POLICIES TO SUPPORT SMALL AND MEDIUM SIZE ENTERPRISES (SMEs) FOR ECONOMIC DEVELOPMENT
- FEALAC should sponsor a new level of dialogue on SME policy;
- FEALAC Senior Officials could consider the possibility of directing the relevant working group to focus on the specific challenges for SME policy in the FEALAC region;
- Senior Officials could consider the possibility of a formal study on ways to promote SME development that might build on this information exchange;
- The working group should consider the potential for training programmes at the regional or inter-regional level;
- The working group might look at ways to promote private sector participation in this dialogue;
- Thought is given to establishing a FEALAC website to assist in this process.
1. Actual Situation
In discussing the current situation with regard to policies to promote the economic development of small and medium enterprises in the East Asian region, we found that the differences between countries were as great as the similarities across the region. For example, the policies of countries such as New Zealand and Korea were directed at encouraging SMEs to export, while those of countries such as Cambodia were directed at encouraging foreign investment in domestic SMEs. Nonetheless, there were some important similarities in government policy across the region. Governments were implementing policies that sought to address similar problems faced by SMEs in each country. Although the definition, form, and productive orientation of SMEs were different in each country, the problems faced were often the same. These problems included access to finance and credit; training and human resource development; access to technology; assistance with research and development; the impact of government regulation (compliance costs); the impact of government commitments in the WTO (especially for developing countries); limited information on possible markets and clients; weaknesses in transportation and infrastructure; and the impact of external factors such as the broader economic climate. Governments were attempting to address these problems within the constraints of tight national budgets.
(2) Latin America
The accelerated globalisation process and trade liberalisation-taking place in the international economy provides many challenges and opportunities for Latin American countries. In this context, SME participation and growth will be critical to Latin America's future growth and development. SMEs represent a very important share of economic activity in the region and also are a significant employer of the labour force. Specific problems include access to and cost of credit; the technological divide in the region; lack of skills among workers to use technology to their advantage; access to capital; government red tape and the need to promote transparency; and the unpredictability of the economic environment; among others.
2. Common Problems
It is clear from the two preceding paragraphs that there are a number of common problems or challenges faced by SMEs in the FEALAC region. These problems are discussed below:
- Lack of credit/finance/capital - the cost of capital is often prohibitive, and in times of economic uncertainty, lenders tend to be very risk averse.
- Access to technology - the digital divide is a significant problem in many countries. Improving access to technological networks of international standard is also very expensive.
- Training/human resource development - this covers both on-the-job training and the broader education system. There is a strong need to improve skill bases in a range of areas.
- Funding for research and development - SMEs lack assistance both for developing new ideas and turning these ideas into commercial products.
- Extent of government regulation/compliance costs - this can range from taxation and reporting requirements to laws to promote occupational health and safety or to end discrimination in hiring practices. The cost of complying with national and international standards (e.g. ISO) can also be very expensive for SMEs. Government policy should be directed at increasing and promoting transparency across all areas of the government sector.
- WTO commitments - especially for developing countries, compliance with government commitments in the WTO (such as TRIPS etc) can be difficult for SMEs.
- Weaknesses in transportation and infrastructure - this can affect access to markets and business revenue (telecommunications, ports, airports, road networks).
- Limited information on possible markets and clients - many SME owner/operators have little experience in exporting into foreign markets. What should the government's role be in trade facilitation and trade promotion?
- Broader economic situation - SMEs are often the most vulnerable in times of economic recession. Lack of insurance and subsequent business failures can often make the economic situation worse.
3. Measures to overcome the problems and perspectives towards the future
We are conscious that policies to promote the economic development of SMEs have been discussed in great detail in various international forums over the past two decades. We do not want to reinvent the wheel. Publications such as the OECD's Best Practice Policies for Small and Medium Sized Enterprises provide good examples of current thinking on SME policies. In this symposium, rather than go over well-trodden ground in terms of recommending specific policies, we want to turn our attention to the challenges faced by each region and the opportunities for future progress.
East Asian and Latin American governments have an important role to play in supporting the economic development of SMEs across the region. This must first of all focus on providing an environment that is conducive to business development. Government policy should be directed at establishing a level playing field for SME development and operation. The exact nature of this framework will of course differ from country to country depending on the structure of each economy. Regular opportunities to share information and co-ordinate on responses to shared problems may help to build and develop these policy frameworks.
We believe that FEALAC has the opportunity to make an important contribution in this regard. The organisation was born out of a common realisation that the links between the two regions needed strengthening. It has a role to play in building new links not just between governments, but also between private sectors. Closer business links and increased cultural and people-to-people contact can help to promote better mutual understanding.
In terms of specific initiatives, we propose that FEALAC could sponsor this new level of dialogue on SME policy. Senior Officials could direct the relevant working group to build on the work done by other organisations on this topic (such as APEC, ECLAC, or the OECD). This could lead to information exchange that would focus specifically on the particular challenges for SME policy in the FEALAC region. We hold open the possibility of a formal study on ways to promote SME development that might build on this information exchange. The working group could also consider the potential for training programmes at the regional or inter-regional level. Thought could also be given to ways to promote private sector participation in this dialogue. Rather than expanding the institutional scope of FEALAC, we feel that this type of co-ordination could best be achieved electronically, for example through the development of a FEALAC website (although that would of course lead to the question of who would be responsible for the development and maintenance of the site).
Strengthening contact between the two regions on issues such as the economic development of SMEs may help to promote stronger trade and investment links. This is important as the growing network of bilateral and regional trade agreements around the Asia Pacific expands. SMEs will as a result of this trend inevitably come into more frequent contact with similar firms in other FEALAC countries. We believe that FEALAC has the potential to play a useful role in facilitating and promoting closer regional co-operation, and in reducing the perception of distance between East Asia and Latin America.
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