Globalization increases the need for coherent local-level developmental policies in transitional economies, supported by national-level policy that allows room for constructive local initiative and a variety of ownership forms but prevents self-defeating 'competition downward' to secure foreign direct investment. This paper first summarizes new UN research showing that success of a 'productive' SME sector requires both active support services at the local level and the survival, revival or development of a healthy large enterprise sector as supplier of inputs, output market, provider of various social and technical externalities.  Expectations that 'market automaticity' would solve these problems were entirely wrong. The small enterprise sector will not by itself create successful economic growth. Equally misguided were assumptions that individual private ownership was the only viable form and that local banking services are best provided by large, usually foreign-owned, national units.

Sarajevo, Bosnia and Herzegovina, 10-11 October 2003

From Transition to Development: Globalisation and the

Political Economy of Development in Transition Economies

 

 Robert J. McIntyre

 

Local Development in Transition, UMass-Amherst 

Institute for International Economic and Political Studies, Moscow

Local and regional governments have a central role in stimulating growth of various types of business activity. This includes creation of a local finance system based on credit co-operatives (to overcome the SME credit famine and stimulate local saving-investment cycles), as well as directly para-entrepreneurial functions (including equity ownership), all generally consistent with the 'local developmental state' growth model. The natural synergy between savings/credit co-operatives and production units with co-operative or partial employee ownership is evident in Nordic experience and is relevant in all transition countries as well. The advantages of credit co-operatives in mobilizing and financing local economic development contrast with the disadvantages (despite their unfortunate local popularity) of conventional 'micro-credit' and the so-called 'new wave financial institutions'.

 

It is important to link financing of small enterprises based on localized savings and investment cycles with measures to support local production in the face of the pressure of internationalization of the market. With the arrival in developing markets of large, well-financed foreign producers and distributors, even potentially promising local production capacities may be destroyed before finding their feet. Local producers may expire as a result of short-run 'predatory' tactics (penetration pricing, loss-leaders, bribery of distributors or retailers, etc.) or loss of market access. Full-information approaches to labeling and non-tariff preferences for locally produced goods are possible policy responses.  It is especially important to maintain consumer access to locally produced goods when new distribution channels emerge.

 

 

 

1.   MODEST RESULTS AT BEST FOR SMEs IN TRANSITION

This paper highlights the conclusions of the newly published World Institute for Development Economics Research (WIDER) study on Small and Medium Enterprises in Transitional Economies (McIntyre and Dallago, eds., 2003).  It offers a harsh but not hopeless assessment of what has been achieved in the first decade of transition and provides a basis for conclusions about the appropriate role of government in transition economies facing globalization and EU expansion.  My analysis points to the danger globalization poses for the development of productive local small enterprise systems and the centrality of locally-rooted financial support mechanisms if there is to be any success in filling the still gaping (directly-productive) small enterprise 'black hole'.

 

Transition advising and policy making have been controlled by a series of means-ends confusions. Assumptions about the automatic emergence and developmentally functional articulation of markets led to a failure to work seriously to establish the institutional, structural and demand conditions that would allow real growth. Understanding the possibilities and limitations of SMEs proved difficult in this context, but it is important to look at both the realities of the SME sector and the unfortunate interactions of SME policy with transition ideology. While the SME sector is crucial to the evolution of all of the transitional economies, hopes that it would, by itself, have system-dynamizing, transformational effects have proved unfounded.

 

Without competent market-oriented policy at the national level, 'market exchange' brings few of benefits of real competition. Real markets function 'successfully' only when surrounding institutional, infrastructural and behavioral conditions are already in place and, equally important, are widely accepted as a cultural norm. Sensible policy making in transition requires avoiding a simplistic view of capitalism as a self-organizing system of natural equilibrium.

 

Despite this, the same 'early-naïve' transition advice continues to be offered to countries, such as Bosnia and Herzegovina, where mistaken policy can sharply alter outcomes.

 

2.  LITTLE EFFECT BY ITSELF: ONLY PATIENT POLICY OFFERS HOPE

The complexity of creating and sustaining SME development becomes evident as soon as we look beyond retail and neighborhood-level services to directly productive small enterprises. Unless surrounding large enterprises have been successfully commercialized (meaning privatization was delayed or done in a way that did not sever existing working relationships) and overall demand conditions are not severely restrictive, no significant and sustained growth of productive SMEs can be expected.

 

The WIDER study considered the complex multiple connections between large enterprises and the existing/emerging SME sector. Large enterprises include both those entities that remain state-owned (SOE) and those that were previously state-owned (PSOE) but are now in private hands.  Uvalic (2003) explores the link between the way  large enterprise privatization is carried out (the extent, form, speed, and degree of social assent) and the resulting health and character of the SME sector that functions in the surrounding economic space.

 

SMEs have some competitive advantages over large SOE and PSOE, but confront a series of barriers that raise operating costs and threaten their economic viability. They face higher costs for and more limited access to credit and other inputs, have greater difficulty penetrating export markets and are vulnerable to harassment by criminal gangs. The criminalization of everyday life is often sensationalized, but is a serious and complex problem. There appear to be set of systematic path-dependent relationships between on the one hand: the extent and character of the work done preparing the legal and commercial infrastructure before privatization; the way in which privatization per se is carried out; the organizational and behavioural features of wholesale trade (and other market-access determining conditions); and on the other hand: the extent and character of criminal development that results (McIntyre 2001b; Glinkina 2003).

 

Despite the tendency to think of and present the SME as an alternative to the former SOE, except for the face-to-face retail and service delivery sector, little can be expected from the SME without either: (a) active support efforts at the local level; or (b) the survival or development of a healthy large enterprise sector which the SME can utilize as supplier, customer and provider of various social and technical externalities. If ways can be found to encourage the formation of purpose-built alliances and sub-contracting relationships, positive and mutually reinforcing interactions can be expected to emerge.

 

The SME sector needs the large enterprise sector as a source of inputs, a market for its output and also (unexpectedly) as source of individual entrepreneurial leadership. This points to the need to create a synergistic relationship between the SME and the large enterprise sectors, not thinking of a zero-sum environment where success of the small can only be secured by destroying or disassembling the large.

 

3.  THE 'NEW' SME SECTOR IS A POVERTY TRAP

Glinkina (2003) stresses that much of this very small-scale activity (excluding traditional skilled trades and professions) has a 'dead-end' and essentially subsistence character. These developments are often emphasized as the most visible sign of the marketization process in transition economies, as well as in other countries that do not have established advanced capitalist market economies.  At the individual level this type of 'business activity' holds out little promise of cumulative growth and is highly unlikely to provide the foundation for successful system-level growth.  It is thus more properly considered as part of the poverty and health crisis aspects of the transition.  

 

Especially in those countries where the transition has been abrupt and chaotic, independent economic life emerged in specific forms that often involve a high level of 'self-exploitation' as well as exposure to physical conditions directly destructive to the health of the participants. 'Self-exploitation' as economists use the term is not automatically the sign of an undesirable situation. Even if money earnings are less than available through paid employment, after account for the non-monetary 'income' that flows from feelings of autonomy and self-actualization, an individual decision to work independently can still be entirely rational.

 

The benevolent view of self-exploitation is based on a labour market model in which there are available alternatives to be rejected: the self-exploiting decision-maker is passing up a positive income flow from an existing employer in order to work independently. To the extent that depressed aggregate demand and employment market conditions accompany the transition process; such paid alternatives may not exist to be turned down. Thus a large proportion of the independent work force may simply be engaged in a desperate survival struggle, perceiving few or no options to the course taken.

 

The ideological orientation which expects automatic emergence of successfully functioning markets (and automatic solutions by those markets for the basic problems of organizing economic life) played a role in the largely uncritical reception accorded to reports of the rapid growth of 'small trader' and 'shuttle trader' (chelnoky) activity in transition economies. Much of this measured growth represents pursuit of desperate survival strategies that are both destructive at individual or family-level and hold little potential of creating a cumulative developmental effect. This activity is admirable in its own right, but is not the kind of society-transforming entrepreneurship that is expected by advocates of market-automaticity views (Glinkina 2003 and Scase 1998, 2003).

 

It is time to stop treating either the Anglo-American social ideal of the solitary entrepreneur (rapid development from 'a single entrepreneur in a garage' to a large high-technology firm) or 'Latin Americanization' (a la De Soto 1989, treating the 'informal sector' as the motor of development) as useful development metaphors or ideal-types for Eastern Europe or the FSU (McIntyre 2002).  It is more useful to analyze the conditions of transition economies from inside their institutional/behavioural universe, where many people whose formative experiences were in the 'old' private sector or illegal economy of the pre-transition system seem to adapt poorly to the new 'post-shortage' environment (Dallago 2000).  In a number of countries, it is owners and managers drawn from the old state sectors are the sources of much of the productive, dynamic entrepreneurial activity that has emerged.

 

Along with vastly different developmental backgrounds, accumulated human capital, physical capital and settlement infrastructure, the surprising roots and characteristics of the 'new entrepreneurs' in transition economies highlight the inappropriateness of 'Latin Americanization' analogies (Surdej 2003, Dallago 2003, Csaba 2003).

 

 

4.  MANY EXAMPLES OF THE MERITS OF DIVERSE ORGANIZATIONAL FORMS AND POLICY APPROACHES 

There are real SME-stimulation alternatives based on actual developmental experience, taking the form of the local developmental state (Johnson 1982). This model has been pervasive in successful post-World War II cases, from Germany, Austria and Italy to Japan, Taiwan, South Korea, and most recently China, but has been conspicuously absent from policy advice or practice in the transition economies after 1989.  Bateman (2000, 2002) points out that virtually everywhere, national-level success in rebuilding and modernizing after World War II was heavily dependent on SME support measures, carried out by local-level governments, as part of a national strategy.

 

TVEs illustrate the 'Local Developmental State'   One of the most interesting aspects of dynamic Chinese development after 1978 is the emergence of unorthodox ownership and governance approaches that form a distinctive 'mixed property' system, in some ways like the Soviet NEP.  The Township and Village Enterprise (TVE) part of the system is in active, rapid evolution toward unclear future forms (Granick 1990, Sun 1997, Sun et al. 1999, Chi and Chou 2003).  The remarkable success of Chinese local authorities as facilitators and direct entrepreneurs (para-entrepreneurial activity) perfectly illustrates the local developmental state conception (Johnson 1982) and is extremely important to other transition economies. 

 

Local authorities in some CEE & CIS economies face structural conditions that are similar in important ways (bearing effective responsibility for some local production and <!-- Generation of PM publication page 27 -->distribution, in the face of the collapse of the economic leadership role of the central state and a stagnant local economy) and often have nearly identical ownership/partial ownership/effective ownership rights in some local goods- and service-producing entities. Even in countries where privatization and market reforms have gone quite far, some structural carryovers from the planned economy remain. Local-level governments in transition economies are likely to remain economic actors on a scale generally greater than in long-time market economies.

 

A key lesson of Chinese experience is that the original core TVE[1] should be considered as a promising partial model[2] for other countries. Within this complex small town and rural mixed system there are strong elements of municipal socialism in which 'social' but non-nationalized property ownership plays an important role (Weitzman and Xu 1994). In what are essentially closed cooperatives, local government may either play only a supervisory and facilitative role or act directly as full or partial owner. The classificatory logic used by the World Bank treats all these variations as 'private sector development' (no matter who owns it, if it is not the national government, it is considered 'private').

 

Chinese institutional reforms and mixtures thus have unexpected relevance elsewhere, especially as these new structures are not unlike the multi-owner partnership form that is widely successful in advanced market economies. Stiglitz (1999a) and others (Nolan 1995, McIntyre 1996, 1998, Stiglitz and Ellerman 2000) propose wide application of this aspect of the Chinese experience in other transition countries.  How Chinese ownership will develop in the future is an open question, but many small- and medium-sized local-SOEs slated for comprehensive reform and loss of national subsidies are likely to end up under township and local government control, taking the joint stock co-operative form with some degree of employee ownership.  When TVEs move from full local government ownership to joint-stock co-operative form (with mixed local government and employee share ownership) they are indeed and example of what Stiglitz advocates (1999a) as 'privatization to stakeholders'.

 

A similar category of 'employee-owned' enterprises (narodnaya predpreyatiya) was established by 1998 Russian legislation and has interesting potential.  It is structurally similar to Chinese joint-stock co-operatives and may eventually be able to include local government as partial equity owner (McIntyre 2001a).

 

Barriers of culture, development level and political culture have made it convenient to not think carefully about the challenging and complex lessons of the Chinese experience. A combination the features highlighted here could be useful in local-level revitalization efforts elsewhere, even though enormous regional differences in incomes and living standards and sharply increased inequality within regions pose a great threat to the continued success of this mixed model in China itself (Riskin 2001).

 

Finnish Co-operatives and Development Policy  The Finnish co-operative tradition provides another useful point of reference. For over a century, Finland has used co-operatively-owned local-level financial institutions as part of a national-level economic development strategy (Kuisma et al. 1999).  It is a provocative addition to debates about SME financing and suggests new tools to support market-based economic growth under sparsely settled, peripheral conditions found in much of the FSU and parts of CEE (Skurnik and Vihriälä 1999).

 

Finland has been astute and vigorous in pursuing complex and subtle industrial and developmental policies, while appearing to practice free-market rectitude. Banking is a case in point, since the success of the cooperative banking system traces back to initial government deposits (overcoming the initial trust and scale problems) and forming local banks into regional alliances under a national confederation, creating scale economies and assuring political visibility.  Parallel to and with the support of co-operative banks, a wide array of production and marketing co-operatives arose. In 2000 they retain a large share (meat 71%; dairy 96%; eggs 60%; forest owners 34%; livestock breeding 100%; retail trade 41%; banking 34%; insurance 8%) of the contemporary Finnish market (Skurnik 2002).

 

This type of intervention is not unique to Nordic countries, but is especially strong there.  The European Observatory for SMEs notes that across the EU:

Many banking/credit/insurance co-operatives and mutuals have their roots in the co-operation of SMEs and the objective of providing auxiliary services to these enterprises. Co-operation is an important strategy for SMEs to strengthen their market position against larger competitors.  In crafts, retail, trade, transport and some production, co-operative members are almost exclusively SMEs. …. (M)any (co-operatives) have been founded by and for SMEs and are, on the whole, SMEs themselves. (1996, pp. 351-352)

 

In many countries co-operatives operate in legal categories that are not explicitly 'co-operative', leading the Observatory to note that it is hard to judge the scale of operation by productive cooperative SMEs in the EU.

 

Combining co-operative saving and lending institutions with production, processing and service co-operatives makes good sense in many transition economies. The hundreds of 'new wave' co-operative formed during the severe Finnish depression of the early 1990s are similarly promising. Many are technology and technical service companies, in the form of multi-branch work co-operatives and single-branch expert co-operatives.

 

National or local government engagement is generally required to start such savings and lending institutions, but is criticized as unproductive subsidies or unfair competition to commercial banks. On theoretical and historical-empirical grounds, Bateman (2000) has attacked the idea that market interest rates, combined with banking conventions about acceptable risk, answer all necessary questions about what is wise and developmentally viable is thinking about small enterprise support policies. Supporting that line of argument are studies appraising differential SME access to finance within the EU:

The financial structure of an enterprise seems to depend more on the financial system and the financial habits of the country in which it operates than on any other characteristics of enterprises such as size, sector, age and even profitability.  Moreover, the smaller the enterprise, the greater are the international differences in financial structure. (Observatory 2000, p. 19)

 

It is useful to consider the implications of these findings for SME policy in transition countries, especially in light of the felt policy imperatives within the EU:

The efforts aimed at meeting the Maastricht criteria have substantially narrowed the room EU countries' governments used to have for maneuvers in the field of SME policy.  This has not reduced the necessity to adopt new stimulating measures especially for SMEs and, in some case, has led governments to widen the scope of their enterprise policy.  (Ibid, pp. 249-250, emphasis supplied)

 

This suggests that Finnish-style use of national policy to create conditions in which local-level saving, financial services, production, marketing, wholesale buying and other co-operatives take root, is directly relevant to solution of the puzzling failure of productive SMEs to play a significant role during the first decade of transition. In the former Yugoslavia the vast literature on the "efficiency of worker-managed enterprises" must immediately come to mind, perhaps carrying with it doubts about the viability and efficiency of real co-operatives.  Addressing exactly this concern, Hansmann (1996, 1999) and Stiglitz (2000) offer a bracing reinterpretation of the net efficiency advantages of co-operatives in light of new developments in agency and information theory dear to the hearts of all neo-classical economists.

 

Co-operative Core Bank plus Business Consultancy in Spain   While the Finnish co-operative approach to local-level enterprise finance and production reinforces the local developmental state conception and illustrates a highly successful solution to the pervasive SME finance famine, relationships like this can be found all over the world. An example is the role of the Lankide Aurrezzkia Bank in the famous Mondragón system of locally-owned cooperatives in Spain, all of which were and many of which remain SMEs. The Bank provides borrowers with technical and management guidance when needed and sometimes even moves employees between cooperatives in keiretsu style (Shuman 1998).  Another example is Credit Desjardins and the associated Casises Populaires that form the largest element in the financial system of the Quebec province, Canada.

 

These examples embody a vital insight: too often SMEs in transition economies are assumed to only have a future as atomistic competitors, whereas real-world experiences point to the centrality of a small-enterprise system for both micro- and macro-level success and support consideration of a wide range of possible organizational and ownership forms.

 

5. ASYMETRIC OPENING: MARKET ACCESS AND OTHER NECESSARY PROTECTIONS FOR SMEs

The lack of policies to support the emergence of 'small enterprise systems' is partly explained by illusory 'immediate' SME success that diverted attention from this serious but difficult policy issue. Standard 'business environment improvement' and 'entrepreneurship' programs are of some value, but generally manifest an excessive concern with crime and regulation and fail to address the major problems -- an inadequately developed institutional/organizational context, lack of product market access for small-scale producers and most critically finance. Many of the WIDER authors point toward new policies that will allow transition economies to capture some of the 'secrets' of Italian, or Japanese or south German 'small enterprise systems'.

 

The situation of rapid uncontrolled and asymmetric market opening (relevant locally) is not unrelated to the lessons of the Poland-Russia comparison above.  A recent UNCTAD (2002) study suggests that the process of opening up even well-established market economies has strong negative effects on the SME sector.  This reflects a mixture of the effects of domestic demand repression and the arrival of more mature foreign competitors in all economic sectors. The results could be even more negative in those (many) transition countries where an era of normal growth is yet to occur, magnifying vulnerability to outsiders.

 

With the arrival in developing markets of large, well-financed foreign producers and distributors, even potentially promising local production capacities may be destroyed before finding their feet.  Local producers may expire as a result of short-run 'predatory' tactics (penetration pricing, loss-leaders, bribery/black mail of distributors or retailers, etc.) or loss of market access. A central but often invisible aspect of the survival or growth of productive SMEs is the ability to expose their products to the processes of consumer choice. It is especially important to maintain consumer access to locally produced goods when new distribution channels emerge. Only a short period of exclusion from the market is enough to kill off otherwise viable and promising local production capacities. It is important to link financing of small enterprises based on localized savings and investment cycles with measures to support local production in the face of the pressure of internationalization of the market.  'Full-information' approaches to labeling and non-tariff preferences for locally produced goods are possible policy responses.

 

Small-scale credit is obviously central to any successful cumulative SME development, but conventional 'micro credit' approaches are not development-functional in the middle income, urbanized settings that characterize the bulk of the CIS and East/Central Europe. Based largely on grant funds and building no viable locally owned institutions able to grow and evolve to a scale adequate to finance serious small enterprise development, they are at best viewed as a poverty palliative.  Even in agricultural areas their long-term value is suspect because micro-credit propagators often work to prevent the rise of alternative self-supporting credit institutions, such as real credit cooperatives. The enthusiasm with which various donors and multi-national institutions view the micro credit approach is not justified by their efficacy. 

 

Similarly misguided is the recent enthusiasm for so-called 'new-wave micro-finance institutions' -- commercially-oriented, competing, independent, financially self-sustaining lending bodies to deliver financial services to the poor and disadvantaged (Bateman (2003a, 2003b).  This 'new wave' model quickly became a major local-level strand of the neo-liberal development conception worldwide and

…has also attracted substantial political support and donor agency funding in the context of the reconstruction of South-East Europe in the wake of the Yugoslav civil war which ended in late 1995 and, more recently, in the aftermath of the Kosovo conflict of 1999.  … In some countries, such as Bosnia, the 'new wave' MFI model has effectively been the centre-piece of the international donor community’s support for local economic development and poverty reduction. (Bateman 2003b)

 

Like the misguided efforts to 'commercialize' business support services in transition economies, these new entities will almost automatically diverge from and ultimately abandon pursuit of the positive externalities that are the essence of successful local development efforts in all market economy environments.

It appears that the short term benefits of this approach are largely wiped out by the negative effects of the associated economic policies that accompany it, including accelerated de-industrialisation, rising trade deficits, declining state legitimacy and capacity, and the destruction of social capital. (Bateman 2003b)

 

Dynamic economic growth requires credit cooperatives and other forms of locally-owned banking institutions tasked with serving local small enterprise interests. There are sharp differences among the WIDER authors on the point of what is 'bankable' and the proper role of directed or subsidized small enterprise credit programs.  A parallel concern arises over the concrete local development effects of the absorption of local banks by international banking companies. Consolidation, restructuring, and privatization of large banks prevented the establishment and development of financial institutions for SMEs. The indebtedness and low profitability of large banks strengthened their inherited attitude of avoiding risky financing, requiring high collateral and charging high interest rates. These features of the credit market discouraged expansion and modernization but apparently not the foundation of SMEs.

 

Locally-owned banks and local small enterprise systems in various countries function successfully on 'social capital' that is very costly for large banks that have no inherent local development mission or mandate to acquire (Dallago 2000).   It does not make sense for them to provide the type of patient, step-by-step credit and other financial service support that firms of a nascent small enterprise sector require.

 

6.   FDI DOES NOT SOLVE THE PROBLEM

            For those wishing to avoid the need for active policy, foreign direct investment (FDI) is often viewed as the crucial way out.  This is in fact problematic for several reasons:

 

First, there is the pervasive linguistic confusion between the purchase of existing assets (= asset-swaps with no change in productive capacity) and the creation of new productive capacities (= increased production and income-generation capacity). Only the later is 'investment' in the sense that economists use the word to discuss growth theory.  When some one says "investment is the key to growth in transitional economies" either they are not talking about the purchase of existing transition country assets, or they do not understand the words they are using. Adding the word foreign has no effect on this point. 

 

It is true that a non-investment change of ownership ('asset swap') can have positive effects, by bringing new management and motivational techniques or access to established marketing channels. That is a different point and these results can be achieved by a number of paths that do not involve ownership change. When FDI is mentioned it is generally understood on a grand scale involving large enterprises, but many new entities that do in fact represent new investment will be SMEs, so they can make a statistical and real contribution.

 

Second, large-scale non-investment 'asset swaps' by foreign firms often have strong negative effects on those local SMEs that are involved in production. When foreign purchase of retail and wholesale distribution assets are involved, the effects on local SMEs are likely to be especially awful.

 

Third, even when new foreign investment takes the form of 'green-field' construction of large production facilities the effect on SMEs is clouded, with positive results appearing to be heavily policy-dependent. Analysis of the largely unsuccessful "jump-starting" of the economy of the former GDR is useful here (Pickel 1992).  Grabher (1992, 1995) has coined the evocative term "cathedrals in the desert" to describe the utter lack of local developmental effects from most of the green-field investment that did occur, with nothing beyond salaries percolating into the local economy.  Of course, this income has multiplier effects on the local service economy but virtually no supplier relationships emerge in which autonomous local producers join in the 'value chain' of the large enterprise.

 

This very much matches the experience of Hungary later in the 1990s, when it received a great volume of FDI (concentrated in automobile and connected areas), but with very little developmental spill-over beyond salaries. Only after explicit government pressure, leading to 'voluntary' cooperation and supported by explicit attention in an economic development plan (the so-called 'Szécheny Plan' for 2000-2006 and 'Szécheny Plus Plan' for 2003-2004) did foreign firms begin to address this issue (Dallago 2003, pp. 88-90 and 94-96). 

 

The effects of this particular ‘Szécheny’ initiative are unclear, but the analytical point is clear -- without explicit policy attention to this issue very little involvement of small productive enterprises was occurring despite a considerable concentration of real FDI.

 

7.  V, V and VW: THREE ILLUSTRATIONS OF 'FREE MARKET' REALITIES 

Valio, Vattenfall and Volkswagon are almost randomly selected from the end of the alphabet of advanced market economies. Together they suggest some non-transparent

realities of the internationalization process faced by the transition economies.

 

Valio Oy is the largest foreign supplier of processed milk products (milk, yogurt, smetana, cheese) to Russia.  It is wholly owned by 28 Finnish co-operatives and operates with both the extensive and clever support provided to agriculture by Finland and an EU export premium. With double subsidies underpinning its export success, Valio illustrates many relationships visible throughout the Balkans (different company names but the same political-economic principle) that pose a deadly danger to all small-scale local food producers and processors.

 

Vattenfall AB is one of the largest energy production and distribution companies in Europe and has been active in acquiring production and distribution assets 'privatized' by transition country governments.  The quotation marks on privatization reflect the fact that as a 'private' buyer Vattenfall was itself a fully state-owned entity.  It was a 'public utility' from 1909 until 1992, when it was 'commercialized' becoming a 'limited-liability company' but remaining 100% owned by the Swedish state.  EdF is the second 100% state-owned participant that has been very active in 'non-private privatization'. Thinking clearly about these mixed cases is made difficult by the general tendency of the popular and semi-professional financial press to treat partial privatization (even with complete effective control remaining in state hands (or two states, plus airline employee in the Air France-KLM case) as 'privatization' (without any need for additional qualifying words).

 

The Volkswagon AG automobile company is 18.6 per cent owned and effectively controlled by the provincial (Land) government (Lower Saxony), and has been managed under the dictates of the co-determination law for 30 years.  This means that more than a majority of its governing board consist of employee representatives and representatives of the SPD-controlled provincial government. VW illustrates, along with Renault, the success of ownership and management arrangements that divergence from standard forms, even in core global markets with strong scale economies.  Pohang Steel, Snecma and Statoil could be added here.

 

We add LegaCoop (Lega Nazionale delle Cooperative e Mutue in Italy), RaboBank (Netherlands), Raiffeisen Bank (Austria) and OkoBank (Finland), all cooperative banks, as further illustrations of the viability, in the financial sector emphasized elsewhere in this paper, of divergent ownership, management and organizational arrangements.

 

8.  CONTINGENT POLICY ADVICE OR A (DISCREDITED) 'COOKBOOK'?

The point of these examples was to provide the basis for the following question: why are reform/reorganization approaches so often suggested/imposed on transition countries in a 'cookbook' fashion.  And why do the institutions proposes seldom reflect the variety that rules in existing successful market economies, but instead focus on institutional variants of distinctly Anglo-American origin (even for those countries reflecting a introductory text-book simplification rather than the actual variety of forms extant there).  The same point is to be made regarding fiscal policy (US and one or more large EU states) and monetary policy (US), where behavioral norms 'at home' diverge sharply from the 'restrictionist' prescriptions offered to others.  Exact parallels in social welfare policy are also evident.

 

While there is no simple answer as to what the recipients of advice and 'suggestions' should do to reduce the damage caused by narrow and unrealistic advice, one approach is to simply demand the discussion of alternatives in the certainty that there are some.  A particularly useful point of reference is the research department of the World Bank that regularly produces (in Washington) results that can be used to challenge the policy advice delivered (from Washington) through the channel of the World Bank country office. As the currently fashionable management analysis of Christensen (2003) points out, management (and management 'reform') and policy (and policy 'reform') are inherently contingent processes, not amenable to 'one-size-fits-all' solutions.

 

What will work in a situation depends on careful analysis of the micro-, mezo- and macro-level internally, as well as the external features of the concrete situation.  The simple question of "How did this work elsewhere, according to its critics?" will open up most conversations with visiting policy advisors.  This leads us back to conclusions about specific SME policies.

 

 

9.   CONCLUSIONS

A successful SME sector that goes beyond neighbourhood-level services and retail distribution (the later often doomed in any case) requires both active support services at the local level and the survival, revival or development of a healthy large enterprise sector as supplier of inputs, output market, provider of various social and technical externalities, and also (unexpectedly) as source of individual entrepreneurial leadership. Systems success is more a question of quality than quantity, particularly concerning the interconnection of all the elements that form the economic system. SMEs are a crucial element, but policies that target the SME sector without paying attention to these surrounding conditions are unlikely to have substantial and long-lasting positive effects. Efforts to provide direct assistance to SME often end up mired in corruption, have high overhead costs and ultimately serve other than announced programme interests (Wedel 1998, Bateman 2000).

 

Local and regional governments have a central role in stimulating growth of various types of business activity. This includes creation of a local finance system based on credit co-operatives to overcome the SME credit famine and stimulate local saving-investment cycles, as well as directly para-entrepreneurial functions (including equity ownership), all generally consistent with the model of the 'local developmental state'. The natural synergy between savings/credit co-operatives and production units with co-operative or partial employee ownership is evident in Nordic and other experience and is relevant here as well.  At the enterprise level, various forms of full and partial employee ownership are appropriate. 'Incomplete privatization' often leaves local government with some de facto ownership rights, raising the possibility of development of something like core-TVEs. Pressures to reorganize units that provide municipal services into quasi-corporate ESCOs (Energy Service Companies), TSCOs, and so on, offer similar opportunities.

 

SMEs supply the bulk of employment in EU and transition countries and the integration process will have a great impact on both. The forces changing the SME landscape within Europe present dangers and opportunities, calling for institutional policies and governance mechanisms that reduce the former and support the latter.  Hopes that internationalization and the local effects of globalization will make it unnecessary to formulate local-level development polices are likely to be forlorn.  Internal 'liberalization' only intensifies the need for policy. The recent UNCTAD study led by Charles Gore (2002) echoes the WIDER conclusions, pointing out that central Europe was one of several areas where conventional policies reflecting Bretton Woods Institution structural adjustment priorities and simultaneous economic liberalization had or would have a devastating effect on both rural and urban SMEs. 

 

No attractive long-term developmental processes will occur without sustained growth of internal demand and active policy measures, including sharp attention to the competitive threat of new EU members who will experience great difficulty selling in old EU markets but will dispose of various EU subsidies for exploring 'outside, but nearby' markets. This competition may damage transition country SMEs, but their lower costs (deriving from lower wages, weaker social protection and less rigorous regulation) offer EU firms great opportunities to establish transnational networks that include them.  In this way transition country SMEs may find important market access and incentives for modernization.

 

 

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