Most classical development theories do not explicitly mention the role and importance of small-scale enterprises, but generally cover the role of the industrial sector in the development process.
Consequently, conclusions as to the role and importance of small-scale enterprises have to be indirectly taken from the discussed issue of industrialisation.
Subsequently, the insights from development theory and policy debates are presented in a short historical overview and build on the general points presented in relation to the importance of the private sector in the previous chapter.46 The aim is to explicate the context of the present thesis and illustrate possible promotion strategies in this field.
3.2.1. The linear growth model and the catch-up goal
According to theorists of the 1950s and 60s, the take-off to a mature and dynamic economy with sustained growth could only be achieved through the development of concentrated and exclusively selected large-scale industries and, accordingly, large-scale technology. The contribution to economic growth and development of small-scale enterprises was basically considered to be marginal or negligible.
The notion of scale in big push industrialisation strategies has two different connotations: the first refers to the comprehensiveness of investment (whereby theorists believed investment should occur in all sectors simultaneously), the second refers to the preference for large-scale plants (Szirmai 2005: 331).
46 The development of the informal sector concept will not be discussed in further detail in these sections. Changes over time in relation to the definition, concept, importance and role of the informal sector in development theory and practice have been shortly touched upon under the section 2.1.2.
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3.2.2. Structural-change models
Modernisation theories are based on the assumption that economies in developing countries are split: on the one side, there is a capital-intensive, dynamic, modern sector which is integrated in the world market; on the other side is a traditional, stagnating sector which is not linked to the higher-developed growth poles. The former is associated with industry, modern services and increases in productivity, while the latter one tends to be associated with subsistence economy, stagnation and traditional behaviour patterns and is considered to be a major inhibition for rapid economic development.
Typically, sectors and enterprises are characterised in bi-polar opposites: large- vs. small-scale enterprises, modern vs. traditional, formal vs. informal, dynamic vs. stagnating.
Small-scale activities are located in those sectors and industries which are not (yet) profitable for large-scale enterprises or alternatively use resources which are not (yet) drawn upon by the formal sector (Späth 1997: 67).
Since the small-enterprise sector is put on par with a backwardly, underdeveloped and progress-inhibiting sector, which has to be overcome by a catch-up type of development. Structural-change theorists largely agreed on the fact that this could only be achieved through a rapid social modernisation and sustained growth, which could in turn only be achieved through accelerated industrialisation based on large-scale production, transfer of modern technologies and increased capital intensity (Späth 1997: 68).
The small-enterprise sector is at best seen as playing a transitory role, especially in countries in the early stages of industrialisation, in a transition to a higher development stage.
Industrialisation is given priority above other sectors: dynamising effects for other sectors of the economy are expected from it, as well as the absorption of un- or underemployed labour from the traditional sector (Späth 1997: 66).
3.2.3. International dependency models
At the centre point of international dependency models are issues related to power relationships, dependence, dominance and exploitation. It is assumed that there are strong economic connections among the different labour relations at the local, regional and international levels.
The existence, the function and the development of the small-scale enterprise sector is explained against the background of these power relationships.
The so-called informal working conditions are given special attention: they are not considered to be the result of missing development or as remains of pre-capitalist ways of production, neither as desirable or inevitable goal of development, nor as a autonomous, stand-alone sector, but as an element as well as a product and result of unequal development (see Späth 1997: 73-78, for a description of dependence theories). At the same time, it is assumed that this unequal development takes on ever different forms and that therefore also the structure, geographical distribution and scope of production patterns of different sizes change regularly. Small-scale
45 enterprises are seen as functional for the development of a capitalist production system, but are categorised as dependent and subordinated. The dualistic or bi-polar perception is discarded: on the contrary, the interdependence and the linkages between the modern and traditional sectors are highlighted in dependency models. This way, indirectly, the implicit importance of agriculture and the small-enterprise sector in the overall process of development is highlighted. In relation to the small-enterprise sector this means that it is no longer seen as a traditional sector coexisting side-by-side with a modern, large-scale sector, but that both sectors are inter-linked, albeit with negative consequences for the small-enterprise sector (Späth 1997: 77).
3.2.4. Strategies for development in practice: import substitution vs. export promotion
Import substitution
In practice, at first an inward-looking development policy caught on, based on import-substitution industrialisation (ISI). The ISI strategy aimed at diversifying the domestic production structure and can be broadly divided into two main phases: (1) easy ISI, consisting of production of non-durable consumer goods for the international market, and (2) secondary ISI, consisting of production of intermediate and capital goods and consumer non-durables, being more capital- and knowledge-intensive than easy ISI (Cypher/Dietz 2006: 289). This was to be achieved through a package of measures including among others foreign currency policy, licenses and pricing policy, investment and technology policy, customs and tax policy, all designed to favour and preferentially treat large-scale enterprises, directly or indirectly penalising and constricting small-scale enterprises. In the absence of private entrepreneurship and capital, the state took up the role of investor and entrepreneur in many cases.
The ISI policy blocked wide autonomous developments in agriculture and industry supported by innovative activities of small and medium farmers and manufacturers (Hayami/Godo 2005: 256). It was usually targeted to protect large-scale modern industries; correspondingly, agriculture and small- and medium-scale industries were victimised. While automobile assemblers benefited from both restrictions on automobile imports and a generous quota on the imports of parts at prices lowered by overvalued exchange rates, small part manufacturers had to face international competition handicapped by overvalued currencies (Hayami/Godo 2005: 256).
The development of the small-scale sector during import substitution was framed by the parastatal monopolies and their limited ability to deliver on the one hand, and by the mostly urban and often inefficient formal industry and its inability or limited desire to serve the rural and low-income rural areas on the other hand; at the same time, their development was constrained by their limited access to credit and transport, which is why most small-scale enterprises operated in very local markets (Pedersen 2005: 12-13). A strong concentration of services, poor infrastructure and an often inefficient formal economy have not only led to the development of a large informal economy, but also to the development of intense rural-urban linkages at the household level (Pedersen 2005: 15).
46 Most African countries have had small-enterprise development organisations coming up during the 1960s and 70s, but in some cases also dating back to before independence: they focused on the development of small or medium-sized, formal manufacturing enterprises, although a major share of small enterprises is engaged in trade and distribution and informal; these organisations have often been supported by donors but have been met with limited enthusiasm by the governments and therefore also have had limited success (Pedersen 2005: 13).
Export promotion
The approach of export-oriented industrialisation was mainly utilised by Asian countries from the 1960s onwards, especially giving rise to the so-called East Asian miracle. As described shortly in the previous chapter, the East Asian economies do not exemplify what a market-based approach to development can attain, but rather quite the opposite, what a “governed” market can do. In the East Asian economies the goal was to raise the level of efficiency and technological capabilities: this was done through a policy of shared growth, in which all classes gained from progress, and by development from within, depending predominantly on local capital and local capitalists to operate industry (Cypher/Dietz 2006: 293-4).
Cypher/Dietz compare the industrialisation approaches chosen by Latin American and Asian countries, contrasting the respective focus on import substitution and export promotion (see Cypher/Dietz 2006: 289-95): easy ISI had helped to create, protect and promote the growth of an indigenous capitalist class with the potential to be world-class competitors. Latin America and India, countries that entered secondary ISI directly following the easy ISI stage, did so by promoting transnational investment within their borders, which resulted in a shift in the locus of power in the economy away from the still emerging class of domestic entrepreneurs who had been nurtured by the easy ISI strategy. The strategy switch in the larger Latin American countries in the direction of secondary ISI stunted and even reversed the growth of the local capitalist class, particularly as it came at a stage of development when this emerging class was not fully prepared to produce the more complex array of products characteristic of the secondary ISI phase. This cutting-short the development of the local entrepreneurial class is a crucial cost of shifting prematurely toward secondary ISI strategy rather than easy export substitution strategy after easy ISI. Easy export substitution allows the local entrepreneurial class to continue to mature by becoming more efficient producers able to weather international competition; in Latin America and India, the shift toward favouring transnational investment as the agents of premature secondary ISI has made the technological learning process more difficult for local producers, who found themselves increasingly closed out of the productive circle. In South Korea and Taiwan, the states assisted in the formation of industries with backward linkages to the existing industrial sectors. These industries operated behind infant industry tariffs and non-tariff barriers that protected them from international competition as they initiated production, but over time the countries were able to replace simpler manufactured good exports with more complex manufactured goods.
47 The remarkable development of small- and medium-scale enterprises in Taiwan, for instance, has been based mainly on their linkages with foreign enterprises rather than with domestic state enterprises (Hayami/Godo 2005: 274). In most ASEAN economies, China and India, local industries are engaged in processing industrial materials and intermediate goods supplied from Japanese and other multinational firms into final products for export to the market of high-income economies, especially the USA and Japan (Hayami/Godo 2005: 274).
The remarkable thing about the export-oriented industrialisation pursued in Asia is the support given to production activities of poor people: strengthening the productive capacity of the economy was the focus of their strategy, deliberately promoting small-scale enterprises as well.
3.2.6. The discovery of the informal sector
During the 1970s, the problems of foreign-currency- and technology-intensive large projects, the trickle-down effect not materialising, an increasing number of absolute poor and the accelerating urbanisation, became more and more evident.
The ILO and the Institute for Development Studies (IDS) of the University of Sussex played a decisive role in examining and critically questioning development policies at the time. In this context, the role of small-scale economic activities was extensively discussed for the first time and labelled with the term “informal sector”.
The World Bank propagated an approach based on re-distribution with growth and formulated a poverty-oriented strategy, while the ILO proclaimed the basic-needs approach in the context of their World Employment Programme, in which the importance of the informal sector for employment creation and income generation was highlighted (for a discussion of both approaches and their implications, see Späth 1997: 101-106; see Bangasser 2000, for an analysis of the institutional history behind the relationship between the ILO and the informal sector).
In these organisations, a change of mind was initiated, which lead from a purely quantitative approach of economic growth to a more qualitative assessment of development. Until well into the 1980s, the promotion of small- and medium-scale enterprises was considered to be more of a socio-political instrument by development agencies as well as developing countries, rather than an independent instrument in economic policy (Späth 1997: 168).
3.2.7. Structural Adjustment Programmes: the Washington Consensus
With its strong belief in the efficiency of the market mechanism, the Washington Consensus advocated leaving investment in production infrastructure to private funds mobilised by the market. This was a reasonable corrective to the bias of ISI strategy of concentrating development resources in large-scale, capital-intensive industries, but it is critically flawed when applied to infrastructure critical to small farms, cottage industry and petty trade since their production scale is too small to internalise gains from any infrastructure project adequate to pay its cost and they
48 are too numerous to effectively organise collective actions for producing their own infrastructure (Hayami/Godo 2005: 305).
Structural adjustment has led to a contraction in the formal economy during the 1990s in most African countries and has also given room for a rapid growth in the number of small formal or informal enterprises, and most of the urban growth, especially in the small and intermediate urban centres, is likely to be based on small enterprises (Pedersen 2005: 23). However, there is no simple direct link between contraction of the large-scale, formal economy and the expansion of the small-enterprise sector because both complement each other and not necessarily serve the same markets: small enterprises serve low-income markets in both rural and urban areas, as well as urban middle-income niche markets left un-served by the formal sector, but small-scale traders distribute produce from both small and large producers, as well as imports (Pedersen 2005: 23).
There has generally been a rapid shift from production to trade in the small-enterprise sector. The reason for the transformation in the retail trading system probably is that increased commercialisation of both the rural and urban low-income economy requires a much more differentiated distribution system than traditional parastatal and formal retailing could deliver (Pedersen 2005: 24).
Informality is no longer seen as a result and expression of under-development and marginality.
Development problems are not related to missing employment opportunities or the existence of a large “reserve army”, but are brought about by the over-regulation of the modern sectors of the economy (see De Soto 1992, who considers the informally active as competitive and proactive small-scale entrepreneurs building the modern market economy from below). Mainly from the beginning of the 1990s, new impulses were expected from the small- and medium-sized enterprise sector in relation to economic recovery, alleviation of structural adjustment and solution to mass unemployment. The role of small-scale enterprises in the process of industrialisation was being reconsidered: they were increasingly being contrasted with large-scale and state-owned enterprises and exposed as the more efficient, dynamic and flexible economic units (Späth describes this process as the “(re)-discovery of the small- and medium-sized enterprise sector”, see Späth 1997: 138-143, for a description of the perception of small-scale enterprises during the 1980s and early 1990s). Structural adjustment, based on the introduction of a market economy and the deliberate strengthening of the private sector, implicitly meant promoting the development of small- and medium-sized enterprises simply because in most developing countries, enterprises of this size represent the vast majority of the private sector. The interest in small- and medium-sized enterprises is part of a bigger picture or concern, including deregulation, privatisation, promotion of competition and, most importantly, the creation of a so-called
“enabling environment”.
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3.2.8. The Post-Washington Consensus
As shortly explained in the previous chapter, the Post-Washington Consensus still holds that development has to be market-based. However, the state is seen as the provider of an enabling environment, as well as fundamental public goods.
The Post-Washington Consensus advocates that a greater share of public resources be allocated for the delivery of social services to the poor rather than for strengthening the productive capacity of the economy. There is a risk that strong emphasis on social services might result in under-investment in the productive capacity of sectors from which the poor earn their livelihoods, mainly agriculture, small-scale manufacturing and petty trade. If the productivity and profitability of these sectors are not increased, how can poverty reduction be sustainable?, is a question asked by some scholars (see Hayami/Godo 2005: 304, for instance).
Still a focus in general PSD strategies is the provision of an enabling environment, accompanied by the strong emphasis on “good governance” in developing countries. These actions are meant to benefit the private sector in general, meaning enterprises of all sizes equally. Although a major emphasis is put on poverty reduction, there are still contested points among donors and PSD practitioners as to whether direct targeting of certain types and sizes of enterprises or more general interventions advocating for trickle-down effects are more effectively in achieving pro-poor market outcomes and growth. Whereas the MDGs 1 and 3 call for direct targeting, other MDGs might rather call for the involvement of larger and even multinational/global enterprises in delivering results.