Anton de Kom University of Suriname
Faculty of Social Science
The 4th Biennial International Business, Banking and Finance Conference on the theme
Restoring Business Confidence and Investments in the Caribbean
June 22 – 24, 2011
‘Diversification and opportunities for growth and development in emerging economies’
Economic Diversification: The role of SMEs and Governments in generating growth and
development
Author : Drs. Ramdath Dwarka
Affiliation: Economist, Senior Lecturer &
Head Department of Economics
University of Suriname
Adress : Leysweg 68
Paramaribo, Suriname
Phone : 597- 465558 ext 487
Mobile : 597- 8798871
E-mail : dwarkasr@yahoo.com
r.dwarka@uvs.edu
Paramaribo, June 2011
Economic Diversification: The role of SMEs
and Governments in generating growth and
development
ABSTRACT
The world financial crisis has put a huge damper on almost all
economies of the world.
Large countries such as Greece and Spain, with reasonable
economies almost went bankrupt. Even the most developed and
most industrialized countries with the strongest economies such as
Germany, United States of America etcetera have suffered from
the financial downturn . These countries have never abandoned
the courage but continuously searched for opportunities to have
their country's economy on the rail again. They start getting
success in it, because the economy of most of these countries are
growing step by step. Entrepreneurs and investors who had lost
confidence in the economy have become optimistic again. They
invest in various products and have penetrated different new
markets for the same products. The Caribbean states have also
suffered from the world financial crisis. They should not invent
the wheel again but can learn from these countries how to build
the economy again.
There are many opportunities to restore the lost business
confidence and attract investors to do business in the Caribbean.
INTRODUCTION
The financial crisis has affected the economies of almost all
countries in the world. The countries with a poor economic
diversification have suffered more than those where they have a
relatively well diversified economy. Both local and foreign
entrepreneurs in many countries have gone bankrupt. According
to the Puerto Rico Boletín, a local bankruptcy-data-gathering
service, there were 953 bankruptcies filed on the island in
February 2011 [1]. And as Mark Zandi, chief economist at
Moody's Economy.com has said, people are panicked, and they
want something as close to the mattress as they can find [2]. They
will rather be safe than sorry and stop their businesses and
enterprises because they don’t have confidence in business
anymore. Can economic diversification be the answer to restore
business confidence, so that growth and development can be
achieved again in the emerging economies? And if yes, what will
be the role to play for both the Small and Medium Enterprises
(SMEs) and the local governments?
THE CASE
Arnold, D.J. and Quelch, J.A. (1998) defined an Emerging
Economy as a country that satisfies two criteria: a) a rapid pace of
economic development and b) governmental policies favoring
economic linearization and the adoption of a free-market system
[3]. According to this definition, China and India are the two
largest emerging economies. The impact of the world financial
crisis on the business, but especially on the SMEs in China was
also immense. Some of these impacts are (4):
1.
Market decline in aggregate demand. This meant
decline in export volume which resulted in ceasing
operation or even bankruptcy.
2.
The increase in costs, that squeezed the profit margins.
3.
Financing difficulties
To avoid the SMEs going bankrupt, the government took some
actions. It created facilities both for restoring the business
confidence and getting finance. First of all the government created
a special fund to develop a small business loan interest subsidy
system. Second the government asked relevant government
departments to guide Scientific Research Institutions, colleges and
Universities with the SMEs ‘production and research’
combination of technological innovation for SMEs to provide
credit support to facilitate the transformation of scientific and
technological achievements.
Figure: gaining business confidence
Third, the Premier personally
motivated the SMEs with his
very popular saying ‘confidence
is more important than gold and
currency, confidence is a source
of strength to overcome the
crisis’.
The SMEs took this at heart
and worked out their internal
strengths into success to survive the financial crisis.
[5]
The Indian case is almost the same as in China. A great number of
SMEs in manufacturing sector has been badly affected
particularly who have been mainly in exports, such as Gem &
Jewels, Textiles, Leather & Leather Product, auto Components,
Coir & Coir Product etc. Not only the orders of SMEs were
canceled but also their receivables were not realized resulting in
squeeze of bank credit, layoffs and loss of production. Most of
the companies could weather the storm and these SMEs are on the
recovery path. Some of them had to re-engineer business, find
new customers, dig into their savings and borrowed from their
friends and relatives. The Indian government has always
supported the entrepreneurs [6].
1. In order to provide a contra-cyclical stimulus via plan
expenditure, the government had decided for additional plan
expenditure of some billion Rupees in 2008-2009.
2. Pre and post-shipment export credit for labor intensive exports
for many sectors was made more attractive by providing an
interest subvention of 2 percent up to 31st March 2009 subject to
minimum rate of interest of 7 percent per annum.
3. An additional allocation for export incentive schemes was
made.
4. Government back-up guarantee was made available to enable it
to provide guarantees for exports to difficult markets/products.
5. Exporters were allowed refund of service tax on foreign agent
commissions. They were also allowed refund of service tax on
output services while availing of benefits under Duty Drawback
Scheme.
These two giants can’t be compared with the Caribbean states.
But still we can use their skills and knowhow to reorganize our
economies. These two countries have been able to bear the pain
of the youngest financial crisis. The SMEs have had full support
from the local governments. The erosion of business confidence
could be stopped on time. The lost business confidence was
restored again and entrepreneurs started investing again in their
countries. Employment was created in all the sectors. This means
that employment is distributed quite evenly. The case is different
in the Caribbean countries. The vast majority of the workforce is
employed in sectors that are relatively less economically
productive and of secondary strategic importance in sustainable
development. Governments are the biggest employer in these
countries. This means a majority of workers are laboring in
sectors that are supporting other economic sectors, rather than
driving growth themselves. Countries with this type of labor
distribution may suffer economically.
Researches have shown that China is the most diversified
economy in the world [7]. Despite a well-diversified economy,
these countries are desperately looking for possibilities to make
this even better. As I have mentioned in an earlier presentation [8]
economic diversification is not only when a country has incomes
from many different sources that are not directly related to each
other, but also the export of one or a few products to various
countries (export markets). Even if some sources are suffering,
other, more competitive sources will keep the economy relatively
healthy. And this is exactly what China and India are doing now
days. They are penetrating even the smallest market that is
available. They increase the production volume and export to
nearly all over the world. They get all the supports from the policy
makers in doing business. The government benefits from this
development, because it creates employment and it leads to a
great spin-off effect. Supply companies also benefits from this
development. And don’t forget the tax and other related income
for the government.
Even though policymakers, managers, business groups,
entrepreneurs, economists and others are aware of the benefits of
a well-diversified economy, history shows us that most Caribbean
countries, but especially the Small Caribbean countries, suffer
from a lack of output and export diversification. Most of these
countries are continuously working forward in diversifying their
economy in such a way that makes them less vulnerable to
changes in the world economy. And even though, judging from
the data on foreign reserves, exchange rate changes, tourist
arrivals and inflation, the Caribbean’s worst fears about the
impact of the global economic crisis have not been realized so
far, we must be alert for these kinds of international economic
downturns. The Economy of Jamaica has been affected the most
by the global crisis so far, with significant exchange rate
depreciation and some loss in foreign reserves. The performance
of the more diversified Caribbean economies such as Belize,
Guyana, Suriname and Trinidad and Tobago is quite respectable
[9].
This financial crisis is an eye opener for the governments, the
entrepreneurs, managers and all investors. Petrified by the
decrease in sales, profit and other threats which come along with
this financial crisis managers often overlook that the crisis also
offers significant opportunities to increase business performance
which are hiding in most enterprises waiting to be retrieved. And
as Praveen Annubhukta once said “recession is a better tool for
SME's to grasp better opportunity and work with big ones. This is
going to bring uniformity and good competition among entities to
provide the best product/ service at the lowest possible rate” [10].
The financial crisis offers chances to reduce procurement costs.
There are more chances which enable companies to exploit
favorably the economic situation. But to successfully implement
them, the right tools and the latest business know-how are
required.
Governments of these emerging economies have become aware
that they have to play the role of facilitators better than ever. They
have learned that the government alone is not able to achieve
growth and sustainable development. They need all the other
sectors that are or have the potentials to be economically
productive. A poor economic diversification tends to have an
unfavorable effect on the productivity and competitiveness of the
other, lagging sectors. Low productivity levels translate into high
costs to produce goods and services. That in turn has a direct,
negative effect on competitiveness, slowing economic growth and
threatening a nation’s long-term and sustainable economic
development [11]. We can conclude that there is a clear link
between economic diversification and sustainable development.
Knowing this, both the governments and the entrepreneurs, and
especially the SMEs, have to do their utmost to realize economic
growth and sustainable development.
The jobs to be done by the SMEs:
Most of the companies, entrepreneurs and other businesses in the
Caribbean can be categorized as SMEs, producing different goods
and services. These SMEs can’t compete with the large foreign
companies. The entrepreneurs don’t always comply with
international rules and laws. Quality requirements, such as ISO
and HACCP standards, environmental rules etc. can’t always be
met. The ability to invest in quality is very low. The output is
usually not large enough to fully satisfy the demands of customers
abroad. This means loss of opportunities for growth and
development for these emerging Caribbean countries. Once the
Members of the Competitiveness Council agreed that the SME
sector is the engine of development and job creation [12]. Leaving
these SMEs without support can lead to large-scale failures in the
economic tissue as well as to unpredictable social consequences at
the macroeconomic level. Except that they get support from the
government, they also have to look in their own environment for
solutions. What can be done:
a.
b.
c.
d.
Small and individual entrepreneurs producing the same
goods and services can form business groups, the socalled SME clusters. Especially when there are potential
export markets. The access to bank loans will be easier,
because the bank guarantees will be higher.
Forming business groups will also mean a certain
degree of risk diversification. This will also help
reducing procurement costs (saving freight costs,
storage costs etc.) The ability to invest in quality will
increase. They can easily meet customer demands
abroad, because they will be able to increase their
production.
The lack of knowledge, experience and talent has to be
abandoned by participating in seminars, trainings and
workshops, organized by local business associations or
the government. They will be able to make their own
business projects and can represent this to the banks
properly.
They can ask assistance from the local business
associations, because these associations have
connections with all kind of businesses, buyers,
suppliers etc. This can help them getting better access to
international business markets. Especially for growthorientated SMEs, export will be an important strategic
option to achieve continued business growth. They have
to know that export does not only facilitate sales
e.
f.
growth, it offers a range of other advantages such as
expansion of customer base, reduction of dependence
on few major customers, opportunity to even out
regional business cycle-related demand fluctuations and
additional growth opportunities for niche products, for
which the local market is limited.
They have to pick up networking seriously, because it is
vital for meeting new customers and contacts, and
gathering information and advice. It’s one of the easiest
ways to generate new business. They must, more than
ever, use the opportunities ICT offers.
The SMEs must set timeframes and mechanisms for
implementation of all measures they plan.
The jobs to be done by the governments:
We are all aware of the precarious financial situation of most
Caribbean countries. So, we can’t simply expect from the local
governments to do magic and, for example, subsidize the SMEs
with the scarce resources they have. But still, there is a lot of
homework to do for these governments. They surely understand
that SMEs definitely have a vital role to play in cushioning the
fall-out from the financial crisis and strengthening the foundation
for long-term growth and development. What can be done:
a. They have to recognize those SMEs that have a great
contribution to employment, income generation and
economic development. Because each government is
committed to good governance, they first of all have to
restore the business confidence. A good public-private
relationship has to be created. This means that
policymakers have to put in place more transparency
and focused policy.
b. They have to work on governmental laws and policies
to get a good and attractive investment climate. The
barriers for’ exporting’ companies, both at home and
abroad where they deliver their products have to be
eliminated. By doing this, both local and foreign
companies, investors and others will be interested in
investing in these countries again. So to realize
economic growth the governments have to becoming
more business-friendly. Reducing the time required to
issue permits is an important thing that the governments
can do to become more business-friendly. They also
have to reduce the time it takes to start a business.
c. Despite the existence of the CARICOM, ‘market
access’ is still a problem. Local governments must
ensure that all CARICOM members adhere
to the agreements made within the CARICOM.
d. Monetary authorities could make sure that state owned
banks provide uninterrupted financing for SMEs and
commercial banks that receive liquidity support from
Central Banks maintain or even increase present levels
of funding for these SMEs. A banking sector providing
loans at low cost is probably the most important factor
in the development of SMEs.
e. Government back-up guarantee must be available in
case companies get problems exporting their products
f. The government must take some tax relief
measures, including reduction of import duties on raw
materials, so that SMEs can compete with other large
companies.
g.
h.
The government must assist the development of
registered SMEs while discouraging the
unregistered SMEs. Due to the legal requirements
of government contracts, SMEs hiring unreported
labor and evading taxes would not be able to
participate in bids for procurement contracts issued
by the government.
The government can create an environment which
will be effective in the long run such as improving
education, training and development of SME
clusters.
I hope that this information can be used positively by the
entrepreneurs as well as the policymakers of especially the
Caribbean states to develop the SMEs more than ever, because
there are several benefits of these kinds of entrepreneurs. All the
parties have to understand that there is a strong link between
economic diversity and sustainability, and that economic
diversification can reduce a nation’s economic volatility and
increase its real activity performance.
ACKNOWLEDGMENTS
I’m grateful to The Department of Management Studies, The
Caribbean Centre for Money and Finance and The Sir Arthur
Lewis Institute of Social and Economic Studies at The University
of the West Indies (UWI), St. Augustine Campus, for inviting me
to be part of this conference. I thank the Anton de Kom University
of Suriname for the support they have given to me to attend this
conference. Further am I thankful to the Surichange Bank of
Suriname for their support.
REFERENCES
1.
http://www.caribbeanbusinesspr.com/cb_content/news02.php
?nw_id=5234&ct_id=3
2.
http://www.usatoday.com/money/industries/banking/200811-02-banks-safe-deposits_N.htm
3.
http://www.sba.muohio.edu/management/MWAcademy/200
0/4a.pdf
4.
http://eng.hi138.com/?i166221 The financial crisis on the
impact of SMEs in China and Countermeasures
5.
www.caribbeanbusinesspr.com/cb_content/news02.php?nw_
id=5234&ct_id=3
6.
http://www.online-artikel.de/article/impact-of-the-globaleconomic-crises-on-smes-in-india-55822-1.html The
Government has been concerned about the impact of the
global financial crisis on the Indian economy and undertook
steps described below
7.
http://team.univparis1.fr/teamperso/berthelemy/Cours%20Berthelemy%20E
ED%20La%20mondialisation%20chapitre%206.pdf
8.
http://sidsgg.webs.com/procedures2010.htm
9.
http://www.ccmf-uwi.org/files/publications/newsletter/
Vol2No6.pdf
10. Praveen Annubhukta Manager ‐ Business Development /
Sales at NewStar Software Services Inc.India
11. http://www.booz.com/media/uploads/EconomicDiversification.pdf
12. http://www.eucommerz.com/a/0794_growth_friendly_enviro
nment_for_smes