose areas specifically designated by Congress. For example, loans to businesses operated by the socially or economically disadvantaged can be justified in the national interest, as can loans to businesses owned by handicapped persons or to businesses displaced by governmental actions.

SBA makes loans to minority enterprises, under relaxed

eligibility criteria, to try to correct the imbalance in minority ownership. Even here, however, the ability of loans to achieve the desired purpose is questionable.

Minorities make up 17 percent of the population but own only four percent of the businesses and these do less than one percent of total dollar business. It would take over a century to rectify the imbalance at the present rate of improvement. The failure rate is especially high among minority business start-ups.

This is a clear reflection of the need for stronger management

of minority business, rather than for easier credit.

SBA should operate on the theory that under normal conditions

of liquidity banks will make any legitimate loan. As matters stand,

a loan application must be rejected by commercial banks before the borrower is eligible for SBA loan support. This gives the borrower an incentive to get rejections from banks because SBA direct loans have a lower interest rate. Through this loophole much evidence of the banks' willingness to lend to small business manages to escape notice.

There is, of course, a sizeable gray area between acceptable and unacceptable banking risks---an area of marginal cases and of requirements for unusually long terms. This is a proper place for SBA support, but not necessarily for the form of guarantees in which the agency is now specializing.

It would be entirely feasible, in my opinion, to develop an insurance program that would attract all the private financing that is now being generated by SBA's loan guarantees. By this means, SBA could be relieved of an enormous administrative burden associated with its involvements in investigations, loan decisions, auditings, collections, reschedulings, defaults, foreclosures and other details that now account for about 60 percent of the agency's total work load.

The banks would deal with loan delinquency problems, possibly using outside collection agencies, and SBA would come in only after liquidation proceedings, to make up the losses.

Under such a procedure, premiums could be made commensurate with the risks. Such factors as worth-debt ratio and extent of

business experience could be taken into account in fixing the cost. Coverage could range down from 90 percent to perhaps 60 or 50 percent, as desired. Stringent ceilings on annual volume or activity, such as are now imposed on guarantees, would not be needed.

Possibly the private insurance industry would want to take over the operation of all or part of such a program as it did the export credit insurance facility of the Export-Import Bank through the FCIA arrangement.

In any event, when it comes to providing back-up assurance that will cause banks to take extra risks, insurance can work as well as guarantees.

The really critical need of small business is for management assistance, the scanty supply of which is a national disgrace.

Studies suggest that perhaps half of small business failures--200,000 of them each year---could have been prevented by timely help with management problems. Further studies indicate that each small business provides, on the average, employment for four persons. The loss thus assumes the proportions of 800,000 jobs a year. This does not take account of the secondary effects of business failures; the additional machines that were not purchased, the materials that were not consumed, the construction that did not begin, the tax revenues that were not generated.

There is still more involved. SBA analysts estimate that in addition to the failures, another 800,000 struggling entrepreneurs whose activities are nothing more than job substitutions, could be strengthened and stabilized by management assistance, and that another million going businesses would grow and provide more jobs with the benefit of good management counsel.

This weakness is cutting into our national productivity. It is one of the reasons why the U.S. ranks last among the 11 leading industrial nations in its rate of productivity increase. From 1960 to 1973 our increase averaged 3.4 percent a year while Japan set the pace with a rate of 10.5 percent. Even the United Kingdom maintained a 4 percent rate, and productivity in that country is so low by comparative standards, that the British share of the world market for manufactured goods has dropped from 33 percent to 8 percent in the past 20 years. Comparisons of the U.S. rate must allow for the much higher state of our productivity when the others started catching up, but we still suffer in the contrast of recent years.

What is most embarrassing is that much of the improvement abroad was achieved through Productivity Centers, an idea that we ourselves inaugurated in Europe after World War 11, but failed to apply in our own country.

Our Economic Cooperation Act of 1943 founded Productivity Centers in 11 European countries. The activities conducted there

included exchanges of technical information, research into specific productivity problems, and training of management and labor. The idea spread to Japan and, by 1961, to 14 Asian countries. It has been extensively refined and broadened into cooperative efforts by business, government and education to attain new national heights of industrial efficiency, and thereby to gain price advantages in world trade. To take specific examples, in Japan and Great Britain today, anyone planning to start a business will be offered an intereview to determine his need for specialized knowledge in such fields as law, accounting or marketing. The education will be provided without charge, after which a Certificate of Preparedness will be issued to make the entrepreneur more creditworthy at a bank. The government does not provide any support for loans, however.

While economic conditions in the U.K. vitiate the advantages

of such

program there, the fact remains that the British are ahead of us in recognizing and dealing with the real nature of the small business problem. Here, as well as in the U.K. and everywhere else, the small company exists not just for its own benefit, but for the general welfare.

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