Ram Dwarka

Document Sample
Ram Dwarka Powered By Docstoc
					             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

                                                   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 :

                                           Paramaribo, June 2011
                                                                             2.   The increase in costs, that squeezed the profit margins.
Economic Diversification: The role of SMEs
and Governments in generating growth and                                     3.   Financing difficulties

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

Shared By: