d smes one shot magazine sept mba students 2013 2015
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D-SMEs ONE Shot Magazine
SEPT MBA Small Enterprise Promotion and Training
Students 2013-2015
DECEMBER-2014
2
WORDS FROM THE MAGAZINE BUILDERS
Write is a way of sharing. This magazine shares knowledge and insight of SEPT
MBA students through 10 articles. These articles come directly from the blog of our
generation 2013-2015, without any edition of the content and in the most similar
way our peers posted them (septleipzig.wordpress.com).
We thank everybody in SEPT, we all made this magazine
possible.
Special thanks to the writers, we understand writing is
a tough task. It demands time, and effort. Moreover,
one exposes to the world. Thank you for writing.
Thank you for reading!
CONTENTS
Do Patents Encourage or Discourage Innovation? Ernesto Guzman 6-8
Local Economic Development As The End And Means Of Recovering From Natural Disasters. Jun Piong 9-11
Certification: Competitive Advantage or Barrier? Lukman Haris 12-15
Benefits of Adopting Drone-technology (UAV) in SMEs. Alan Tovar Prado 16-19
How diaspora can contribute to the Venezuelan economic development. Fernando Rodríguez 20-23
B Corporations: Evolution of Capitalism? Martin Kempf 24-28
Industrialization as the stages of development – Textile Industry in Egypt. Jomana Ismail 29-32
Governance in the value chain: the case of Namibian beef value chain. Rodney Seibeb 33-37
Entrepreneurs and the concept of anti-fragility. Alan Tovar Prado 38-40
Forceful Formalization – Is it Panacea? Ketevan Morgoshia 41-65
Words From The Magazine Builders
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
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LE
TT
ER
FR
OM
TH
E T
EA
M
There are times in life when we meet a lot of people that inspire you at once. We arrived in Leipzig in 2013 to start our SEPT MBA Program. The first two semesters were unforgettable. Now we have friends from nearly all the continents in the world with diverse expertise and experiences. There are many reasons why each of us came to Leipzig, but we believe this is the right moment to start making a wave in this world. We realize our encounter here in Leipzig have a huge potential for the future. We started with a blog. This is very simple yet
powerful tool to connect our thoughts, experiences and expertise from every continent in the world. We
started to fill our blog with our topics of interest and we found them good. Two of these international fellows, Mr. Guzman from El Salvador & Mr. Haris from Indonesia, thought the richness of our blog’s contents should reach broader range of readers. That was the time when we came up with this magazine idea. The world of SMEs is very challenging, promising and surprising. Platform technologies such as 3D printing and many customized online services have made it easier to create anything you wanted. Internet has made knowledge of what and how to become easier to be accessed. That includes the knowledge to create a company and entrepreneurships. These have fostered the birth of thousands of new startups. They are potential disrupters that start small even too small to be considered dangerous by the incumbents, but we know they have the potential to be giants.
We thank you to our marvelous fellows for their contributions to our magazine.
Ernesto Guzman & Lukman Haris Magazine Team
Letter from the Team
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Article Contributors In the order they posted in the blog
Jun Piong: “I am a strike-anywhere kind of person
with great passion for travel. I want to become a
Consultant specializing on SME development and
assistance.”
Lukman Haris: “I am raised in a family business
environment, an industrial engineer and have worked
in standard and certification for two years. In the
future I see myself as entrepreneur and investor in
SMEs especially in technology based sector.”
Alan Tovar Prado: “Stay open about learning new
things and work on building your reputation through
discipline.”
Fernando Rodríguez: “My passion: To help other
people by providing the tools and skills acquired
during my professional, academic and personal
experiences.”
Ernesto Guzman: “Make things happen is better than
talking”
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
Article Contributors
5
Martin Kempf: “I'm a journalist and I worked for 6
years if different areas related to communication and
marketing. My idea in the future is to help and push
SME's to start and develop in my country but with an
environmental and social responsibilty approach.”
Jomana Ismail: “Eager to help start-ups to start and
small business to grow.”
Rodney Seibeb: “I have a deep passion for poverty
reduction and rural development. I believe that
innovative small and medium enterprises (SME) can
effectively drive the city's or region's development.
Thus, I would like to help people to establish
sustainable SME's and actively guide them to innovate
new products and services.”
Ketevan Morgoshia: “I am graduate of the Ivane
Javakhishvili Tbilisi State University. Major interest
comprises in macroeconomic planning, international
commercial law, taxation policy creation for SME
development.”
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
Article Contributors
Meet all the Septies 2013-2015! In https://prezi.com/wykv9zbx15kj/septies/
6
DO PATENTS ENCOURAGE OR DISCOURAGE INNOVATION?
By Ernesto Guzman [email protected]
There is any conclusive answer, but tendencies. Those tendencies relates with: (i) The patent´s quality; (ii) Type of innovation; (iii) State of development of a country; and (iv) Size of the enterprise. Based on those trends, I propose the following model:
This model explains how patent’s quality, type of innovation, state of development of a country, and size of the enterprise may discourage innovation. The model is a circle divided if for slices, with the logic that its center is a discouraging area for innovation (therefore, the negative
signs on it), and that the outlying is an encouraging area for innovation (thus, the positive marks on it).
Despite that, the “+” and “-” symbols not only indicate the areas that encourage and discourage innovation, respectively. They also show how to interpret every slice. For instance, the patent’s quality slice is read like: The more (+) patent’s quality, the more patents encourage innovation; the less (-) patent’s quality, the less patents encourage innovation.
Speaking clearly, it is a matter of how centered we are. The more in the center we are located in the four slices, the more patents may discourage innovation for us and vice versa.
The Findings
First, it seems that the less patent quality is, the more patents may discourage innovation. When the
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Do Patents Encourage or Discourage Innovation?
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patent lack quality it means that it was granted for obvious and no novel inventions, blocking the real innovator and adding licensing fees. Furthermore, such poverty in quality increase the risk of demands coming from trolls. So, patents increment the cost and risk of introducing a product in the market. Conversely, a higher quality in patents leads to make true the utilitarian argument and the spillover effect limiting the negative effects of the monopoly (Jaffe and Lerner, 2004; OECD, 2004).
Secondly, it seems that the less radical the innovation is, the more patents may discourage innovation. Less radical means more incremental; and incremental innovation builds on previous innovations. Thus, patents impede new attempts and approaches coming from others innovators. Also, complex industries get affected because they have to pay several licensing fees for the different technologies they need to build on, that discourage innovation. In addition, patents promote the trolling behavior on first innovators, discouraging innovation efforts because of licensing fees efforts. The other way around, the monopolist protection that patents provide seems to be effective when the innovation requires a high investment; secrecy does not work, and it is easy to imitate, in other words when it is more radical (Boldrin & Levine, 2013; Rai & Jagannathan, 2012; Llanes and Tranto, 2010; Bessen and Maskin, 2009).
In Third place, it seems that the less developed a country is, the more patents may discourage innovation. The technological improvement of developing countries through imitation and adaptation is hampered by patents because they prevent precisely that imitation. Likewise, import-based developing countries can even have problems importing different technologies because of property rights of foreign companies. Moreover, the whole process of technology transfer for developing countries can be seriously damaged or stopped for patents protection. However, scientifically advanced developing countries seem to be benefited on their leading industries as whichever other multinational company, indicating that patents are more beneficial when the country is more developed (Dornberger, 2013; Ray, 2012; Tvedt, 2010; Vaitsos, 1972.).
Lastly, It seems that the less the size of the enterprise is, the more patents may discourage innovation. Patenting activities and monitoring its compliance requires resources the SMEs lack, for them to focus on those activities works on detriment of innovation because of the relocation of resources. As well, patents have high direct and indirect costs and truly expensive consequences if infringing one. So, patents reduce the spectrum of possibilities to innovate. Notwithstanding, for high-tech SMEs the usefulness of patents relies on attracting venture capital, what is related with the radical innovation traits. Beyond that, for large SMEs the
Do Patents Encourage or Discourage Innovation?
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patents reduce the risk of reverse engineering based on their products, thus from copy. All these draw the idea that patents may encourage innovation as the size of the enterprise increase (Holgersson, 2013; Jaffe and Lerner, 2004; OECD, 2004).
Assembling the puzzle, those four pieces form the Patents Encourage-Discourage Innovation Model (PEDIN). This model is a visual abstraction of the four previous observations; it makes easy to understand and present when patents may discourage or encourage innovation. It is my wish that the innovation community finds it useful and provocative.
References
Bessen, J., & Maskin, E. (2009). Sequential Innovation, Patents, and Imitation. RAND Journal of Economics, 611-635.
Boldrin, M., & Levine, D. K. (2013). The Case Against Patents. Journal of Economic Perspectives, 3-22.
Dornberger, U. (2013). Fostering Technology and Innovation in SMEs The Linkage Approach. Leipzig, Germany.
Holgersson, M. (2013). Patent management in entrepreneurial SMEs: a literature review and an empirical study of innovation appropriation, patent propensity, and motives. R&D Management, 21-36.
Jaffe, A. B., & Lerner, J. (2004). Innovation and Its Discontents. MIT Press.
Llanes, G., & Stefano, T. (2010). Patent policy, patent pools, and the accumulation of claims in sequential innovation. Econ Theory, 703-725.
Organisation for Economic Co-operation and Development. (2004). Patents and Innovation: Trends and Policy Challenges. Paris: OECD Publications.
Rai, R. K., & Jagannathan, S. (2012). Do Business Method Patents Encourage Innovation? Boston College Intellectual Property & Technology Forum.
Tvedt, M. W. (2010). One Worldwide Patent System: what’s in it for developing countries? Third World Quarterly, 277-293.
Vaitsos, C. (1972). Patents Revisited: Their Function in Developing Countries. Journal of Development Studies, 71-97.
Do Patents Encourage or Discourage Innovation?
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
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LOCAL ECONOMIC DEVELOPMENT AS THE END AND MEANS OF RECOVERING FROM NATURAL DISASTERS
By Jun Piong [email protected]
It is said that when natural disasters and calamities strike, everyone is equal. Nobody is exempted from its wrath. It minds no social status and everyone has an equal footing – no rich and poor, no developed or developing countries, no big and micro enterprises, no businessman or farmer – everyone is a victim.
This is what happened in 1996 when a 6.8 magnitude earthquake rocks Kobe, Japan that damaged properties specifically the physical infrastructures and in 2010 when 7.0 magnitude earthquakes put Haiti to ruins that slashed more than 220,000 lives from its population. Similarly, in 2005 Hurricane Katrina devastated the coast of New Orleans in the United States of America leaving an estimated property damage of $81 billion and $105 billion of reconstruction and repairs. And just last year typhoon Haiyan swiped the central region of the Philippines claiming more than 6,000 lives and leaving the survivors miserable and hungry causing them to loot the commercial buildings and warehouses. In economic language, the catastrophe reveals one thing – it is a threat that could alter the
economy and the behaviour of the market in an instant.
How one could brace from the natural disasters then? The answer depends on how the territory basically reacted from the previous crisis, learned from other territory’s lessons and used this crisis to prevent or minimize the degree of damages. And how one could move forward after the disasters? The development experts have varying views and suggestions. But altogether these questions point to one thing: the pre- and post-disaster measures. What is in it for a common resident and what does it mean for a business individual? The answer can surprisingly draw these two worlds separated by wealth and income together in one common cause through the emergence of the generally untapped concepts of social capital and local regional economic development (LRED).
Why RED?
Local Economic Development As The End And Means Of Recovering From Natural Disasters
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Buying the idea that LRED approach must be the end and means of a post-disaster recovery needs a lot of explaining, if not supporting theories and facts. The big question to expect is why it should be LRED when things can proceed as they were before. Why initiate LRED when even the term itself is unpopular?
Disaster has its optimistic side as it open up unique opportunities that, if properly understood and managed, could spring development and unlock potentials either at the individual level representing the people who embraces entrepreneurship for momentary survival or at the large-scale where international community pull together to offer assistance to the country affected. In a complex perspective these opportunities could also mean invigorating the social capital and produce a collective outcome that benefits not only a
certain community but the locality or the national level in general.
How?
Although different in generation and approach, the disaster proved a different thing to the case of Lisbon which owes its present economic condition from the colossal damage caused by the chain reaction of earthquake, tsunami and blaze. The Portugal’s capital learned its lessons by proactively positioning its recovery efforts on its competitive advantage: strategic location anchored on the flourishing shipping industry at that time. With the right intervention from the monarchy facilitating resources for its rebuilding coupled with the merchants bracing their businesses towards the direction of reinvigorating the naval trade, Lisbon rise from the rubble and made it an important trading hub until today.
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Local Economic Development As The End And Means Of Recovering From Natural Disasters
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This seems to be the path envisaged by the World Vision when they decided to forge partnership with the Mesopartner to align their humanitarian intervention with local economic development. The organization believed that there is more beyond the short-term stance of international organizations providing relief efforts and government’s pouring of resources in physical reconstruction. And that is investing in social capital by engaging the various multi-sectoral stakeholders in identifying the opportunities for action. The World Vision championed the cause in cognizant of the burdened government without disregarding the latter’s role. In fact, through Mesopartner’s coordinating role, both public and private stakeholders work together effectively and proceed towards a common goal.
Taking into account the preceding discussions leads to important points that the present day decision-makers can learn from. One, start recognizing the social capital and harness its potential to effect change. This means that the participation of stakeholders in identifying solutions and courses of action that they themselves will implement works better than the one-tier top-down approach. Two, anchor the post-disaster recoveries on the competitive advantage of the locality or region. As in the case of Lisbon, organizing its effort in the rebuilding of its economy based on the competitive advantage of the city prompted the stakeholders to become proactive by
aligning their present actions to long-term gains. Three, a champion (take the case of World Vision) is necessary to advance the identified actions or initiatives. The SMEs for this matter having the wide scope of influence, vested interest, and resources can take the lead role.
The end and means
All these important points are the essence and combinations of LRED which can be revealed through a natural disaster. The destruction could mean starting anew –to do better and change the old ways. If this opportunity is recognized by the stakeholders (especially the government) then the post-disaster recovery can be more than reconstruction and rebuilding of physical infrastructure, it can also be an amalgamation of the sectors working together to produce proactive and long-term measures against disasters. If the government accept the challenge of involving the stakeholders to extract the potential of its social capital, the post-disaster recovery could serve as a chance to initiate LRED and reap the benefit of it in the long run and withstand any storm that will come.
Indeed, natural disasters are engines of development and economic growth and the territories challenged by natural disasters should learn to seize this opportunity by making LRED the end and means of it.
Local Economic Development As The End And Means Of Recovering From Natural Disasters
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
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CERTIFICATION: COMPETITIVE ADVANTAGE OR BARRIER?
By Lukman Haris [email protected]
Certifications are thought to be the
source of competitive advantage.
As small and medium enterprises,
having a certification is considered as
one of a competitive advantage to
compete in the global market.
Together with different kinds of label
on the products, the customer can be
assured of the various qualities of the
products. One is the quality of the
product itself. The other is quality of
the processes regarding the
environmental issue or the child labor
issue. With these certifications and
labels the SMEs are positioning their
products superiority.
On the other side of the coin,
certification is also seen as a
barrier. The local SMEs are excluded
from the global market because of the
imposed standards and certifications.
These terms challenge the
sustainability of SMEs that are
focusing their activities on products
with limited sources. Even though the
products of the SMEs are good, they
cannot compete because they don’t
have enough resources to proof their
quality through certification. It costs
not only the certification process, but
also preparation and maintaining the
certificate.
So, certification has two faces. It is
like a sword, with which one can kill or
be killed. It is a tool but it is neither
the barrier nor the source of the
competitive advantage itself.
Why it is not competitive
advantage?
Discussing about competitive
advantage and entry barrier, let’s visit
the work of the scholars who have
generated firm understanding about
these two phenomena. To name a
few, competitive advantage has been
discussed by Barney and Michael
Porter. In his book, Competitive
Strategy, Porter describes competitive
advantage as the outcome of the
value a firm delivered to its customers
that exceeds the creation cost. The
question now is then how to have
such an advantage and where does
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Certification: Competitive Advantage or Barrier?
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this advantage come from? In 1991
Barney answered these questions. He
pointed out that a firm should have a
resource that has four particular
criteria that can give competitive
advantage. These criteria are:
First is valuable in the sense that it
makes firm able to develop and
implement strategy that improve firm’s
efficiency & effectiveness, exploit the
opportunities and neutralize threats at
the same time.
Second is imperfectly imitable. A
firm’s resource is imperfectly imitable
if other firms can not acquire this
resource because of special historical
events, ambiguous causal
relationship (between resources and
competitive advantage) and complex
social phenomena that is beyond
firms control.
Third is rare. If every firms possesses
the same resource, this resource is
not giving any competitive advantage.
Fourth is no substitute for the
resource posses by the firm.
Then, if certification gives a
competitive advantage then it should
fulfill the four criteria above. Let us
check each and every criterion.
First certificate is partly valuable
because it can improve firms’
effectiveness and efficiency, but it
does not neutralize other firms’ threat
of obtaining the same certificate and
have the same process efficiency or
product quality.
Second, because certification can be
acquired by competitor, it is imitable.
Third certification is to some degree
rare. Most certifications are openly
offered to every firm but access to it
are not equal because of financial and
knowledge difference across firms.
Fourth, certification is substitutable.
There are competing certification
schemes available and in case the
certificate is used to communicate
quality, there are other mechanisms
to do so such as users testimony or
direct product demonstration.
In conclusion, certification is not a
resource of competitive advantage.
Why it is not a barrier?
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
Certification: Competitive Advantage or Barrier?
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Now let’s visit the work of the scholars
about entry barrier. McAfee, Mialon, &
Williams (2004) defined barrier to
entry as:
“An economic barrier to entry is a cost
that must be incurred by a new
entrant and that incumbents do not or
have not had to incur” (pg. 463).
What does it mean for the SMEs?
This definition says that if an industry
require all the suppliers to have a
certain certification regardless the
size of the company or their
cooperation time, there is no barrier to
entry. Normally the industry is trying
to protect the consumer from bad
products. In case of the food industry
in European Union, the certification is
imposed to increase the track-ability
of the food’s origin and to control the
safety and health requirements.
And then the next challenges are
raised, the SMEs do not have the
money, knowledge and skill to be
certified. That’s totally true. For SMEs
the cost to prepare the certification
process (setting up documents,
adjusting processes and procedures,
buying the required machines and
tools) can be very expensive. Then
even if they have the money, they
should struggle for “the know how”
and “the who” to do it.
Now take a look at these money,
knowledge and skill problem from
different angle. If we look from the
helicopter perspective, these three
challenges occur in every decision-
making processes in SMEs. From
struggling to exist to growing, from
expansion to innovation, the SMEs
are always facing these three
constraints. Taking the ideas further
we can see that these constraints
apply also any-sized organizations.
In conclusion, certification is not a
barrier.
Then what is it?
Certification is neither a barrier nor a
competitive advantage. Certification is
a tool. It is a tool to serve the goals of
firm and the governing institutions.
For the firm, it is a tool to show to the
customers the quality of the products
or processes. The processes to get
and to maintain the certification are
learning opportunities to acquire
proper processes to enhance their
capability. It is a tool for the managers
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Certification: Competitive Advantage or Barrier?
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to convince customers in new
markets.
For the governing institutions in value
chain or government, certification is a
tool to protect the market from
incapable producers. It is a tool to
assure the quality of the products or
the processes through third party
assessment. Through this third party
assessment, governing institutions
are able to manage the quality of
products produced through
cooperation and collaboration among
thousands of supporting firms.
It is a tool. It can give the users
advantages and also disadvantages.
And there is the time when the tools
can no longer work.
Use the tool wisely, for there is a
saying “a fool with a tool is still a fool.”
Reference:
Barney, J. (1991). Firm Resources
and Sustained Competitive
Advantage. Journal of Management ,
17 (1), 99-120.
McAfee, R. P., Mialon, H. M., &
Williams, M. A. (2004). What Is a
Barrier to Entry. The American
Economic Review , 94 (2), 461-465.
Porter, M. E. (1998). Competitive Strategy. New York: The Free Press.
Certification: Competitive Advantage or Barrier?
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BENEFITS OF ADOPTING DRONE- TECHNOLOGY (UAV) IN SMES?
By Alan Tovar Prado [email protected]
According to the Department of
Defense of the Unite States (2003),
unmanned aerial vehicles (UAV), also
known as unmanned aerial systems
(UAS), pilotless aircraft, robot planes
or simply drones are powered aerial
vehicles that do not carry human
operator, use aerodynamic forces to
provide vehicle lift, can fly
autonomously or be piloted remotely,
can be expendable or recoverable,
and can carry a lethal or nonlethal
payload. This definition is descriptive,
since it refers to a general conceptual
frame of what a drone is, but vague at
the same time because it covers lots
of other flight objects.
Based on the latter concept, the first
unmanned aircraft registered so far
was Germany’s V-1, flying bomb, but
it was in during the Vietnam War
when UAVs equipped with cameras
and sensors played a key role by
doing surveillance and monitoring
flights. Since then, the term drone
connotes a high-technology-war
instrument. Eventually in late 1970’s
and 1980’s the Israeli Air Force
successfully used UAVs during
military operations in Lebanon. Since
conflicts in Kosovo, military agencies
have been using these robot planes
for intelligence gathering. Later on,
throughout the war in Afghanistan and
Iraq, broadcasting means covered the
military effectiveness of UAVs in
battle areas, where they showed two
advantages above manned-aircraft:
risk minimization at considerable
lower price.
Most of the people not involved in
aeronautical issues know few about
unmanned aerial vehicles. Some
years ago, UAVs were only known for
their efficiency and promising
capabilities as a war device. This
technology was mainly used for
armament delivery and for
surveillance purposes. As
aforementioned, for a long time the
evolution of this technology remained
strictly linked to military agencies.
They did the basic research according
their interests with little concern on
other commercial applications.
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Eventually, UAV technology has
evolved hastily with the maturing and
miniaturization of its application in the
1980’s and 1990’s. It is becoming
more popular, available and
affordable for many other usages
besides military purposes. Lucintel
Consulting Group (2011) reported that
half of the expenditure of UAV’s
marketing was spent for procurement,
the other half on research and
development activities.
Afterwards, early adopters started the
process of modification of the UAV
technology and the creation of new
applications. Grant (2002) described
this phase as the creation of new
products and processes through the
development of the new knowledge or
from new combinations of existing
knowledge. Most inventions are the
result of novel applications of existing
knowledge.
Nowadays, UAV technology already
entered the phase of popularization or
early majority, in which innovations
encompass the production or
commercialization of a new product or
service. In other words, drones could
be adapted to an existing business
model. Innovation occurs when the
combination of technologies takes
part in the value proposition and
SMEs are in process to do it.
Some industries have become early
adopters of this technology,
agriculture, commercial surveillance,
oil & mineral exploration, transport of
materials and communications. These
industries were able to integrate the
UAV technology into their practices
because they had other components,
which work much better mounted on a
drone. The example in the agriculture
sector is clear: infrared and
hyperspectral sensors have been
used for a long time for the same
purpose.
One can suppose that any other
device, which can be attached to a
drone, will upgrade its performance.
SMEs will profit from this technology
as much as they will be able to
combine gadgets. So UAVs must be
seen as a complementary technology.
SMEs can benefit from this
technology in two ways. In primis, by
developing new applications while the
research process becomes
increasingly affordable. Some SMEs
are able to incursion as UAV
producers. Most of the inputs needed
are available in the market and will be
cheaper in the next years. The
flexibility of this technology makes it
very easy to combine with other easy-
to-find and existent tools. The term
drone does not always connote a
Benefits of Adopting Drone-technology (UAV) in SMEs
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high-technology product. There are
endless possible niche-markets
waiting for an application to detonate
new capabilities.
In secundis, by embracing existent
tools into their process like recently
happened in some industries. This
essay documented the agriculture
sector improved its practices by
reducing costs and maximizing the
value of the crop. The surveillance
sector is upgrading from the
monitoring business to the information
management. The innovation process
of this technology leads to mass
production and digitalization.
To sum up
SMEs need to encourage innovation
by creating and adding value through
their products and services. Every
time more SMEs have the opportunity
to include UAVs into their businesses
as prices fall. UAVs will change the
way many activities have been done
and will improve user experiences.
They can foster innovative ideas that
lead to changes in how businesses
are done in a wide range of activities
like processes, services, marketing
and products.
In effect, drones technology is used in
most of the activities conforming a
value chain. From logistics facilitating
the transportation of materials saving
time, automating request processing
and inventory management, and
delivering emergency loads; in
operations like in agriculture and
surveillance taking part in the core
business procedure increasing
efficiency and quality expectations; as
a marketing tool to create video
advertisements; and in some services
like search and rescue.
However, despite legal regulations,
lack of awareness of UAV’s
capabilities and their benefits are the
main barrier for the successful
implementation of this technology. It
also includes the shortage of
knowledge and expertise on how to
employ these devices, and the false
perception that these technologies
are unaffordable and dangerous.
Yet, national aerial authorities have
not decided the set of rules to
integrate UAVs into their airspace
systems. Legislation is mandatory to
ensure the safe and peaceful use of
drones without disconcerting personal
Benefits of Adopting Drone-technology (UAV) in SMEs
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privacy. It is matter of time before one
get use to see drones working all
around.
Soon, one could see drones picking
up garbage on the street, painting
walls, taking dogs out for a walk, or
even reading emails for people while
jogging. One will reach the moment
when drones will be individual or at
least familiar objects, meaning this
not only to get use to them but also to
incorporate them as personal devises.
It could happen within the next
decade.
Reference
Federal Aviation Administration
2013 Integration of Civil
Unmanned Aircraft Systems (UAS) In
the National Airspace (NAS)
Roadmap. The U.S. Department of
Transportation. First Edition.
Asghari, N. (2011) Creating the
Equation for Growth. Growth
Opportunity in Global UAV Market,
Lucintel Brief. Retrieved 30.01.2014,
from http://www.slideshare.net
Benefits of Adopting Drone-technology (UAV) in SMEs
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
20
HOW DIASPORA CAN CONTRIBUTE TO THE VENEZUELAN ECONOMIC DEVELOPMENT
By Fernando Rodríguez [email protected]
Venezuelan diaspora is growing and
should be used as potential resource
for economic development in the
country. Those skilled professionals
living out of the country represent an
option for their home country
progress. However the question is
how these capable individuals could
help Venezuela from abroad? The
possible answer for this query is to
understand what have been doing
other emerging countries with similar
situations to turn this diaspora into a
helpful resource for the nation.Several
developing states with mature and big
diaspora around the world such as
India, Armenia and China are
obtaining constructive contributions
from their expatriates. Though the
causes and realities of diaspora in
these countries are different, some
strategies could be replicated and
implemented in the Venezuelan case.
How diaspora can contribute to the Venezuelan economic development
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
21
Networking
Indian diaspora has been a key factor
for the country´s high-tech
development since information
technology sector grows rapidly.
Without adequate infrastructure for
the software industry and no
government policy for high-tech
investment, expatriates networks
serve as facilitators between
international corporations in OECDs
and India (Devane, 2006). In other
words, individuals from Diasporas are
potential enablers to generate
business contacts, networking and to
find new sources of investments for
LDCs.
In the Venezuelan case, this
approach would be useful to recover
the oil industry which has been
heavily damaged since 1998. In 2002
after an economic strike, thousands of
professionals from the Venezuelan
state-owned oil company (PDVSA)
were forced to leave their jobs, and
most of them finally migrated looking
for new working opportunities. As a
result the oil production decreased
from 3.25 million barrels per day in
2001 to 2.55 in 2006. Nowadays most
persons from this high-skilled
diaspora are employed in Colombia,
Canada, and even Saudi Arabia; and
have acquired new business contacts.
Eventually if the governmental and
institutional conditions in Venezuela
change positively, these professionals
abroad could serve as communication
bridges between oil companies in
OECD countries and PDVSA, in order
to support recuperating the
performance of the national oil
industry .
In addition, the creation of an
expatriate knowledge network would
be convenient since at the moment
there is no such way of linkage. This
will facilitate to set up connections
among capable expatriates and
Venezuela.
Transfer of technological expertise
and know-how
When capable migrants have the
opportunity to live, work or study in
developed countries, generally
acquire additional technical
knowledge and expertise which could
be useful back home. This statement
could be only applied if adequate
high-tech infrastructure and sufficient
investment in research and
development is previously established
in countries of origin. South Korea
once a developing country and now
part of the OECDs is an example how
this strategy can be implemented to
foster economic development. Broad
exchange programs with the United
States in the high-tech field,
aggressive investment in education
How diaspora can contribute to the Venezuelan economic development
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
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and R&D, allowed South Korea to
adopt western business practices
which contributed to the its economic
expansion.
Skills and expertise acquired in
developed countries by the
Venezuelan diaspora is a potential
source of knowledge which sooner or
later will foster the productive capacity
of the country, driving it into the
development way.
Direct Investment
The most direct option for a qualified
diaspora to contribute with the country
of origin is investing in existing
companies or becoming
entrepreneurs back home.
Israel is an excellent sample on how
diaspora community did support the
acceleration of the high-tech industry
in the country. Numerous technology
companies were created in the 1990s.
After a large immigration of Jewish
scientist from Russia, the country had
the highest per capita concentration
of engineers in the world (Devane,
2006). This allowed a potential growth
of the technology sector, and
attracted direct investment from
Jewish diaspora mainly established in
the United States. Additionally public
investment in research and
development increased and
government venture capital stimulated
such progress.
In Venezuela opportunities for direct
investment are enormous in all
sectors. The saving capacity of
diaspora professionals living outside
the country is by far higher than the
offered by the low salaries of local
professionals. Eventually this
represents a chance for high skilled
migrants to create new enterprises in
Venezuela which would fulfill needs of
the local market.
However, there is a precondition for
this alternative, business environment
must be ideal. Stability in social,
politic and economic situations is a
prerequisite to reduce risk and
guarantee a return on investment.
Conclusion
Although the general circumstances
in Venezuela are forcing most local
professional individuals to migrate,
looking for better opportunities in
other countries, this situation could be
turned into positive. This capable
diaspora which is dispersed around
the world can contribute to the
country’s economic development in
many ways. As mentioned above,
diaspora could serve as
How diaspora can contribute to the Venezuelan economic development
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
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communication bridges between
companies in OECDs and home
countries through expatriates
knowledge networks. Another
possible way to support is through the
transfer of expertise and know-how
acquired by intellectual diaspora
abroad. These competences and
capabilities learned outside the
country are potential resources to
transform the economic development
of the nation. Direct investment is
seen as the most suitable option of
contribution to the economic growth of
the country by high-skilled
Venezuelan diaspora; however, it is
necessary to create appropriate
political, economic and social
conditions in order to generate a
favorable business environment for
local investments.
To sum up, the Venezuelan diaspora
commitment with their own country’s
development is seen as a critic
resource that will determine future
opportunities of progress and
economic growth for the nation.
References:
Vega, I. D., & Vessuri, H. (2008).
Science and mobility: Is physical
location relevant? Technology in
Society.
doi:10.1016/j.techsoc.2007.10.003
Devane, R. (2006). The Dynamics of
Diaspora Networks: Lessons of
Experience. In Y. Kuznetsov (Ed.),
Diaspora networks and the
international migration of skills: How
countries can draw on their talent
abroad. Washington, DC: World
Bank.
How diaspora can contribute to the Venezuelan economic development
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
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B CORPORATIONS: EVOLUTION OF CAPITALISM?
By Martin Kempf [email protected]
The “B Movement” (referring to
Benefit Corporations and Certified B
Corporations) is a global concept that
was born in U.S.A. in 2007 with one
clear objective: redefine the “success”
in business. What will happen if
companies start to compete not to be
the best company of the world, but to
be the best company for the world?
B Corps are companies that,
voluntarily, meet rigorous standards
of social and environmental
performance, transparency and
accountability; aspects that will lead
them to create benefit not only for
shareholders, but also for all
stakeholders (community, workers
and environment). The main purpose
is that business should aspire to do
no harm and benefit all (including
the decrease of poverty, rebuild of
communities, preservation of
environment and create proper places
to work).
Some people say, B Corps might
“turn out to be like civil rights for
blacks or voting rights for women –
eccentric, unpopular ideas that took
hold and changed the world”,
(Richardson, J, 2010). Why? The
traditional way of doing business
today is known by everyone.
Basically, a company is created to
make profit for their shareholders, and
a lot of them don’t care much about
the whole chain of stakeholders that
have participation in the every day’s
process of that company. To show
this with a practical example, there
will be no questioning by a directive
board of a certain company if the
manager decides to move a factory
from U.S.A. to China because the
costs are lower and the company can
B Corporations: Evolution of Capitalism?
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
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make a higher profit by doing that. In
fact, this is a very common strategy.
But what about the thousands
workers from U.S.A. who will be
“kicked out”? As Richardson points in
his article, “corporations are legally
prevented from being decent and
humane”, because in the same
example of moving a factory from
U.S.A. to China, if the corporate
leader “decides to make profits
secondary to the well-being of his
workers and neighbors, his
stockholders can sue him (…).
Corporate laws are written so that a
company’s fiduciary responsibility is
to the stockholders. Nothing else
matters. If the choice was between
the survival of the corporation and the
survival of America itself, the law
would compel him to pick the
corporation”, (Richardson, J., 2010).
So, we are living in a capitalist world
where these types of practices are
normal. However, B Movement is
advancing relatively fast with a
different conception of capitalism;
some people say, this is the evolution
of capitalism, which uses the power of
business as a force of good to solve
social and environmental problems.
What is a B Corporation?
This idea of B Corporations sounds
very idealistic and maybe utopian,
isn’t it? Can this really work in a world
where the prevailing capitalism rules
the way of making business? Are
shareholders truly willing to adopt
new policies inside their companies
which could harm their wealth and
decrease their profit, “only” for the
good of the environment, society and
the community?
Well, it seems that there are
companies, shareholders and also
investors who are willing to redefine
the way of doing business in favor not
only for shareholders, but also for
stakeholders. In fact, the number of
these types of companies (Benefit
Corporations and Certified B Corps)
ascends to over 900 in 32 countries
and in 60 different industries with only
4 years after the beginning of the B
Movement. And Chile is the third
country with more B corporations,
accounting 4.2% (after USA with 673
and 74.3% and Canada with 98 and
11%).
But how can Benefit Corporations
differentiate from Traditional
Companies and Non-profits? A
Benefit Corporation is a new legal
status form of corporation created in
the United States that voluntarily
B Corporations: Evolution of Capitalism?
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meets higher standards of corporate
purpose, accountability and
transparency; a triple bottom line that
considers workers benefits,
community and environment -along
with profits- in every decision process,
with the objective of create general
public benefit.
To understand the main differences
between these two business forms, it
is relevant to mention that until
recently (before the benefit
corporation legal structure was
passed in several states of U.S.A.)
“corporate law has not recognized the
legitimacy of any corporate purpose
other than maximizing profits. That
old conception of the role of business
in society is at best limiting, and at
worst destructive” (Gilbert, J. C.,
Houlahan, B., Kassoy, A., 2013.
These authors are the founders of the
B Movement).
Basically, the idea is that corporate
law requires only profit maximization,
leaving aside any attempt of social
responsibility or social impact, which
means that entrepreneurs or
company owners with a mission-
driven business may be “reluctant to
accept outside capital from investors
who may not share their long term
vision (…). The ability to register as a
benefit corporation empowers these
entrepreneurs, not only to take their
company to scale while maintaining
mission, but to clearly identify
themselves as purpose-driven
companies”, (Gilbert, J. C., Houlahan,
B., Kassoy, A., 2013).
Conclusion
Is this the evolution of capitalism? Is
this really a movement that can
change the traditional way of making
business, leaving aside the obsession
of profit-making and focusing in a
social mission?
Personally, I think the answer to those
questions is yes; it could be. I believe
some business people (from now, still
a minority group) are having these
change of paradigm inside their
heads, willingly to make a difference
in the way of making business. And
the reason why I think this is possible
is because the ideology of B
Corporations still haves a capitalist
base; still cares about profit; and still
operates as a business (I mean, they
need to be competitive in the market,
they need to improve constantly
because they still can fail or go
bankruptcy if they perform badly), but
in a logical way.
Why in logical way? Because at least
for me, sounds logical that a company
may have other purposes than only
maximizing profits for shareholders.
B Corporations: Evolution of Capitalism?
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Business, as one of the most powerful
man-made force on the planet, can
contribute to create value for society
and for the environment.
It also sounds logic that a company
should worry about the community
where she is inserted; to put the
workers as a priority; and to take care
about the environment. But with legal
and real commitment; not just with a
handful of CSR activities at the end of
the year.
“Capitalism is becoming less
obsessed with revenue and more
focused on creating social value (…).
If 20th century was obsessed with
maximizing financial returns, then the
21st century will be all about creating
social value”, (Balch, O., 2012, citing
Andrew Kassoy).
Of course there are opinions saying
that the impact of B corps will not be
big for the worlds or America’s
economy, but I think every big idea
requires some time to mature.
Forbes Magazine published an article
on 12th April of 2010, written by
Susan Adams, called “Capitalist
Monkey Wrench”, where one of the
topics discussed was that the
Rockefeller Foundation gave US$ 1
million to develop a new rating system
for social and environmental effect.
“Wealth advisors and private banks
are hungry for such a standard, says
Antony Bugg-Levine, a managing
director at Rockefeller: ‘Credible
ratings unlock a whole new source of
capital’. But can it unlock wealth? So
far all the B corps are privately held,
and none has revenues exceeding
$200 million. David Vogel, a
business ethics professor at the Haas
School at UC, Berkeley, who has
written extensively about corporate
responsibility, doubts the potential is
that great. “It’s a moderately nice
thing,” he says, “but it won’t be
transforming American business”,
(Adams, 2010).
But is really “unlocking wealth” the
main purpose of the B Movement? I
don’t think so, and the article “Today
marks a Today Marks A Tipping Point
In The Evolution Of Capitalism”
provides an overview about why. “(…)
And for investors, it mitigates risk,
reduces transaction costs, creates
additional rights to hold management
accountable, and accelerates the
growth of a big market opportunity to
meet the needs of people who want to
invest to both make money and
make a difference.”
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Make money and make a difference…
that’s the key. They are not talking
only about profit maximization; here
one must understand that the
proposal of B Corporations includes a
change of paradigm in the way of
making business. The main objective
(unlike the traditional capitalist way) is
to contribute with social benefit, and a
Benefit Corporation or a Certified B
Corp must have that purpose clear in
their statutes.
“To truly live in a more egalitarian
society, with less poverty and with a
healthier environment, we don’t need
only companies that put people in the
center of it; we need investors to
start investing in a different way.
We need public policies that are
friendlier; we need universities
teaching this issue so that new
entrepreneurs come out with this
‘chip’ in their heads. We need every
single actor of the economy in this,
and that’s why we have ally with more
organizations”, (M.P. Salas, 2013).
References
Adams, S., 2010. Capitalist Monkey
Wrench. Forbes [online], 12 April.
Available at:
http://web.archive.org/web/20100328
155935/http://www.forbes.com/forbes/
2010/0412/rebuilding-b-lab-corporate-
citizenship-green-incorporation-
mixed-motives.html [Accessed
February 2014].
Salas, M., 2013. Las empresas B
utilizan el Mercado para resolver
problemas sociales. Y no solo están
en alza, sino que cada día son más
valoradas. cl [online] 29 November.
Available at:
http://www.eldefinido.cl/movil/actualid
ad/lideres/1461/Sistema_B_empresas
_que_no_buscan_ser_las_mejores_d
el_mundo_sino_para_el_mundo
[Accessed February 2014].
Gilbert, J. C., Houlahan, B., Kassoy,
A., 2013. Today marks a Today
Marks A Tipping Point In The
Evolution Of Capitalism. Forbes
[online], 17 July. Available at:
http://www.forbes.com/sites/skollworld
forum/2013/07/17/today-marks-a-
tipping-point-in-the-evolution-of-
capitalism [Accessed February 2014].
Balch, O., 2012. Are B Corps
redefining business for the 21st
century? The Guardian [online], 3
October. Available at:
http://www.theguardian.com/sustaina
ble-business/b-corp-redefining-
business [Accessed February 2014].
Richardson, J., 2010. Saving
Capitalism from Itself: Inside the B
Corp Revolution. Esquire Online
[online], 23 August. Available at:
http://www.esquire.com/blogs/politics/
b-corp-082310 [Accessed January
2014].
B Corporations: Evolution of Capitalism?
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
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INDUSTRIALIZATION AS THE STAGES OF DEVELOPMENT – TEXTILE INDUSTRY IN EGYPT
By Jomana Ismail [email protected]
One of the theories that identify
frequent social change and the idea
of development is Walter Rostow’s
concept of economic growth in his
book “The Stages of Economic
Growth” 1960. He identifies five
growth stages: the traditional society,
the preconditions of take-off, the take-
off, the drive to maturity and the age
of high mass consumption. “These
steps are linear and towards
evolutional higher development”
(Mallick, 2005, p.5).
The first stage, the traditional society,
is characterized by limited production
functions; therefore the main focus is
on agriculture. The political rule is
centralized in the traditional society.
The preconditions of take-off, a
process of transition from traditional
society to take off. It is characterized
by more dynamic society which is
reflected in more production
functions. The society is more open to
trade and it is the beginning of
expansion and internationalization.
The take-off stage begins with
overcoming the old blocks and the
resistances to steady growth. At this
phase growth becomes the normal
condition. The rate of investment is
increasing and the technological
development is expanding. Also there
is an expansion in urban areas and
building new industrial areas.
Moreover, new techniques in
agriculture and industry are used and
the farmers begin to accept the
changes.
The drive to maturity is characterized
by extension of technology over the
whole front of economic activity. The
economy finds its place in the
international economy: goods
formerly imported are produced at
home; new import requirements
develop, and new export commodities
to match them. The society develops
new values and revises the current
institutions to support the growth
process.
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The age of high consumption the
society looks for welfare. The leading
sectors shift towards durable
consumers’ goods and services. In
addition to that, the structure of the
working force is changing; more
people are working in offices or in
skilled factory jobs.
According to Rostow’s theory of
economic development,
industrialization happens through
several development stages to make
the shift from traditional economy. In
early stages, there should be a
surplus which is generated from a key
sector to provide funds for investment
in the manufacturing industries which
means that the output exceeds the
need of the local need which leads to
exporting the surplus. The revenue
from the exported surplus would be
spent in several directions.
Infrastructure is one of the primary
ways to invest the revenue like
railways, roads and roads which
serve the exporting activity and at the
same time their availability will foster
industrial activities. Moreover the
revenues may be used in
manufacturing industries. This
prepares the economy for the first
step of industrial development (Meier,
2000, p.180-185).
Industrial development has two main
stages. The first one is import
substitution while the second one may
be market inward orientation or
outward orientation.
1 “Easy” Import Substitution
“The first step of industrial
development is “the first stage of
import substitution”. This stage
requires some tariff or quota
protection to accelerate the process
of industrial development,” (Hawash,
2007, p.1).
The developing countries start to
substitute imported goods which
doesn’t need skilled labors, is not
effected by low production in sense of
cost and don’t need sophisticated
technology. These goods are usually
clothing, shoes, household goods
which are made of leather, wood and
textile fabric (Meier, 2000, p.180-185).
Therefore, this stage is called the
“easy” stage of import substitution. In
addition to that, external economies
are generated through production of
these commodities. It increases the
human capital and the spread of
technology. Therefore, the increase of
production will be more than the
increase in consumption of the
economy (ibid).
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2 Inward or Outward Orientation
There are two ways for an economy
to continue increasing its industrial
growth rates. The first way is the
second stage of import substitution
which is inward looking industrial
development strategy or the outward-
oriented strategy, the exportation of
manufactured goods (ibid).
The first strategy, inward industrial
development, in based on substituting
imported products by domestic
production. The problem with this
strategy is that developing countries
have low physical and human capital
and unskilled labor, “highly physical-
capital-intensive intermediate goods
and skill-intensive producer and
consumer durables” is challenging
(ibid).
The other strategy is the outward-
oriented strategy. This strategy
focuses on international trade and
exporting the goods and services that
the country can be competitive at.
Examples of these economies are
Hong Kong and Taiwan.
Countries applying outward-oriented
development strategies performed
better in terms of exports, economic
growth, and employment than
countries with continued inward
orientation (ibid).
Industrialization in Egypt
In the end, according to Rostow’s
economic growth concept, Egyptian
industrialization in general and textile
industry in specific, has passed by the
‘take off’ and now in the ‘drive to
maturity stage.’ In other words, the
textile industry has passed the import
substitution phase and the inward
market orientation and now struggling
in the outward orientation phase.
The textile industry in Egypt first
started mechanization in the 1899 by
the European commission who lived
in Alexandria and then was adopted
by the government which led the way
afterwards in 1952 to the import
substitution stage. When Gamal Abd
El Nasser ruled, he applied the
‘Inward Industrial Development’
strategy. All the production of the
cotton was purchased by the
government and subsidized the textile
products for the domestic market.
Afterwards in the early 70s, when El
Sadat has come to power, open door
policy was adopted which shifted the
strategy from inward orientation to
‘Outward Industrial Development.’
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The challenges in this phase are
huge. On one side the industry is not
efficient; the backward and forward
linkages are weak, the technology
used is old and the labour need
intensive training. On the other side
the policies and the institutions need
reform; the corruption is high, the
public companies customizing the
rules and laws to their benefits and
the private companies are not well
presented and involved in the
decisions and policies that is taken by
the government. These challenges
make it difficult for the textile industry
to compete internationally.
By making reforms in the policy level,
improvements in the domestic
capabilities and adjustments in the
market strategies, the Textile industry
in Egypt will be able to fully adopt the
‘drive to maturity’ level and be able to
compete internationally which will
have a huge impact on the Egyptian
economy because of the Textile
industry role in the economy.
References
Hawash, R., 2007. Industrialization in
Egypt: Historical Development and
Implications for Economic Policy. [pdf]
Cairo, Egypt: Faculty of Management
Technology, German University.
Available at:
<http://mgt.guc.edu.eg/wpapers/001h
awash2007.pdf>
O. B., 2005. Development Theory:
Rostow’s Five-Stages Model of
Development and ist Relevance in
Globalization. [pdf] School of Social
Science, Faculty of Education and
Arts, The University of Newcastle.
Available at:
<http://202.202.111.134/jpk/data/gjzrz
ygl/web%20prepare20110608/paper/
Rostow%20Development%20Model%
201960.pdf>
Meier, G. M. & Rauch J. E., 2000.
Leading Issues in Economic
Development, 7th ed. [pdf] New York:
Oxford University Press. Available at:
<http://econweb.ucsd.edu/~jrauch/lea
dingissues/leading.pdf>
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GOVERNANCE IN THE VALUE CHAIN: THE CASE OF NAMIBIAN BEEF VALUE CHAIN
By Rodney Seibeb [email protected]
Globalization and global
interdependence has provided
opportunities to businesses in
developing to access and profit from
lucrative markets beyond their border.
However, they are expected to meet
high standards and demands from
governments and consumers. Thus,
effective governance of the value
chain is required for a developing
country’s value chain to be able to
maintain access to pricey markets.
The Technical Centre for Agricultural
and Rural Cooperation (CTA) which is
a jointly established international
institution of African, Caribbean and
Pacific (ACP) Group of Countries and
the European Union (EU) revealed
that from the 79 ACP countries which
are granted duty free access to EU
markets, only Namibia exports beef
constantly to the EU. This fortunate
situation for Namibia has been
attributed to the fact that it can meet
the governance requirements set by
the EU (CTA, 2013).
Namibia was granted preferential
access to supply 13 000 tons of beef
to EU, however the country has been
unable to supply that amount due to
numerous challenges facing the beef
sector. One main factor is
governance, because 51% of the
cattle are resident in the communal
areas north of the VCF, thus EU
cannot accept any meat products
from those areas, due to potential risk
Governance in the value chain: the case of Namibian beef value chain
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
34
of the foot and mouth disease, hence
Namibia is unable to take full
advantage of the 13 000 tons duty
free access granted to its beef
exports under the Economic
Partnership Agreement.
Namibian beef value chain
Source: Deloitte & Touch, 2013
Moreover, due to the access to EU
market, Namibia is subjected subject
to rigorous inspections and audits
from the EU and other entities. EU
required the implementation of a time-
consuming computerised traceability
system from the Namibian meat
industry, and in response the industry
has implemented the Namibia
Livestock Identification and
Traceability System (NamLITS). The
requirements from institutions in
developed countries are changing
from time to time. However, Namibia
has proved that with effective
governance even the most stringent
requirements can be met by
developing countries, though at a high
price.
Disease zoning with the veterinary
cordon fence and strict control of
animal movement by DVS has helped
parts of the country to be to be free
from food and mouth disease.
However, 51% of Namibia’s cattle
population are resident in the
communal areas north of the VCF
and can therefore not be exported to
overseas markets. Thus, the country
is faced with a challenge to have the
areas declared disease free by the
international authorities, such a
declaration will shift the VCF
northward to lesser risky areas and
enlarge the FMD free zone and thus
integrate some cattle farmers into the
mainstream economy. This
integration will unlock the economic
potential of the communal areas north
of the VCF as it will not only boast
Namibia’s cattle production for export
but it will also enable these producers
to benefit from the high returns from
export to the EU and other lucrative
markets.
Veterinary zones in Namibia
However, the realization of this dream
requires very close cooperation from
between all the stakeholders to
anticipate potential risk and thereby
avoid coordination failures, because
coordination failure might result in the
suspension the country’s beef
exports.
Governance in the value chain: the case of Namibian beef value chain
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
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Source: Adopted Gawande, et al, 2007
Governance in the value chain: the case of Namibian beef value chain
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
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The Meat Board plays a coordinating
role in the beef value chain, all key
stakeholders are represented on the
Meat Board, its platform is used to
raise and discuss important
governance issues and workout
national strategies to implement
requirement of Supranational
institutions. The Meat Board was
instrumental as it ensured that
Namibia meet the EU’s 90/40
residency and the traceability
requirements. Meat Boards’ FAN
Meat scheme ensures that Namibia’s
claim that its beef is naturally
produced from healthy free ranging
cattle is maintained internationally.
Farmers that subscribe to the FAN
Meat scheme are closely monitored
as they are expected to maintain high
standards in terms of farm
management, environment, animal
welfare, animal health, feed and
traceability.
Namibian cattle producers have
established Meatco and developed
the corporation over the years into a
multinational company. As a result,
the producers have indirectly
upgraded in the value chain
collectively. Therefore, they are
benefiting directly from the returns
from the lucrative markets. Meatco
has been able to meet and maintain
multiple standards, thus it has earned
trust in foreign markets. Due to the
capacity which Meatco has developed
the corporation is able to strengthen
and empower cattle producers to
improve the quality and quantity of
cattle which they supple to it.
Finally, Meatco has been able to
tighten co-ordination, and thereafter it
upgraded in the value chain from a
beef processor/trader to a beef
marketer. By developing a strong
brand and appealing packaging
Meatco has yielded positive returns
for the producers (Members).
Moreover, Meatco also owns
subsidiary companies in Europe and
South Africa. Therefore, this can also
serve as a model for primary product
exporting companies in developing
countries. Beef producers in other
ACP countries should organised
themselves under one entity and
engage other stakeholders in order to
strengthen value chain governance.
Once the value chain governance
mechanisms are firmly in place then
successes in terms of upgrading,
exports and higher returns will follow .
References
Animal and Plant Health Inspection
Service (APHIS). (2005). “APHIS
Evaluation of the Footand-Mouth
Disease Status of Namibia (Site Visit
Report and Risk Analysis).”
Veterinary Services, National Center
for Import and Export. Retrieved from
https://web01.aphis.usda.gov/db/mtad
Governance in the value chain: the case of Namibian beef value chain
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
37
dr.nsf/2f5c87c0140172cb852564bf00
46d1e2/aaff1b4d96d760de85257129
006cc523/$FILE/
Chiriboga, L., Kilmer, C., Fan, R. and
Gawande, K. (2008). Does Namibia
have a comparative advantage in
beef production? Texas A&M
University Retrieved from
http://kishoregawande.net/wp-
content/uploads/2008/12/finalreporti.p
df
CTA. (2013). Executive Brief Update
2013: Beef sector. Retrieved from
http://agritrade.cta.int/Agriculture/Com
modities/Beef/Executive-Brief-
Update-2013-Beef-sector
CTA. (2012). Executive Brief Update
2012: Beef sector. Retrieved from
http://agritrade.cta.int/Agriculture/Com
modities/Beef/Executive-Brief-
Update-2012-Beef-sector
Deloitte and Touche. (2013). Draft
Joint Vision of the Livestock & Meat
Industry of Namibia. Retrieved from
http://www.nammic.com.na/index.php
?option=com_jdownloads&Itemid=14
6&view=viewdownload&catid=8&cid=
180
Gawande, K., Cabrera, R., Cochran,
K., Dangelmayr, L., D’aguilar, G., Lee,
J., Speir,I., & Weigand, C. (2007).
African Capacity Building For Meat
Exports: Lessons From The Namibian
And Botswanan Beef Industries.
Trade Law Journal, Vol. 19, No. 55,
2010. Retrieved from
http://ssrn.com/abstract=1979233
Gereffi, G. (2009). Value chain
governance. Briefing Paper. USAID.
Retrieved from
http://www.microlinks.org/sites/microli
nks/files/resource/files/vc_governance
_briefing_paper.pdf
Kaplinsky, R. and Morris M. (2001). A
Handbook for value chain research, A
report
prepared for the IDRC. Retrieved
from
http://www.ids.ac.uk/ids/global/pdfs/vc
hnov01.pdf.
Meat Boad of Namibia. (2011).
Namibian livestock sector strategy
Retrieved from
http://www.nammic.com.na/jdownload
s/Industry%20Acts/NamibiaLivestock
ProducerSectorStrategy.pdf
Meatco. (2012). 2011/2012 Meatco
annual report. Retieved from
http://ecbiz124.inmotionhosting.com/~
tripna5/Meatco%20Annual%20Report
%202011%202012.pdf
Governance in the value chain: the case of Namibian beef value chain
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
38
ENTREPRENEURS AND THE CONCEPT OF ANTI-FRAGILITY
By Alan Tovar Prado [email protected]
Have you ever wondered what is the
exact reverse concept of fragility?
One might think of peripheral ideas
about what is not fragile and consider
robust, solid or resilient as possible
answers.
First, it is necessary to define what
makes a package fragile. Usually, you
can see that something is fragile,
when you find the “handle with care”
stamp on the box. According to the
Oxford dictionary, fragile is an
adjective that refers to an object
easily broken, damaged or
threatened, or a delicate and
vulnerable person.
Second, lets characterise a fragile
object, person (dispositions,
behaviours, personalities) or systems.
A clear example is a wine glass,
which is better preserved, well kept
and protected; it is an object which
would be at its best unharmed.
Another good example could be the
current financial system; the more
stable and the less risk the better.
Third, all the concepts
aforementioned (robust, solid,
resistant, etc.) could be
representative qualities of anti-fragile
products or systems, however they do
not cover the substantial attribute of
the phenomenon.
Nassim Nicholas Taleb, a Libanesse-
American scholar and statistician, has
created the neologism of Antifragility.
He, an uncertainty and risk expert in
the fields of Philosophy and Finance,
points that some things benefit from
shocks; they thrive and grow when
exposed to volatility, randomness,
disorder, and stressors and love
adventure, risk, and uncertainty. That
is what he called Antifragility.
So, antifragile has the exceptional
property to become better; it evolves
from errors, it manages to deal with
the un-know, and it does things
Entrepreneurs and the concept of anti-fragility
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
39
without completely understanding
them; to say, stressors and volatility.
One can guess, that the analysis
around the concept of antifragility is to
become aware of what is fragile and
its better understanding. Taleb
himself explains that you can
measure how fragile a system can be,
but risk is not measurable and one
cannot predict the occurrence of a
stressful event that could harm it. In
the long run, the antifragile wins from
prediction errors.
So, how is this conception translated
into personal domains? There is a
name for them: Fragilistas. These
individuals usually take the role of the
victims of the system, a bad boss, a
bad mood. Further, they are
characterized by their attitude towards
errors and variability; after making a
mistake, they feel defensive and
embarrassed rather than moving on,
introspect and learn. They are
nonaction types.
On the other hand, the Entrepreneur
is that one, who gains from innovation
and conviction, and –not always-
speculation. But, how to innovate?
Get in trouble -recommends the
author- real and serious trouble but
not terminal. Innovation is usually a
consequence of necessity more than
the outcome of bureaucratic
academy.
Contrary to fragility, entrepreneurship
may be considered a risky and heroic
activity, necessary for growth or even
mere survival for the Economy, says
Taleb. Still after a failure, the
Entrepreneur is still alive, though
morally and financially broken, and it
is the high rate of failure –a necessary
high failure rate- what makes the
economy to be antifragile.
However, the Entrepreneur may not
regret its activity of constantly and
rationally modifying its targets as
he/she acquires information; this is an
opportunist predilection, which has
significant consequences in business.
The Fragilista believes in the illusion
of thinking that others, too, know
where they are going, and that they
will tell you what they want if you just
asked them. The Entrepreneur denies
this assumption.
The strength of the computer
entrepreneur Steve Jobs was
precisely in distrusting market
research and focus groups –those
based on asking people what they
want- and following his own
imagination. Taleb interprets the
famous “stay hungry, stay foolish” as
“be crazy but retain the rationality of
Entrepreneurs and the concept of anti-fragility
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
40
choosing the upper bound when you
see it”.
This simplistic orientation towards trial
and error (seen as the expression of
an option so long as you could
identify a favourable result and
exploiting it), with no comparative
shame in failing, starting again, and
repeating failure triggers whole
economies. Indeed, U.S.’s largest
generators of wealth are based on
real estate (financial optionality) and
technology (based on disruptive
innovations). In contrast, Japan or
Germany hide risk by making small
contributions, adding small benefits.
According to Taleb, technology is the
result of antifragility, exploited by risk-
takers in the form of tinkering and trial
and error, with nerd-driven design
confined to the backstage, to say
emphasising in the implementation
more than in the innovation.
Also, the Entrepreneur shows the
distinctive quality to control fragility in
four ways:
1. Detecting fragility (more than
prediction) by understanding the
dynamics of causal-effects and
forecasting errors. How to benefit
when you make a mistake?
2. Focusing on make things -your
company- more robust to defects
and exploit these errors (both
internal and external). Do not try
to change the world for now.
3. Considering time as the mother of
all stressors. Antifragility is
necessarily how things move
forward under time.
4. Understanding innovation as a
concept of options and optionality.
How can you take the upside if
you like, but without the
downside?
The model of Antifragility covers well-
known dilemmas about risk and
chaos from a very peculiar
perspective. The idea is not try to
solve or shield something against
disorder agents or volatility but rather
understand and learn from stressors.
Entrepreneurs may consider his
advice to face a world full of
uncertainty, where randomness
seems to be the only constant. Be
able to gain from disorder.
Entrepreneurs and the concept of anti-fragility
D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
41
Forceful Formalization – Is it Panacea?
By Ketevan Morgoshia [email protected]
Modern economic picture shows
highly complex and interconnected
trends, which creates challenges to
identify the root of the problems that
developing countries usually stand in
front of. Among those ambiguous
economic challenges, the most eye-
catching one – informal sector,
attracts attention among the
economists’ circles, especially in the
standpoint of development
economics. The current discussion
over the topic divides those circles for
and against informal sector which is
still growing in the Third World. The
proponents share the idea that
informal sector fills the gaps of formal
sector “among the poorest of the
poor” and helps to maintain the
baseline in the “survival economics”
(ILO, Geneva). They argue that not all
developing countries are prepared to
root the informal sector out
completely, as long as various social
and institutional processes are
involved aside economic ones.
Hence, Structural Adjustment
Programs (SAP), initiated in 1980-
1990 by the World Bank (WB) and
International Monetary Fund (IMF),
along with the Washington
Consensus policies of 1989 do not
necessarily result in expected
economic growth, but the other way
around (Stiglitz, 2000). Thus the topic
is complex due to the fact, that it
involves not only the economic
concepts and discourses explaining
development economics, but
sociological and anthropological
aspects as well (Rand, Torm, 2011).
The proponents of informal sector
usually refer to the “rigidities of labour
market” and “voluntary choice of
informality” as a result of costly labour
market regulations, often leading the
labour force voluntarily join the
informal sector. Such critical
standpoints have to be taken into
consideration while dealing with the
transition economies, which mostly
suffered from the “shock therapies”
during 1990s resulting in high inflation
rate and growing number of
“underground economy” that was later
labeled as “informal economy”.
On the other hand, SAP proponents
suggest the formalization to sustain
economic growth and high
performance in a state’s economy.
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42
Elimination of informal economy will
reduce the level of crime, exploitation,
industry inefficiencies and
unemployment as long as public
records of registered businesses
would let governments tackle directly
with the shortcomings. Formalization
increases the level of social
protection, access to financial
support, government services, growth
rate and Foreign Direct Investments
(FDI) (ILO, 2013).
The concept of informal sector stems
from early 1970s, when economic
anthropologist Keith Hart conducted
his research in Ghana having found
out it not only existed but expanded.
Later it was accepted by ILO,
(International Labour Organization)
perceiving the range in which
marginal workforce turned into the
profitable enterprises. It was followed
up with the International Labour
conference in 2002 broadening its
concept to an economy wide
phenomenon involving the jobs and
workers inside (ILO, 2013). There are
also various definitions incorporated
by the various economist and
sociologists, but ILO Resolution of
2002 delivered the one commonly
applied in many states: «The informal
economy comprises half to three-
quarters of all non-agricultural
employment in developing countries.
Although it is hard to generalize
concerning the quality of informal
employment, it most often means
poor employment conditions and is
associated with increasing poverty.
Some of the characteristic features of
informal employment are lack of
protection in the event of non-
payment of wages, compulsory
overtime or extra shifts, lay-offs
without notice or compensation,
unsafe working conditions and the
absence of social benefits such as
pensions, sick pay and health
insurance. Women, migrants and
other vulnerable groups of workers
who are excluded from other
opportunities have little choice but to
take informal low-quality jobs (ILO,
2002)”.
Various socio-anthropologists and
economists define informal sector in
their own particular way. Meagher
(2004) introduces following
categories: survival informal group,
dependent workers and
entrepreneurs. House (1984)
investigates the motivation triggering
entrepreneurs start a business which
accordingly lines up in three
categories: dynamic IS (Informal
Sector) with subcontracting
arrangements with the formal sector;
poor, marginalised workers trying to
survive; transitional subsector
stretching between the previous ones
(Ishengoma, 2006). ILO has recently
stratified the manifestations of
informal economy, which differs from
country to country and from region to
region. It discusses the peculiarities of
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Forceful Formalization – Is it Panacea?
43
each and every single type of
manifestations giving the detailed
explanation of the cause and effect
ending in the informal economy.
The list of actors in the informal
economy ranges from street vendors
up to Micro, Small and Medium
Enterprises (MSME), which usually do
not involve contractual relationships
and thus do not participate in creation
of decent work. The underlying
causes of informal economy, listed by
ILO, may be poverty, poor absorption
capacity of industrial sector, the drive
of flexibility, changing production
structures, economic restructuring,
the labour regulation and economic
crisis (ILO, 2013). All these
challenges that are present in the
developing countries closely relate to
the Structural Adjustment
Programs and Washington
Consensus, giving recipes of liberal
economic organization to let the free
market function.
The debt crisis in Latin America of
1980s let IMF (International Monetary
Fund) and WB (World Bank) to think
about solutions for the indebted
governments to maintain economic
stabilization and issue even more
loans to repay existing debts and
avoid international banking crisis. The
policy set the preconditions for the
borrower governments to earn credit
from WB and IMF, named
afteWashington Consensus. It
required governments to liberalize
trades and open markets, change
state owned industries to private-
owned ones, and let FDI freely flow in
the countries ending in the total
deregulation of their economic
systems (Woods, 2003). Structural
Adjustment Loans were repeatedly
given to the same countries to make
“adjustment” viable, though
sometimes ending the zero level of
“adjustment with growth”, for instance,
in Argentina, Ghana, Senegal and
Malawi. They suffered from the same
black market premium and inflation
rate, the same real overvaluation and
real interest rates among the 1980s to
1990s. The primary demand to
ensure intensive lending from WB,
was tax reform, enhancing property
rights and increasing formalization
policies to enforce law over the
private sector. The overall negative
outcome could be observed on the
post USSR countries, named as
“transition countries”. Only Poland
and Hungary had success along with
Georgia, but the latter showed the
worst case of output due to the civil
wars in 1990s.
The paper will analyze the relation
between informal sector, formalization
outcomes and macroeconomic
structural changes. The analysis is
based on the three country examples:
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D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
44
Brazil,Vietnam and Georgia. Those
countries were selected due to their
experience to cope with the informal
sector, i.e. Brazil was chosen for its
successful public and financial policy
ending in the rise of formal sector;
Vietnam for its partly successful
formalization, but more for its
successful informal institutions and
lastly Georgia, conducting all
necessary structural adjustments, but
ending in decrease of formalization
incentives.
Brazil – Successful Formality
Brazil’s economic reforms took off in
1996 and over a decade after it
reaped the harvest of dynamism in
social-economic composition. The
first phase was distinguished with the
macroeconomic policy changes and
handling internal crisis of currency
fluctuations and high inflation rate.
The devaluation of Real in 1999
ended up in the increased value of
Dollar and substantially increased
production costs. Due to the dollar
rise, public debt stood on the agenda.
At the same time, opening markets
defined the prices at the international
level, which was followed by the
privatization of public services and
became also dependent on the
general price index of the
commodities. To combat the inflation
rate and maintain purchasing power,
the government introduced minimum
wage policy along with the inflation
target policy. It kept going to
devaluate Real, increase export share
and create better conditions for
domestic producers to compete with
the international ones. Interest rates
were kept high, but public spending
low, to prevent the speed-up in
inflation. Public debts forced
government to increase taxes
throughout 1990s which was resulted
by the costs of the newly projected
social security system in the country.
In addition, the National Congress
detached a part from its revenue
(20%) implementing Fiscal
Responsibility Law to contain
expenditure and pay a portion on the
interest of the debt. It also involved
public funds and public financial
institutions to absorb a portion of the
public debt at the same time to keep
rolling over the debt to finance the
economy. Due to the international
loans and open domestic markets,
large companies started to invest in
Brazil, placing the debt securities and
property titles in national currency.
The GDP growth was accelerated by
the appreciation of Real in 2004 after
increased consumption and
investment. Raising international
reserves and lowering external debt
stock led to the decrease of the loans
by the banking system in GDP from
33.7 to 24.2%. The state became able
to invest in infrastructure. Though
trade and finance prospered,
industrial sector was still lagging
behind as long as aggregate value did
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45
not increase and other sectors lacked
dynamism to advance.
The next Government of Lula
maintained the same macroeconomic
policy, but increased the cost of social
security, restored public investments
to enhance infrastructure, supported
by the national business groups and
investment funds from public
enterprises. The response to the
financial crisis in 2008, Brazil
launched the Selic (lowering basic
interest rates); IPI (reduced taxes);
simplified bank reserve requirements
and used international reserves to
strengthen export abroad; ensured
lending money to the MSMEs. Formal
employment start to grow after
devaluation of local currency and
intervention of Ministry of Labor and
Employment to supervise
formalization of the labor contracts.
Increasing formal jobs changed the
composition of total labour income in
terms of occupational status leading
to the positive development of
employment and raising up the real
wages. Labour regulation involved
“protected employment”, the term
describing jobs validated by the work
cards. Only the owner of the work
card could access the social security
program. Labour rights included paid
holidays, maternity leaves, the
minimum wage and the “thirteenth
salary” – added bonuses in the end of
the year. The most vulnerable
working groups were converted
formal with temporary contracts both
in public and private sector, though
the employment growth derived from
the open-ended contracts raising it to
60% throughout the decade. Although
employment grew, it did not eliminate
other forms of contracts respectively
outsourcing, internships and labour
cooperatives. To control and
supervise labor contracts, or to
unravel informal workplaces the
following public institutions were
created:
1. “Super Receita” (Super
Revenue): social security and tax
revenue auditing systems;
2. Mobile inspection groups: child
labour eradication program and
national plan for slave labour
eradication in partnership with
ILO in order to create a decent
work.
3. Public Ministry of Labour:
monitoring compliance with laws.
Its competence also includes a
resolution of collective labour
disputes. It revealed fraudulent
practices demanding work card
registration to eliminate fake
cooperative members, which
became the trend to evade taxes,
and regulate labour laws.
The growth of formal enterprises was
identified in two initiatives: recognition
of employee status (cooperator,
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46
judicial person, individual worker) and
recognition of accountability. First
initiative helped government to
identify the characteristic of
employment relationship and root out
possible fraud. The second initiative
forced employment relationships to be
monitored from one of the involved
parties and thus avoid future labour
liabilities. Trade unions played
important part to increase
formalization as it helped vulnerable
workers: earn bargaining power;
pushing public institutions to fight
against fraud. In the end, labour
market configuration paved the way to
decrease poverty level: 61.4 million
people were living in poverty in 2003
which reduced to 41.5 million in 2008
(Monteiro et al, 2011).
Source: IBGE-PNAD. IPEADATA See
at: http://www.ipeadata.gov.br/
Another research of Brazilian case
suggests, that the reforms only
affected retail trade, manufacturing,
though the SIMPLES Nacional law is
uncertain in manufacturing and
service sectors. The research
revealed the fact that SIMPLES law
was working in definite sectors, like
retail trade. The incentives to
formalize was mainly frequent
inspections, especially for the firms
highly exposed on the street markets.
Another revelation referred to old
procedures of registration of business
taking 15 steps and visiting several
institutions, which reached 152 days
according the Doing Business
estimates (World Bank, 2004). The
authors argue that different economic
activities need other initiatives to
experience lower level of informality
(Monteiro et al, 2011). The most
recent policy development for MSMEs
started in 2009, initiated by the
Ministry of Development, Industry and
Foreign Trade introduced EI –
Individual Entrepreneur policy to
formalize individual entrepreneurs.
Here the formal status was required
from workers employed from 400
occupations and earning USD22.000
annually. Before registering EI one
has to register for the Simples
Nacional which represents unified tax
regime for small and micro
businesses. Attraction to formalization
was triggered by the pension and
other employee benefits (insurance,
maternity leaves) covering at least 10
to 12 months. Formalization also help
MSMEs to have access to better
prices and suppliers, that does not
happen before the registration as the
company is not accountable.
Registration with the CNPJ (National
Register of Legal Entities) exempts
from certain taxes as PIS (social
integration tax), COFINS (social
contribution tax), Income Tax and IPI
(tax on industrialized products). The
Trade Ministry also initiated
formalization via Internet spreading
the access possibilities to every
region of the country as long as
IBGE1 documents 11 million sole
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D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015
47
proprietors working on their own and
not collecting taxes. Support to
formalize is delivered from SEBRAE2
giving the course in management to
entrepreneurs and endowing them
membership of the organization
(Pires, 2011).
Table 2. Macroeconomic Indicators in
Brazil, 1980-2011.
Another study shows that economic
revival stemmed from the underling
macroeconomic strategies that
reinforced in 1980-1990s. It paved the
way the further economic growth and
development, namely, restrictions for
the foreign banks to enter local
financial markets, sheltering domestic
banks from the international
competition. Regarding labour market
regulation, minimum wage policy was
successful to reduce income
inequality and create lower middle
class. It helped raise the purchasing
power among the population,
although it imposed burdens for
MSMEs to contribute social security
system making up 50% for their gross
profit. The study revealed 9%
contribution of pension funds to the
GDP, which is a high figure for the
developing country. On the other
hand, it do not show sustainability,
reflected on demotivation effect on
companies with low skilled workers to
formalize. Moreover, unemployment
insurance system results high
turnover of the workforce and
demotivate businesses to invest in
professional training and development
of their labour force. The study claims
that Brazil became successful with
the energy and oil reserve, which
spurred the country to export rather
than import raw materials ( Minassian,
2012).
Consequently, time consuming
structural reforms shook 25-year-
stagnated GDP and 15 years of
liberal economic restructuring
stabilized labour market and created
the longing for formal economic
activities despite the policy
shortcomings in certain sectors. The
country can strive to better
adjustment policies and utilize its
accumulated financial resources to
resolve industrial challenges and
reach infrastructural advancements.
Vietnam – Successful Informality
During 1990s Vietnam as a transition
country has faced various challenges
with structural adjustment programs.
It has opened markets and converted
to liberal economic policies. Though
the period marked with unique trends
in entrepreneurial risk management to
establish connection between various
actors of the market. The chapter will
review the trends in formal/informal
institutions and the scope of informal
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48
institutions played to strengthen and
smoothly convert to formalization. The
study by Steer and Sen (2008)
reveals specific trends in Vietnam
between 1990s and 2000s, the former
period was marked in high level of
informal transactions, while the latter
period transformed to the formalized
business relations between
customers and suppliers, suppliers
and manufacturers. The survey took
305 sample firms to measure the role
of informal institutions working at
place when the legal recognition was
weak during the first phase of
transition to the market economy.
Private enterprises recognition took
place in 2000 after the enactment of
the Enterprise Law. It was followed by
the considerable number of company
registrations. Unlikely 2000s,
enterprises operating in 1990s
suffered from scarce information
about markets which was earned by
the informal institutions and
connections in order to manage
interaction with trading partners and
learning “rules of the games.” As we
can see from the chart below,
Vietnam was lagging behind its
regional competitors in terms of
contract enforceability in 2004,
although progress in formalization
and in legal institutions was made
early in 1990s.
Rule of Law Index 2004
Source: Kaufman et al, 2005.
Transaction risk measurement is
discussed in two economic
perspectives: asset specificity and
credit risk. The first implies safe
redeployment ability of the assets
among different users and the second
implies credit risk extension, whether
customer pays in cash at site or
delays payment after delivery of the
certain product. In Vietnamese
business reality of those measuring
variables were closely related to the
informal institutions to verify scope of
the investment made by the foreign
producers or suppliers in the country.
The survey brought significant
comparisons between earlier
research on informal institutions by
McMillan and Woodruff in 1995 (MW).
Below the chart shows dynamic of
monitoring customers in absence of
formal facilities in 1990s and in 2004
(conducted by Steers et al). As we
can see numbers show little
difference confirming the assumption
that informal way of communication
was still prevalent in 2004 after the
market liberalization and progress in
communication mechanisms:
Source: VBS3 2004, MW4 1995
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The same applies to the investigation
process of customers before entering
in business transactions. As we can
see below friends and personal
relationships still hold first place in the
chart although resources of market
research considerably improved.
Source: VBS 2004, Steer et al.
Another finding of VBS 2004 survey
was that formal contracts play a
limited role in Vietnam, though 70% of
transactions were established on
contracts. In MW survey this number
was approximately 60%, but less than
10% believed it could be enforceable
by the court. What has changed since
2004 is that laws and courts became
trustworthy though they played a
minor role to resolve disputes
translated in the fact that formal legal
system is not considered as a mean
to protect commercial contracts.
Vietnamese enterprises use contracts
mainly for relational and social
purposes, fostering cooperation. They
are primary records of agreements,
source of building trust and a way
forward to the market economy. The
case of Vietnam apparently exposes
that assumptions on informal
institutions are working, namely:
1. Informal institutions such as
social and business contacts can
help solve the problem, where
formal institutions do not exist or
function loosely;
2. Informal institutions are resistant
to change and often stabilize
economy if there is dynamism in
the formal economy; They serve
as a complement to guarantee
economic transactions when the
formal laws are out of date or
unviable to conform (North,
1990). In this regard the next
case of Georgia will shed the
light, how the structural
adjustment programs i.e. «shock
therapies” weakened those
institutions and triggered the
growth of informal economy after
the collapse of the Soviet Union.
Georgia
Everyone agrees on the importance
of human capital in the development
of capitalist economy, which mainly
stands on two milestones: individual
risk and the responsibility of taking
risks. In this regard, Soviet reality was
totally the other way around, where
the human aspect of decision making
was ignored and the state bore all the
responsibilities for the ongoing
economic processes. The collapse of
the Soviet Union originated the crisis
of the mindset in people unaware of
new economic structure and unused
to the demands from the market
economy. Georgia was one of the
countries to be the pioneer aparted
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from the Soviet Union. After gaining
independence the government of
Georgia tried to enforce structural
adjustment policies to catch up with
the European counterparts. The
ensuing processes of democratization
and trade liberalization did not pass
without significant loss and mistakes
from both the government and IMF
side supporting Georgia with the
transition from command to the
market economy.
Liberal Reforms in Georgia
Liberal economic reforms took off in
2003, when the corrupted government
and officials were ousted by the Rose
Revolution due to the continuing
budget deficits and hyperinflation
caused by the former government
manipulations presided by
Shevardnadze. Though the strong will
to reform the state emerged in 1990s
in close relationship with IMF and
WB. By that time Georgia suffered
civil war and ethnic adversities with
Abkhazeti and Samachablo, currently
labeled as a dead conflict regions of
South Caucusus. On the other hand,
the inheritance of the Soviet Union
was directly given to the successor
country of Russia, preserving
inherited institutions and statehood.
Other countries, emerging from the
Union, had to construct their own
social and state institutions almost
from a Tabula Rasa (Papava, 2013).
The preceding economic
development could be divided into the
following stages:
1. The stage of naive
comprehension,1989 – starting
new economic concepts of
development after independence;
2. The stage of reform stagnation,
1990 – enacting laws for
economic reforms, though not
effective;
3. The stage of populist economic
reform, 1991-1992 – government
transferred land to people without
compensation as a form of
support to the population, though
there was no legal basis for
private ownership of land, no
property rights enforcement
bodies and no legal framework
(Papava, 2013).
The most favorable “Shock Therapy”
for transition economies to convert to
the market economy was suggested
by the former Polish finance minister
Leszek Balcerowicz. According to the
example of Poland, the following
agenda had to work:
1. Price increase, temporary inflation
to maintain market equilibrium;
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2. Restrictions on incomes of the
population;
3. Restrictions on money supply and
increase of nominal interest rates;
4. Increase of interest rates on
deposits, stimulation to save;
5. Cuts in public spending and
subsidizing unprofitable
enterprises;
6. Covering budgetary deficits via
issued bonds by the government;
7. Tax system regulations,
uniforming the taxes;
8. Establishing common customs
duties restricting import and
stimulating export;
9. Social assistance for population
though in government abilities;
10. Fighting against monopolies and
quitting administrative intervention
in private sector activities (CASE,
2003).
There were several distorted legacies
both in the government and society
after the collapse of the Soviet Union.
Corrupted government stemming from
the old so called Nomenklatura,
plunged into the bribes in every
sphere of economic activities.
Criminal bands, so called Thiefs in
Law, using racketeer bribed the
government and took bribes from
ordinary people instead of safety
guarantees both in business and
social life. No social and state
institutions existed to guide people in
the functioning principles of market
economy; no national currency and
no knowledge to manage national
finances; no macroeconomic planning
and tax administration, which finally
led population to the enormous
shadow (later informal) economy
growth in 1990s. Thus, there were
definite tasks to be accomplished by
the new government of the newly
established small country:
1. Eliminating corruption in public
authorities;
2. Dealing with the criminal groups
and revealing corrupted officials
backing up those criminals;
3. Establishing clear tax
administering and collecting
bodies;
4. Establishing monopoly and law
enforcement bodies;
5. Modernizing accounting system
and standards;
6. Modernizing enterprise
management according the
market economy demands and
modern legal statuses;
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7. Creating culture for taxpayers to
administer tax liabilities and pay
those taxes respectively.
The growing shadow economy
culminated in 1999-2007 reaching
68.8% of the official GDP (Torosyan
et al, 2012). Additionally, there
emerged two-tier labour market: paid
employees working for the state
institutions in the urban area and self-
employed mostly informal, working in
agriculture and petty trade in rural
areas. Even paid employees, working
for the formal institutions, used to
engage themselves in informal jobs
as a second source of revenue with
verbal agreement and short term
work. The reason for informal job
seeking was the miserable wages in
the public sector. In 1999 about 80%
of public sector was formal, but
almost 70% of private sector was
informal:
Source: Georgia Labour Force
Survey, 1998, 1999.
Empirical studies show that poor tax
administration and law enforcement
along with the complex tax system
increase informal economy for which
the year of 2005 appeared crucial for
Georgia. Ideal taxation system is
based on the following principles:
simplicity, plainness, rate,
universality, comprehensiveness,
evenhandedness which became the
incentive to structure new taxation
system to manage unscaled informal
sector and generate budget revenues
(Papava, 2013). One has to keep in
mind the fact, that experience of
doing businesses was absent by that
time, not to mention the absence of
tax payment traditions. Moreover, the
sense of responsibility to pay taxes
was technically zero. Most of the time,
so called Homo Sovieticus preferred
to pay bribes to the government
officials, than to pay
incomprehensible taxes and indulge
themselves in further
misunderstandings with the corrupted
government. The number of taxes
and the rates was reduced from
twenty to seven and gradually refined
in the following way below between
2003-2009:
Number of Taxes in Georgia:
Source:
http://arrow.hunter.cuny.edu/research/
papers/HunterEconWP439.pdf
Innefective taxes were eliminated
resulting a 450% increase in tax
revenues by 2008. In 2005 the
country switched to a flat income tax
at a rate of 12%. The new tax code
applied the same rate to all business
types. The government also
strengthened tax collection
procedures, re-organizing tax
administration, including the
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53
inspectorates at central and regional
levels. Corruption among public
officials was addressed via increased
salary coupled with strict penalties
including firing those found to be
engaged in corruption. In addition,
increasing public awareness on the
taxpayers’ rights and obligations also
helped to eliminate bribery and
ignorance from the law enforcement
bodies (World
Bank, 2012). Another positive change
was introduced by the “single window”
public registry system, which
considerably decreased the process
of registering business. Multiple
authority involvement was replaced
by a single state institution (Public
Service Halls) in every city and every
region of the country enabling
entrepreneurs register business
spending maximum three days. This
public institution also facilitated the
process of property legitimation and
thus creating one space to encrypt
the land details and all available
credentials of the land owners (Public
Service Hall).
Positive change was introduced by
the new labor code which
considerably empowered employers
and limited the rights of employees. It
was intended to support businesses
to develop and employ the labor force
as much as possible, though it bore
certain risks discussed in the next
chapter.
Since 2011 New Tax code united
customs and tax code, which meant
the change in attitude towards the
taxpayers, diversifying the taxes in
terms of size of the business entities.
The government established Revenue
Service after the unification of tax and
customs administrations, offering the
following services to the taxpayers:
private tax agent, preliminary
decision, tax payment agreement,
small and micro business tax regime,
tax ombudsman, production loss
identification, neighborhood tax
officer, Tax Free, Business Map,
special taxation regime for fixed rate
taxpayers. One of the prominent
achievement of the reforms was the
Principle of Mediation. Here the
taxpayer is enabled to go through the
first steps of mediation in the
Department of Audit. The special
commission hears the case from both
sides: a taxpayer and a tax auditor.
The process is transparent for the
taxpayer, where he can bring all
possible arguments to convince the
commission and finalize the case to
his benefit. Electronic administration
introduced with the Business Map
was one of the revolutionary initiatives
enabling tax inspectors to control and
administer tax payment electronically.
System is fully automated, excluding
human factor in risk criteria of
subjectivity, as the selection of
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potential companies for inspection is
anonymous. It allocates taxpayers
according the geographical areas and
assigns the tasks to the respective tax
inspectors in the region. In the end, if
there is any violation to the
regulations, the entrepreneur is given
deadline by which he has to correct
the gaps (Gogiashvili, 2013). Despite
above mentioned improvements in
business environment the reality does
not seem as attractive as the experts
expected due to the shortcomings of
the new tax code and the overall
social euphoria caused by the
changes at work.
Post Formalization Realities
The private sector development is
considered to be the main source to
reduce informal sector in developing
countries. In global economy it
creates nine out of ten working place
and thus makes investment climate
attractive to push new start-ups
appear on the market. Though
Georgia still lags behind in SME
development and its share in the
country’s economic performance. For
instance, the share of SMEs in GDP
consists less than 20%, which is
much higher in neighbouring states.
In Armenia its share is 42% in the
GDP, in Central Asia and Europe this
figure shows average 60% share
(BPI, 2013). After the liberal reforms,
the effect of formalization does not go
over expectations, rather lags far
behind the target. Here we will
compare statistical surveys from 2008
and 2012 which somehow gives a
clear picture, that SME employment
dynamic is not as high as the number
of businesses newly registered. In the
chart below, one has to observe the
figure of registered limited liability
companies and Individual
enterprises/entrepreneurs, who
mostly represent informal businesses
converted to formal entities. As we
can see, the number of LTDs doubles
in 2012, figuring 118.531 business
units comparing to 2008, figuring
62.110 business units. The number of
Individual Entrepreneurs almost
triples, though the percentage of its
share in employment figures does not
reach even the 50% in sum when we
put together the figures of Small and
Medium Enterprise
Dynamics of Formalization, 2008-
2012
Source: Geostat, 2012
The data cannot be fully trusted as it
is provided by the department of
statistics, a governmental institution
which normally tend to be under the
influence of political sentiments.
According the data of Georgian Public
Registry (2010) the number of
registered business units was 80.000,
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but the number of liquidated ones was
approximately 26.000 units, almost
40% of the registered businesses
ceased their existence (Kharadze,
2011). The question here is whether
the rest of the units actively continued
their activities and grew to reach the
next level of their development.
Unfortunately, national statistics does
not give us the chance to evaluate
current condition of the MSME
development, but one can presume
the presence of high level of inactive
companies, which are unable to
liquidate their businesses due to the
complicated procedures with
authorities to approve the liquidation.
MSMEs often do not have proper
resources to finance all the
procedures linked to the liquidation,
sometimes they are careful to reveal
their violation to the tax code due to
the ignorance and insufficient
knowledge of it including procedures
to deal with tax inspectors. Some of
them do not even have proper
accounting system to justify their
commercial activities as long as
accounting services are expensive
and needs additional funds to hire
professional accountant.
The recent surveys of 2014 from
World Bank shows considerable
advancement of Georgia in terms of
doing business both regionally and
globally. It is allocated in the top ten
of the global list of countries in
regards to simplicity to start and do a
business, even overtaking Norway
and the UK. In the regional scale,
Georgia took the first place in Central
Asia though nothing is mentioned
about the life cycle of those
businesses that presumably do not
last longer than five years. Moreover,
the WB survey of 2012 reflected the
allegations that only 2000 newly
registered business will survive out of
42 000. Thus we face high level of
insolvency and inactivity from the
start-ups (WB, 2014)
Status of Georgia in the report of WB,
Doing Business, 2014
Source: WB, Doing Business 2014,
Europe and Central Asia
Source: WB, Doing Business 2014,
Global Ranking
The fact that import exceeds export
almost by 78%, speaks about the
regression of MSMEs in its share of
overall production and industry of the
annual turnover of the country, it is
partly explained by the fact that they
do not know how to position their
product in international markets, they
do not have the tools and necessary
knowledge to negotiate. However, we
have taken into account minimum
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standards which EU and other
developed countries impose on
foreign suppliers to enter their local
markets.
Import and Export Dynamic in
Georgia, 2014
Source: Revenue Service, 2014
Another research findings show that
most challenging point in business
environment of Georgia is the
ambiguous tax code, particularly its
administrative part. It is still hardly
comprehensible and understandable
by both SMEs and tax inspectors.
Thus disputes are often taking place
between entrepreneurs and tax
inspection authorities. Most of them
consider dispute resolution
mechanism extremely awkward
process of doing business and
appraise it negatively as long as the
majority of disputes are resolved to
the benefit of the tax authorities. On
the other hand, entrepreneurs find
themselves vulnerable to the frequent
changes in tax code. For instance, 45
to 61 changes went into effect
between 2003 and 2004. Small
enterprises, not able to hire qualified
tax advisors, cannot get aware of
those novelties and observe
alterations taking into effect in the
renewed tax code. Such obstacles
trigger businesses to leave the formal
sector and engage themselves in the
informal activities.
The same study revealed the need in
proper education and training to
manage business in the market
economy. The majority of the
entrepreneurs (81.25%) is willing to
study business disciplines. Among
them 50% expressed their interest in
strategic business planning, 34.37%
wants to enhance skills in
negotiations and 31.25% is willing to
develop skills and knowledge in
establishing agreements and
expertise in production efficiency
(Gogiashvili, 2013).
Discussion topic here raises, whether
the inactivity of the registered
businesses lays in the lack of proper
education and skills which could
guide them in market economy
regulations and prepare to compete
their local and international peers.
Papava in his observations
incorporates the trend of
“Necroeconomy”, translated into the
passiveness of the entrepreneurs
whenever they have to stand in front
of the challenges operating on the
market. Here we have to deal with the
social and psychological distortions of
the entrepreneurial mind-sets
inherited from the command economy
of the USSR. “Routine” that was
prevalent in the command economy
reproduces “Necroeconomics”.
Command economy never recognized
any kind of competition both
domestically and internationally and it
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never interacted with countries from
market economy. Thus farms and
companies were not stimulated to
produce good quality products and
services, ignoring the most important
stimulus of economic development.
Lipowski called it “misdeveloped”
which was proved after the collapse
of the USSR. The product and
services could not compete Western
production, suffering no market space
and hopeless to ever exist. The
“Routine” forces companies to use the
old behavior patterns which was
mostly depended on governmental
leadership and did not take
responsibility of their own to create
economic affluence. The government
on the other hand was expected to
issue “tax amnesty” to write down the
debts accumulated by the companies.
Papava here brings the new
phenomenon of Homo
Transformaticus, transition from
Homo Sovieticus into the western
type of Homo Economicus. This kind
of human is liberated from the state
control, but still dependent on it
because of his behavioural patterns
shaped during the long standing
Soviet governance. However, planned
and centralized economy could not
totally repress individual market
economy functions. That was the
incentive for natural entrepreneurs
turn to the “shadow economy” and
manage their commercial activities
covertly, evading the state control
(Papava, 2002).
Entrepreneurs often seized their
activities after expropriation and
sequestration of their property from
the authorities despite the fact of
preceding privatization process. They
were vulnerable as long as could not
go to the local arbitrage and hire
qualified lawyers to defend their
property rights. Such occasions grew
insecurity among newly established
companies and raised the chance
from them to keep inactive which
mostly means quit business activities.
Accordingly, excessive fear of the
government and the absence of
relationship culture with the public
authorities in a simply market
economy sense, derives from the past
negative experiences. The challenge
nowadays still exists in the mind-sets
of the Georgian population to totally
alter their attitude to do the business
and start to think in an entrepreneurial
way, where one has to be resilient
and think strategically before entering
the market.
The same trend can be observed in
the projects initiated from the various
governments. They somehow follow
old patterns of behaviour to meet the
expectation of the people by
subsidizing businesses and creating
jobs, though those projects do not
engage market economy concepts.
The first failure to employ people took
place in 2006 as a National
Employment Program. It forced small
and medium size companies to give
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58
three-month jobs to unemployed
people. The budget for the project
was estimated USD85 to be paid
monthly from the national budget.
Overall cost reached USD 12.7 million
though there was no demand from
those companies to employ the
additional workforce. The underlying
motif from government side was to
give people training on the workplace.
Side effects were not beneficial in
terms of overall economic value as
the businesses made a contract with
employees pretending to employ
them. In reality people got salary of
USD255 in three months for doing
nothing. In the worst case,
businessmen agreed to sign contracts
with employees to get the share from
their salaries in turn. In theory
USD12.7 million spent on salaries
should generate goods and services
of USD60 million. But it presumably
employed only 10 percent of the
expected number meaning that USD
12.7 million was spent from national
budget for the goods and serviced
worth only USD 6 million. Another
project started in 2007 which
employed students in Summer Jobs
paying USD 250 monthly salaries,
though the outcome was similar to its
predecessor (Papava, 2013). As a
consequence, targeted outcomes
were not achieved, but it contributed
to the macroeconomic destabilization.
Conclusion
Formalization of informal economies
took decades to reach relative
economic growth in comparison with
the industrial economies of the
developed world. Initiatives, taken by
the pioneering states, to help poor
economies grow and catch up with
them ended in some cases with
success and mostly with failures. In
the paper we discussed three cases.
The first case was presented by Brazil
as a success story of Structural
Adjustment Programs, leaving many
developing countries far behind and
getting closer to the developed world.
The case clearly revealed the
importance of right macroeconomic
planning and its gradual
implementation by the government on
the initial stage. One could also see
the efficient policy preferences to
trigger economic activities and
incentives to reduce informal sector.
Here, the government adjusted SAPs
to the specific needs of a country and
its specific development potential.
Preferences were chosen taking into
consideration the aggregate resource
potential and relevant sectors of
economic activities to be treated.
Finances were accumulated and
allocated intermittently generating
surplus lump of funds to subsidize
SMEs. Labour rights were taken as a
priority in policy making to stimulate
poverty reduction and create social
layer with the middle income workers,
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eventually increasing purchase power
and stimulating vulnerable groups to
convert formal.
The second case was presented by
Vietnam as an example of informal
institutions complementing and not
undermining formalization process.
The case assumed the possibility
from informal economy to moderate
formal economy distortions and take a
burden of alternative solution
whenever formal economy failed to
provide population with the enough
economic opportunities. We could see
that Vietnamese indulged themselves
in informal interactions whenever
formal institutions were absent or
weak to perform check-and-balance
duties. Informal ties and institutions
here played a decisive role to keep
economy going and fill the gaps
before the newly introduced
adjustment programs shaped form.
They enabled informal sector create
the conditions under which the
working poor in the informal economy
were entitled to the benefits of
formality while, at the same time,
being enabled to comply with the
duties of formality. Lastly, the case of
Georgia revealed the problems of
formalization after considerable
efforts to finance SAPs and whole
restructuring of existing economic
system. Here the WB and IMF missed
the social realities which started to
shape after the disintegration of
Communist countries. They did not
pay attention to the underlying cause
of the economic underperformance
after the SAPs were applied. The
country still suffer high unemployment
and poverty rates, businesses soon
decide to leave the markets and
shrink the general life cycle of the
companies. Many experiments and
changes in taxation, in other words,
the attitude of trial-and-error,
demotivates entrepreneurs to stay in
business and be resilient on the
market. Thus, we get double
challenges from informal workers to
convert formal and then stay formal.
In most cases the projects
implemented by the government lack
macroeconomic planning. Most of
them do not end up with the
successful result as long as economic
concepts are almost ignored to
generate public wealth. We can see
the old behavioural patterns in the
measures by which government try to
solve problems, generally the results
of their misleading policies. On the
other hand, population is not ready
enough to take the risk and follow
written guidelines from IMF and WB,
whenever there is no baseline on the
local level to inspire them to convert
formal. Governments do not take
measures to finance strong
educational system for the young
generation and provide necessary
practical opportunities for them to
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develop skills while operating on the
markets. Most of the entrepreneurs
wish to get additional trainings and
earn practical skills to run the
business, which is not totally absent
but lags far behind the western
countries to prepare qualified labour
force. Though the transition countries
crave for such kind of support from
the government.
In case of Brazil, the success came
first from the right macroeconomic
planning and then from relevant
projects to enhance education and
raise awareness of the new system
among the population, with the
nation-wide initiatives as Brazil
conducted successfully. In case of
Vietnam, informal sector
complemented formal sector when
the country was in the transition
process, introducing new laws and
regulations. It was not considered to
be illegal as we practice it in Georgia,
though no study was undertaken
about the informal institutions so
prevalent in the beginning of 2000s.
IMF and WB usually did not take into
consideration of local economic
trends and background of the trends
before SAP application. This
analogue repeated in Georgian case
suffering from various socioeconomic
shortcomings and not being ready to
accept new economic restructuring.
First, they had to realize that the
population used to live in totally
different economic realm from the
realms SAPs were intended for.
“Shock Therapy” was too intense to
roughly apply to the country still inert
to the geopolitical changes and
ending in vast share of shadow
economy. The program could be
implemented without much costs if
they prepared the population for the
changes by the means of higher
education for younger generation and
vocational training schools for existing
informal entrepreneurs in order to
raise awareness how the market
economy works. Reforms in
education could have been prior to
the changes in economic system,
though it took place simultaneously
with the structural reforms. It is
obvious that SMEs’ function will be
realized only after then, when the
results of entrepreneurial activities are
closely linked to the capacity for the
management of one’s own business.
References List:
1. Bernabe, S., 2002, A Profile of
Informal Employment: The Case of
Georgia, International Labour Office,
Geneva, 2002. See at:
http://www.ilo.org/wcmsp5/groups/pub
lic/@ed_emp/documents/publication/
wcms_122203.pdf
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