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Since the end of the Kosovo war in 1999, increasing attention has been paid to the problems of economic development and reconstruction in South-East Europe. In a context of limited resources, small and medium sized enterprises (SMEs) have a key role to play in creating jobs and building a dynamic entrepreneurial economy.
Small Enterprise Development In South-East Europe presents important findings from recent empirical research on key factors, which hinder sustainable SME growth in South-East Europe. Finance is identified as a critical barrier to growth, and the role of commercial banks, micro-finance institutions and credit cooperatives in assisting growth is addressed. Yet finance alone is not enough. A rebuilding of social capital, a reduction of the unofficial or grey economy, and the promotion of inter-firm networks and clusters are also of vital importance in promoting sustainable growth. The book concludes with critical analyses of SME policies in Albania, Croatia, and Macedonia, countries which hitherto have received little attention in the literature.
Small Enterprise Development in South-East Europe will be of great interest to policy makers, business consultants, and academics and post-graduate students working on economic development and reconstruction in South-East Europe.





The dramatic end to communism in South-East Europe at the end of the 1980s led many to conclude that facilitating incremental systemic change was never a realistic proposition. After all, those countries attempting to introduce partial reforms or some notion of a “third way” between communism and capitalism — most consistently in the former Yugoslavia, with its pioneering system of self-management — ultimately failed to achieve either political or economic stability. Instead, it was thought that only a whole-scale conversion to a free market economy would ensure sustained economic progress and material gains. Moreover, the sooner the old inefficient system was dismantled, the sooner a free market economy system would be up and running, and making good on the many heady promises of its most ardent supporters. In reality, however, the collapse of communism throughout South-East Europe dashed most of these early hopes and aspirations. In fact, with the exception of Slovenia, it ushered in a period of drastic economic decline, political extremism, falling living standards, venal levels of inequality, and, largely as a result of this noxious combination (see for example, Woodward, 1995), a series of conflicts in the former Yugoslavia that were to become the worst seen in Europe since 1945.
Will Bartlett, Milford Bateman, Maja Vehovec

Key Background Issues

Chapter 1. What Are the Main Barriers to Small Business Growth in Southeast Europe?

Small and medium sized enterprises are increasingly viewed as a major engine of economic reconstruction and growth in South-East Europe. For example, in its 1999 Transition Report the European Bank for Reconstruction and Development asserts that small firms (start-ups) are “central to a successful transition”, and “they act as a main spur to employment expansion and growth” (EBRD, 1999). A recent report on South-East Europe by the World Bank remarks that “small and medium sized enterprises … have a crucial role in the transition process” (World Bank, 2000). Compared to the relative neglect of the small business sector until recently such statements represent a dramatic re-evaluation of the significance of the sector for transition economies, and affirm the increased importance now being given to small and medium sized enterprises (SMEs) in the transition process in general.
Will Bartlett, Vladimir Bukvič

Chapter 2. Social Capital and SME Development

Economic development has always been discussed in the context of culture. A classic masterpiece by Max Weber speaks of the protestant ethic that propelled the northern parts of Western Europe toward rapid economic growth. Today, failures rather than successes of development policies in developing and transition countries are often explained away with reference to culture. While modernization theorists tried to get away from cultural explanations, by stressing strong correlation between culture and economic development, their demise in late 1960’s brought culture back into the discussion of economic development. Postmodernist theories of the 1990’s have developed and radicalised the cultural perspective.
Andrej Rus

Chapter 3. The Unofficial Economy and the State in Transition

The unofficial economy is among the central issues within public sector economics in countries in transition. In this paper I will, try to explain some basic facts about the unofficial economy, clarify some questions regarding the unofficial economy in the countries in transition, see what the lessons of the unofficial economy research done in Croatia are, what the perspectives are, emphasise the role of institutions, and draw some conclusions regarding economic policy.
Katarina Ott


Chapter 4. The Local Financial System and Sustainable SME Development in South-East Europe

Lessons From Hungary, Macedonia and Slovenia
One of the most important pre-conditions for the sustained expansion of the SME sector in South-East Europe is to have in place a set of cost-effective, accountable and transparent local financial institutions, instruments and credit markets, which together constitute a healthy local financial system (EBRD, 1999; World Bank, 1999; 2000). This is certainly not an easy task. The difficult conditions prevailing in the region — economic collapse, lack of resources, persistent inter-ethnic antipathy, isolation, rising inequality and poverty, endemic criminality — continue to frustrate financial sector reform. Moreover, the inheritance of past financial sector malpractice continues to weigh heavily on the latest generation of policy-makers, who are attempting to upgrade the efficiency of a range of financial institutions long used to an environment of “soft budget constraints”. Also proving to be a barrier to progress are the many elite groups that emerged and benefited handsomely from political connections and financial sector irregularities under communism and during the first post-communist governments. These groups are quite determined, and sometimes very violently inclined (for example, in Albania), to hold on to the power and wealth that they have unjustly accumulated.
Milford Bateman, Taki Fiti, Peter Futo, Hedvika Usenik

Chapter 5. Bank Lending to SME’s in Croatia

A Few Things We Know
Banks in transition countries face many challenges, including lack of historical data to base risk-assessment on; macroeconomic instability, which complicates assessment of clients’ past performance and increases uncertainty about future performance; weak legal frameworks, particularly in the enforcement of contract and the protection of creditor’ s rights; inexperience in crucial areas of banking such as risk assessment and lack of credit and shareholder culture.
Evan Kraft

Chapter 6. Micro-Credit in Transition Economies

The Case of Bosnia-Herzegovina
Micro-credit was originally developed as a specific tool for economic and social development in the poor countries of Asia and South America. In the last two decades, however, it has found an application in the countries in transition, and in some developed regions as well. The objectives of micro-credit include poverty alleviation, the efficient use of limited capital funds, the development and encouragement of entrepreneurship, and employment creation. It is also relevant in terms of addressing social issues: for example, through support to disadvantaged groups in society. These combined applications have ensured that micro-credit is now a widespread practice throughout the underdeveloped countries and regions.
Muris Čičić, Aziz Šunje

Networks and Clusters

Chapter 7. Public Policy on Enterprise Clusters and Networks

This paper addresses the subjects of enterprise clusters and networks, fields that in recent years have attracted increasing attention from subnational and national policymakers. The paper briefly reviews broad features of cluster formation and the competitive advantages that enterprise agglomerations can confer on member firms. An outline is presented of current policies and programmes towards enterprise clusters employed by national and subnational governments. Critical consideration is given to the economic rationale for policy on clusters and business networks. The paper closes by discussing the policy recommendations in this field developed by the OECD Secretariat for the June 2000 Ministerial Conference in Bologna entitled “Enhancing the Competitiveness of SMEs in the Global Economy: Strategies and Policies”. These recommendations form the basis of part of the Bologna Charter, a declaration adopted during the Bologna Conference by 47 Ministers and representatives of government.i
Alistair Nolan

Chapter 8. Cluster Policy as an Aspect of a Pro-Active Industrial Policy in Slovenia

Since Independence in 1991, Slovenia has made significant economic progress. It has created a stable macroeconomic environment and has achieved a yearly rate of growth of around 5%. The level of GDP per capita measured by purchasing power parity was over $14,000 in 2000, which comes to about 70% of the EU average. Of 175 countries ranked in the United Nation’s human development index, Slovenia was ranked 28th in 1997.
Mateja Mešl

Chapter 9. Promoting Supplier Clusters

The Case of the Shipbuilding Industry in the Primorska-Goranska County of Croatia
SME clusters have long been recognised as dynamically efficient local production systems (Marshall, 1916). An examination of the institutional arrangements that underpin the original “Marshallian” industrial district model — networks of SMEs linked into local large enterprises as sub-contractors, a plethora of local education, training and related support institutions, local social structures fostering the rapid interchange of ideas and experiences within the business community reveals that such structures largely arose spontaneously and over a considerable time. For SME clusters to emerge in a particular locality therefore required efficient market dynamics, patience and some luck.
Milford Bateman, Maja Vehovec

Integrated Policy Support

Chapter 10. SME Development Policy in Albania

Developing Support Institutions in an Unstable Environment
Since the beginning of the 1990s, the Albanian economy has been engaged in a profound transformation from a highly centralised, Stalinist economic structure towards a market economy. The first decade of transition has seen a number of highs and lows: rapid annual growth of 8–10% for much of the period but deep recessions, accompanied by severe social instability in 1991/92 and in the first half of 1997. Considerable progress has been made in some areas of economic reform, notably small-scale privatisation and price and trade liberalisation, but progress in other areas such as enterprise reform and financial institutions has been much more sluggish (see EBRD, 1999).ii
Marta Muço, Peter Sanfey

Chapter 11. Barriers to SME Growth in the Republic of Macedonia

This chapter reports on the findings of a comprehensive survey-based research on small and medium sized enterprises (SMEs) in the Republic of Macedonia. It offers an overview of the current situation within the SME sector. It demonstrates, inter alia, the impact of current and past institutional support, and the level to which local SMEs have received assistance from the state or from other current development programmes. The research also indicates the informal practices, illegal operations and the barriers to SME development due to the high level of corruption and crime at national level. The main barriers to the growth of SMEs are identified in terms of institutional, regulatory, and social factors; market related factors; and an array of financial constraints. The research shows how the unstable economic, institutional and social environment has been extremely unfavourable for sustained economic growth in the past ten years in the Republic of Macedonia.
Biljana Acevska, Will Bartlett, Vesna Stojanova

Chapter 12. Small Business Development Policy in Croatia

Design and Implementation
There is a considerable consensus among economists and politicians that policy support for small and medium sized enterprises is desirable in the post-socialist economies. This view is encouraged by the World Bank, the European Bank for Reconstruction and Development and similar institutions, as well as by Western consultants to Eastern European governments. Failures in privatisation and restructuring of the ex-state sector only reinforced this interest in entrepreneurship and the SMEs’ potential (EBRD 1999; Stiglitz, 1999; Lankes and Stiglitz, 2000). Such thinking has been supported by numerous multilateral and bilateral contracts between Western and East European countries introducing a number of schemes to support small businesses, as well as by some public and private donor foundations.
Vojmir Franičević, Will Bartlett


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