Tag: Private sector

Succession Dynamics in Latvian Family Firms

Posted on June 10, 2024 | Policy Brief

Riga's oldest business buildings representing succession dynamics in Latvian Family Firms

This policy brief examines the emergence, succession, and performance of first-generation family firms in Latvia, highlighting the unique challenges and achievements of these businesses since the early 1990s. Following Latvia’s independence, many family firms were established, providing a natural setting to study succession issues. Key findings reveal that initially, nearly half of these firms did not have a majority stake held by the founding family, but within the first few years after founding, families accumulated majority ownership. It typically took seven years for family ownership to exceed 75 percent. However, 23 years later, only 16 percent of the sample firms have second-generation shareholders. Notably, around 80 percent of these firms remain majority-owned and managed by their founders. Furthermore, family firms outperform non-family firms by 3.1 percent in return on assets (ROA). The findings underscore the need for policies that support effective succession planning, incentivize family-owned business sustainability, and provide targeted training for future generations to maintain the robust economic contributions of these firms.

Introduction

Family firms, where key decisions are controlled by individuals linked by blood or marriage, are the predominant organizational form worldwide. These firms face critical challenges, (e.g. leadership transition, generational differences, emotional ties to the business, and estate planning tax considerations) particularly during ownership succession, which is the transition from the first to the second generation of family members. This issue is especially relevant in Eastern European countries like Latvia, where the shift from a planned to a market economy in the 1990s created the first generation of family firms now approaching generational change.

Understanding how family firms manage this transition is crucial for policymakers, business leaders, and researchers. This policy brief highlights the key findings of a study (Pajuste and  Berzins (2024) on Latvian family firms, focusing on ownership succession patterns, the involvement of the next generation, and the impact on firm performance.

Succession Patterns and Ownership Evolution

In Latvia, many family firms began with founders holding minority stakes, reflecting financial constraints and economic uncertainties. Over time, families gradually increased their ownership stakes, demonstrating resilience and strategic planning. On average, it took seven years for family ownership to exceed 75 percent. This gradual ownership increase helped families navigate the challenges of economic transitions and limited access to external capital. The study also reveals that 23 years after being founded, only 16 percent of the sample firms have second-generation family members as shareholders.

Involvement of the Second Generation

The emergence of the second generation in family firm ownership is a pivotal phase. Succession planning and the transmission of familial values, knowledge, and entrepreneurial ethos are crucial during this period. By 2022, only 14 percent of the sample family firms had significant second-generation involvement (defined as the second generation holding a majority of the family shares and having a board seat).

More specifically, in a sample of 266 family firms, 20 percent had involved the second generation in ownership by 2022, with significant involvement in 71 percent of these cases. At the same time, 80 percent of the firms were still majority-owned and managed by the founders. This slow involvement of the second generation highlights the challenges of succession planning and the need for a strategic approach – both from a company and a legal perspective – to ensure a smooth transition from the first to second generation.

Importantly, despite this slow transition, family firms tend to perform better than non-family firms, with a 3.1 percent higher return on assets (ROA). However, within family firms, the involvement of the second generation does not significantly impact firm performance.

Policy Implications and Recommendations

The findings of this study have several important implications for policymakers, business leaders, and researchers.

Support for Succession Planning

There is a need for policies and programs that support succession planning in family firms. This includes providing resources and guidance for families to develop succession plans, ensuring the continuity of family businesses. Ensuring some form of succession, whether within the family or through external parties, is crucial to prevent these firms from closing. Facilitating succession and supporting the survival of these firms would not only protect jobs, but also have a positive economic effect as family firms outperform their non-family counterparts.

Financial Support and Access to Capital

Another way to enable smoother transition and growth for family firms is to improve their access to capital to help them overcome financial constraints. Financial institutions and government programs should focus on providing tailored financial products for family businesses. By doing so, they not only support the longevity of these businesses but also help in maintaining employment levels and preventing the economic fallout from family firm closures.

Education and Training

Educational programs and training for the next generation of family business leaders are essential. These programs should focus on leadership, management, and the unique challenges of family businesses, preparing the next generation for successful transitions.

Awareness and Best Practices

Raising awareness about the importance of succession planning and sharing best practices can help family firms navigate generational transitions more effectively.

Research and Data Collection

Continued research and data collection on family firms and their succession patterns are crucial. This helps in understanding the challenges and opportunities faced by family businesses, informing policies and practices that support their continuation and success.

Conclusion

Latvian family firms, like their counterparts worldwide, face significant challenges during ownership succession. This study highlights the gradual and strategic increase in family ownership stakes, the slow emergence of the second generation in ownership, and the need for comprehensive succession planning. Policymakers, business leaders, and researchers must work together to support family firms in navigating these transitions, ensuring their continued contribution to the economy.

Effective succession planning is crucial for sustaining family businesses across generations, preserving their legacy, and promoting economic growth. By addressing the unique challenges faced by family firms, we can create a supportive environment that fosters the longevity and success of these vital enterprises.

Acknowledgment

This brief is based on an academic article Family Firm Succession: First-generation transitions in Latvia co-authored with Janis Berzins and forthcoming in Finance Research Letters. We acknowledge financial support from the EEA research grant Global2micro (S-BMT-21-8, LT08-2LMT-K-01-073).

References

  • Pajuste, A., and Berzins, J. (2024). Family firm successions: First-generation transitions in Latvia. Finance Research Letters, 64, forthcoming.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Belarusian Business in Turbulent Times

Posted on October 23, 2023 | Policy Brief

20231023 Belarusian Business Challenges

In the past three years, the Belarusian private sector appears to have been caught between a hammer and an anvil, experiencing domestic repressions and de-liberalization as well as collateral damage from sanctions and a deterioration of the country’s image. This policy brief discusses the challenges that Belarusian businesses have been facing since the onset of the Covid-19 pandemic and argues that the private sector may be the last hope for sovereignty and transformation of the country.

The years that have passed since the onset of the Covid-19 pandemic and the subsequent economic shocks have significantly altered the entrepreneurial landscape in Belarus. This period has seen the emergence of private businesses’ social and political activation during the pandemic, as well as during the 2020 election campaign and post-election protests (Bornukova & Friedrich, 2021). Businesses have also had to adapt to reactionary government policies, cope with sanctions against Belarus and deal with issues related to the Russian invasion of Ukraine. In the face of these challenges, the reactions and responses from small and medium-sized businesses signals that the private sector still has the potential to remain a driving force for socio-economic development in Belarus – despite the current political forces in power.

Private Sector Development; Liberalization and Regulation

The liberalization of the business environment, which lasted more than a decade and ended in 2020, allowed the private sector (enterprises without any state ownership share) to become the most dynamic part of the economy (see Figure 1).

From 2012 through 2020, the share of the private sector in employment increased by 7.7 percentage points. Similarly, the contribution from the private sector to the export of goods and services, as well as to GDP, exceeded the contribution from state-owned commercial enterprises. Moreover, even in the absence of significant privatization and restructuring of state-owned enterprises, the private sector took over the “social” function as an “employer of last resort”, absorbing workers released from the public sector (including from fully and partly state-owned enterprises) (IPM Research Center, 2020).

In addition, the development of the private sector increased the diversification of Belarus’ foreign trade. Private companies in the IT sector, advanced instrument manufacturing, electronics, and other high-value-added industries shifted their focus to developed countries’ markets, which reduced the dependency on Russian resources and markets. This increased Belarus’ economic sovereignty and its resilience to political tensions and other external shocks. The year 2020 however marked the end of the liberalization of entrepreneurial activities, as private businesses and private capital started to be seen as a threat to the political system (Bornukova & Friedrich, 2021).

Figure 1. Contributions from the Belarusian private sector to main economic indicators.

Source: Own elaboration based on Chubrik (2021) and IPM Research Center (2020).

Although there are no uncontestable figures describing business’ attitudes and activities during the political crisis in 2020, several non-academic projects documented that 58 percent of people protesting the fraud elections in 2020 worked within the private business sector (Devby.io, 2020). Dozens of businesses also openly supported the anti-regime strikes (The Village Belarus, 2020). As a consequence, legislation and law enforcement have since been steadily tightened, the tax burden has increased, and the possibility for using simplified taxation and accounting systems by small-scale businesses, in particular for sole proprietors, have been substantially reduced.

Against this backdrop, the government has also suppressed the publication of detailed statistical data including those on entrepreneurial activity. Since 2020, the Belarusian Research and Outreach Center (BEROC)’s quarterly enterprise surveys have become the main source of information and analysis on the business development situation.

In general, BEROC’s surveys demonstrate that, despite a reduced safety cushion and the lack of substantial state support during the pandemic, Belarusian businesses had, by the end of 2021,  adapted to the shocks from the post-election crisis and harsh de-liberalization, by realizing  their ability to cope, and finding creative solutions in the turbulent environment (Marozau, Akulava and Panasevich, 2021). Before Russia’s aggression against Ukraine, Belarusian entrepreneurs’ optimism about overcoming external barriers – i.e., factors that are out of a firm’s control such as macroeconomic instability, etc. – was the highest since 2015. However, increased uncertainty forced Belarusian businesses to focus primarily on maintaining the achieved scale of activity, halting investments (Kastrychnicki Economic Forum (KEF) & BEROC, 2022).

Optimism In Challenging Times

In general, the institutional environment for doing business in Belarus has deteriorated in recent years, both due to actions such as changes in tax legislation, price regulation and pressure on disloyal businesses, and due to negligence from the state, such as lack of significant support measures for private business, an outflow of businesses due to sanctions and an increasingly negative image of the country (KEF & BEROC, 2022). The Business Confidence Index (BCI, ranging from 0 – “extremely negative” to 100 – “extremely positive”), developed by BEROC and the Kastrychnicki Economic Forum based on OECD methodology, documented that at the end of 2020, the confidence level of business representatives regarding future developments was in the negative zone – arguably due to the political unrest and the Covid-19 pandemic. As firms accepted a new normality and adjusted their businesses, the BCI steadily grew before comfortably settling in the neutral zone at the end of 2021 (see Figure 2).

In March-April 2022, however, macroeconomic instability, disruption of supply chains, and shortages of raw materials and/or components following the Russian war on Ukraine became serious external barriers for Belarusian businesses. This lowered the BCI and businesses’ perception of their economic situation.

Quite surprisingly, the risks of doing business in Belarus in the second half of 2022, until early 2023, were estimated to be lower than in 2021 (see Figure 3). This may be explained by the fact that (for companies remaining in Belarus) many of the potential risks (inflation, exchange rate instability, sanctions, counter-sanctions, disruption of supply chains, tightening of price regulation, etc.) had already realized (BEROC, 2023).

Figure 2. Business Confidence Index and GDP growth rate, October 2020-March 2023.

Source: KEF & BEROC (2023) and the National Statistical Committee of the Republic of Belarus.

Figure 3. Risk perception by Belarusian Businesses.

Source: BEROC (2023).
Note: Risks were scored on a five-point scale, 1-5, where 1 denotes “very low” and 5 “very high”. Dotted lines denote the 95 percent confidence intervals.

The New Reality

The reaction from most Belarusian businesses to both pandemic- and war-related challenges has manifested in their search for new business models, an introduction of new products/services, and the entry into new export markets. Despite a bundle of powerful shocks to the economy stemming from the Russian war on Ukraine and related sanctions, some factors have dampened the anticipated drop in the economy: in particular, the increase in Russian support, export re-orientation to Russia and developing markets, alongside monetary stimuli, and interference with the activity of state-owned enterprises as well as artificial price controls (Kruk & Lvovskiy, 2022). As a result, the standard of living has remained at pre-war levels: in January-April 2023, real household disposable income and real salary grew by 1.6 percent and 3.8 percent respectively. With sanctions on Belarus being comparatively softer than those on Russian businesses, Belarusian businesses may have gained a comparative advantage and additional opportunities in both the domestic and Russian markets (BEROC, 2022). This caused optimism among entrepreneurs and in March 2023 – for the first time in the considered period – the composite BCI turned out to substantially exceed the neutral zone (see Figure 2). These positive spillovers are however likely to be bound in time – they will end both if the state of the Russian economy worsens (as this would reduce Russian support and decrease export revenues for Belarusian firms), and in the unlikely scenario that Russia’s current isolation is reduced. Whether Belarusian businesses will withstand the current protracted crisis depends on the ability of state authorities (current or new) to restore a constructive dialogue with the business community, return to the rule of law and create a business environment conducive to entrepreneurship.

According to business, the key factor needed to expand business activity is a reduction of external barriers (such as disruptions to supply chains, shortages of raw materials and/or components), rather than government support (e.g., financial, informational, etc.) (KEF & BEROC, 2022). Thus, “We do not need state support, but need the state not to worsen legal conditions for doing business” has become a motto of Belarusian entrepreneurs. Even in the context of war and political instability in the region, it allows looking at the prospects of the private sector in Belarus with some positive expectations.

At the same time, factors such as political repressions, sanctions against Belarus, problems with logistics, and the refusal of business partners to work with Belarusian companies due to the Russian aggression towards Ukraine have forced many Belarusian businesses, especially in high-tech sectors, to relocate. While the scale and direction of Belarusian business emigration is still difficult to assess (Krasko & Daneyko, 2022), these processes devastate entrepreneurship capital in Belarus and jeopardize the prospect of entire sectors such as the IT sector. In addition, the popular opinion about the lack of business opportunities implies that, unless conditions improve in terms of state policy and public confidence in the future, the socio-economic effects (employment, value added, tax revenue, innovations) from entrepreneurial activity in Belarus will diminish (GEM-Belarus 2021/2022). With operations severely affected by external barriers and restrictive legislation, halted investments and limited, if any, commercial contacts with Western countries and individual businesses, Belarusian private enterprises can hardly be seen as a source of stability for the current regime.

Conclusion

To promote an increased role of the private sector in the Belarusian economy, and to ensure high-quality and sustainable growth of the same, two prerequisites are critically necessary.

Firstly, a resolution of the political crisis and a restoration of authorities’ and state institutions’ legitimacy will significantly increase the populations’ confidence in state policy on business and economics. The principle of rule of law must be recognized and public and private actors must be treated equally in all spheres. It is also necessary to ensure the stability of tax legislation and economic law and the mitigation of excessive state control of business activities. All the above would lower external barriers and create stimuli for long-term business investments that, in turn, would facilitate economic transformation.

Although the sanctions’ packages imposed on Belarus by most developed countries due to domestic repressions, and complicity in the aggression against Ukraine, were directed towards the public sector, the private business suffered substantial macroeconomic and reputational consequences in their wake. The refusal of many foreign partners (suppliers, customers, banks, transport companies etc.) to work with Belarusian businesses – regardless of their affiliation with the state and attitude towards Lukashenko’s regime as well as towards the war on Ukraine – also substantially undermine businesses’ potential and Western soft power in Belarus. Such refusal is often driven by the argument that, by paying taxes, private businesses in Belarus support the current regime, when they should instead undermine the regime by halting operations (and thus tax revenues). At the same time, with the complete liquidation of civil society organizations and the termination of international projects and initiatives, the Belarusian private business may serve as the last resort in the hope of achieving independent, decentralized, and autonomous decision-making – all cornerstones of modern democracy (Audretsch & Moog, 2022).

From this perspective, the preservation of the private sector in Belarus may be of decisive importance in the future political processes, necessary to take into account by policymakers and business elites alike in developed countries.

In addition, relocated Belarusian businesses can play an important role in transforming the country by developing social ties between entrepreneurs and civil society, by providing support when solving problems related to doing business outside of Belarus and by investing in the Belarusian economy in the future. In this regard, establishing non-partisan Belarusian business associations abroad creates preconditions for consolidation of the most active part of the Belarusian community and its involvement in the envisaged economic transformation of the country.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes. 

Will Entrepreneurs Be Able to Reactivate the Belarusian Economy?

Posted on June 13, 2022 | Policy Brief

20220613 Will Entrepreneurs Be Able Image 01

Based on data from two recent waves of the Global Entrepreneurship Monitor (GEM), we demonstrate that the Coronacrisis gave birth to many new necessity-driven entrepreneurs who will likely alleviate the current challenges of unemployment and income losses in the short- and medium-term. The readiness and willingness of Belarusians to become entrepreneurs in a harsh business environment could be considered a good sign for the economy and society. However, such businesses may fail to deliver a positive long-term impact on the economy, while the detrimental consequences of the war in Ukraine undermine the potential and sustainability of growth-driving businesses with international and innovative orientation.

Crises and Entrepreneurial Activity in Belarus

During the past 15 years, the Belarusian economy and, in particular, Belarusian entrepreneurs have experienced several crises of different scopes, nature, and origins (in 2009, 2011, 2015-2016, 2020). During these periods, Belarusian private enterprises responded faster to both negative and positive trends in the economy compared to state-owned firms. This has for instance manifested itself in private sector firms being swifter in decreasing or increasing the size of the work force in recessions or recoveries (IMF, 2019).  Stagnating demand also led to deteriorating business opportunities that in turn incited a decrease in the number of both nascent and matured entrepreneurs. In line with Cowling et al. (2015), these circumstances suggest the presence of a procyclical trend in the entrepreneurship development in the country. In the same vein, the period of economic growth brought new entrepreneurs to the market to pursue business opportunities.

However, results from two waves of the Global Entrepreneurship Monitor (GEM), conducted in May-June 2019 and June-July 2021 demonstrate that notwithstanding the Coronacrisis, political unrest, and worsening business climate, the Belarusian economy experienced an influx of entrepreneurs (not necessarily officially registered as a firm or sole proprietor). These findings contribute to the discussion on the motivation, potential, and effectiveness of this wave of entrepreneurs for the economy.

Belarusian Context for Entrepreneurs in 2019-2021

After the 2015-2016 economic crisis, 2019 represented the third consecutive year of moderate economic growth in Belarus. The gradual liberalization of the economic activity, as well as the give-and-take relationship with Eastern-European neighbors and the West, fueled the enthusiasm of Belarusian entrepreneurs, especially in the medium- and high-tech sectors. The year 2019 was supposed to be highly conducive to entrepreneurship. These conditions were captured by the GEM Belarus 2019/2020 (2020).

However, as in most other countries, small businesses were more affected by the pandemic than large enterprises in Belarus. Moreover, many of them were left to fend for themselves in dealing with COVID-related challenges, as only a small portion of enterprises benefitted from state support measures (Marozau et al., 2021). The recovery period was abrupted by the political crisis that broke out after the presidential elections in August 2020. This political unrest resulted in increased pressure on the private sector and NGOs as well as tensions with EU countries and Ukraine. Many famous entrepreneurs were forced to immigrate and re-locate their businesses. Consequently, GEM Belarus 2021/2022 (2022) captured a new reality of the Belarusian entrepreneurial ecosystem.

How the Entrepreneurship Indicators Changed

According to the GEM 2021/22 survey, Belarus experienced an increase in the percentage of the adult population (18-64 years old) involved in all stages of the entrepreneurial process (Figure 1). Nevertheless, the level of the total early-stage entrepreneurial activity (which includes nascent entrepreneurs – up to 3 months old businesses and baby businesses – 4–42 months old) is still lower than one might predict based on the country’s level of economic development (Figure 2).

These positive changes are paradoxical because, according to the survey, Belarusians were not enthusiastic about the opportunities to start a business – respondents reported a high level of fear of business failure, and that the entrepreneurial framework conditions had deteriorated.

Figure 1. Percentage of the adult population involved in the entrepreneurial process

Source: GEM Belarus 2019/2020 & 2021/2022

Figure 2. Early-stage entrepreneurship rates and GDP per capita.

Source: GEM 2021/22 Global Report (Hill et al., 2022)

Moreover, the GEM survey reveals that the profile of early-stage entrepreneurs changed between 2019 and 2021 – the educational level of early-stage entrepreneurs increased, while their income level followed a negative trend. A plausible explanation for these changes could be that a relatively well-educated part of the population, employed in the sectors that were harshly hit by the pandemic (HoReCa, Sport & Leisure, etc), decided to start a business out of necessity due to wage shrinkages or layoffs. Therefore, neither a low level of opportunity perception nor an aggravating business climate kept them from starting an enterprise.

Support for this argument can be found if we examine the reasons why Belarusians started businesses in 2021 (Figure 3). The shares of both nascent entrepreneurs and owners of baby businesses that report ‘earning a living because jobs are scarce’ increased by about 20 percentage points. This phenomenon, when a depressive market reduces employment opportunities and forces individuals into becoming entrepreneurs, is regarded as necessity-driven entrepreneurship (Gonzalez-Peña et al., 2018).

Figure 3. Reasons to start a business

Source: GEM Belarus 2019/2020 & 2021/2022. Note: Respondents could strongly agree, somewhat agree, neither agree nor disagree, somewhat disagree, or strongly disagree with statements reflecting the reasons they were trying to start a business. Figure 3 provides the cumulative share of those who strongly agree and somewhat agree.

Keeping in mind that the unit of analysis in the GEM is on the individual and not the enterprise level, we can suggest a cautious hypothesis that the trend in entrepreneurship development in Belarus has changed from being pro-cyclical to countercyclical in the short term.

It is already obvious that the negative impact of the pandemic and political unrest on Belarusian businesses cannot be compared with the devastating effects of the Russian invasion of Ukraine. In this context, the countercyclical trend or, in other words, the readiness and willingness of Belarusians to become entrepreneurs against all odds, could be considered a good sign for the economy and society. However, such necessity-driven entrepreneurs are more focused on achieving a sufficient standard of living than on expansion and innovation. It is known that the growth and innovative orientations of businesses (product and process innovation, activity in technologically intensive sectors) are important predictors of technological change and total factor productivity (Erken et al, 2018). From this perspective, according to the GEM 2021/2022, Belarus is still doing relatively well in terms of impactful early-stage entrepreneurship (international and innovative orientation, growth expectations, and technological intensity). However, businesses with these characteristics are usually led by opportunity-driven entrepreneurs and are more sensitive to changes in the external environment. Therefore, the detrimental consequences of the Russian aggression against Ukraine (difficulties with payments and logistics, export/import restrictions, and tarnished reputation of Belarus) have already undermined the potential and sustainability of most such businesses and jeopardized the socioeconomic development of the country.

So, the answer to the question of whether Belarusian entrepreneurs will be able to reactivate the economy is rather ‘no’. Based on GEM 2021/2022 data, we argue that the augmented entrepreneurial activity rate will plausibly alleviate the problems of unemployment and income losses in the short- and medium-term, but may not have a strong and long-lasting effect on the economy as a whole.

Conclusion

The 2021 wave of the GEM survey has documented an increase in the share of the population involved in the different stages of the entrepreneurial process in Belarus. This, however, appears to be the outcome of the pandemic-related economic crisis, which manifests itself in income losses and layoffs. As a result, the crisis produced new necessity-driven entrepreneurs with vague prospects.

In this regard, policymakers should realize that stimulating self-employment and small-scale entrepreneurship may indeed be a temporary solution to unemployment issues. If this is the aim, the toolkit to support such businesses is well elaborated and accessible to the government (it includes educational & consulting services, easy access to finance, etc.).

As for impactful entrepreneurship, hardly anything can be done by the current government to retain innovative and international business in Belarus against the backdrop of the consequences and global reactions to the war in Ukraine.

References

  • Cowling, M., Liu, W., Ledger, A., & Zhang, N. (2015). “What really happens to small and medium sized enterprises in a global economic recession? UK evidence on sales and job dynamics”, International Small Business Journal, 33(5), 488-513.
  • Erken, H., Donselaar, P., & Thurik, R. (2018). “Total factor productivity and the role of entrepreneurship”. The Journal of Technology Transfer, 43(6), 1493-1521.
  • GEM Belarus 2019/2020, (2020). “Global Entrepreneurship Monitor Report GEM Belarus 2019/2020”.
  • GEM Belarus 2021/2022. (2022). “Global Entrepreneurship Monitor Report GEM Belarus 2021/2022”.
  • González-Pernía, J. L., Guerrero, M., Jung, A., & Pena-Legazkue, I. (2018). “Economic recession shake-out and entrepreneurship: Evidence from Spain”. BRQ Business Research Quarterly, 21(3), 153-167
  • Hill, S., Ionescu-Somers, A., Coduras, A., Guerrero, M., Roomi, M. A., Bosma, N., … & Shay, J. (2022). “Global Entrepreneurship Monitor 2021/2022 Global Report: Opportunity Amid Disruption”.
  • IMF. (2019). “Reassessing the Role of State-Owned Enterprises in Central, Eastern, and Southeastern Europe”, 19/11.
  • Marozau, R., Akulava, M., & Panasevich, V. (2021). “Did the Government Help Belarusian SMEs to Survive in 2020?” FREE Network Policy Brief Series.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Did the Government Help Belarusian SMEs to Survive in 2020?

Posted on June 14, 2021 | Policy Brief

Enterprises During Pandemic representing Belarus

Capitalizing on the dataset obtained from five waves of the Covideconomy Project business survey, we explore how pandemic-related shocks and state economic policy responses influenced the performance of Belarusian small and medium enterprises (SMEs) in 2020. We find that Belarusian SMEs were left on their own with the COVID-related economic challenges, and only a small portion of enterprises could benefit from state support measures. Only two sectors (Manufacturing and Construction) derived advantages from soft loans provided to state-owned enterprises. The implementation of new, pandemic-adjusted business models did not result in an increase of revenues of Belarusian SMEs, at least not in the short run.

Small and Medium Enterprises During the Pandemic

According to OECD estimates (2020), the small and medium-sized enterprise (SME) sector has been more affected by the COVID-19 pandemic compared to large enterprises. Besides being highly concentrated in the most affected sectors, the main reasons for SMEs experiencing stronger COVID-related shocks are a lower level of cash cushion and limited access to external funds (Goodhart et al., 2021). Next, the stock of supplies and materials, as well as the range of suppliers, are usually lower for SMEs (WTO, 2020). This makes any price changes or abruptions more detrimental for them in comparison to large companies. Lastly, the availability of digital technologies and skills needed to implement new business formats appeared as an additional constraint for the SME sector during the pandemic. Indeed, per the World Bank’s business surveys, the most frequently mentioned effects of COVID-19 on SMEs in Central and Eastern European countries were a drop in sales, liquidity problems, limited access to finance, and breakdowns in supply. In this context, only 35% of SMEs in the region were able to adapt quickly to new conditions by introducing new business models such as online sales, delivery services, and remote work. At the same time, many SMEs in the region laid off employees, reduced wages, or initiated furloughs as alternatives to closing the business altogether.

In this regard, the SME support measures became an extremely important task for national governments to conduce to faster economic recovery and job creation. As a result, a wide range of monetary and non-monetary measures was implemented in various countries to support SMEs.

Internationally, direct support was provided in the form of wage subsidies, cash grants and transfers, tax holidays, reductions, or deferrals that could prevent unemployment growth. In addition, liquidity problems of SMEs were addressed by introducing rental fee deferral or reduction, repayment holidays as well as providing micro and short-term loans.

In many countries, specific measures were aimed to support the digitalization of SMEs (e.g., in China, France, Latvia, Italy, Slovenia, South Korea) by offering subsidies, financial support, training, and consulting services, developing e-commerce sales channels to respond to pandemic-related challenges (OECD, 2020).

Figure 1 demonstrates shares of SMEs in Central and Eastern European countries that benefitted from state support measures and SMEs’ perceived importance of these measures. Wage subsidies (65.1%) and direct cash transfers and grants (47.1%) appeared as the most commonly used measures, while fiscal exemption and reductions were regarded as the most important and relevant ones.

Concurrently, at the macro level, some governments eased requirements on banks’ emergency funds and reduced base rates to provide more and cheaper financial resources as loans for the enterprise sector.

Figure 1: Scope and importance of SME support measures

Source: World Bank data on Belarus, Russia, Poland, Estonia, Latvia, Lithuania, Georgia, Moldova, Slovakia, Czech Republic, Bulgaria, Romania, Hungary.

In general, the scope and target groups of the support programs depended on financial resources at the disposal of governments, access to capital markets, macroeconomic conditions (public debt, exchange rates, unemployment rates), as well as the structure of the economy.

In this brief, we discuss how the macroeconomic environment and the Belarusian government’s policy reaction to the pandemic affected revenues of Belarusian SMEs in 2020.

The Belarusian Economy in 2020

The official statistics reported outstanding results of the Belarusian economy, despite it being expected to be hit harder than other countries in the region. The COVID-19 pandemic-related shocks were aggravated in Belarus by endemic ones: the early-2020 oil-supply dispute with Russia, the sociopolitical crisis that broke out after the presidential elections in August (Bornukova et al., 2021), and the concomitant sharp devaluation of the Belarusian ruble (22.59% to US dollar in 2020) in March and August. Against this backdrop, the 0.9% decrease in GDP, 4.6% increase in real disposable incomes, and stable unemployment rate (at 4.0%) together look like an economic miracle. Some of the rationales behind these figures include the absence of lockdowns and substantial mobility restrictions throughout the year, as well as easy access to bank loans for state-owned enterprises (SOEs) that faced an export shock. At the same time, ad-hoc sampled population and business surveys documented income reductions of Belarusians and a substantial decrease in business revenues in many sectors (Covideconomy project, 2021). Figure 2 displays the shares of SMEs in different sectors whose revenues dropped by more than 20% in the month before being surveyed.

Figure 2. Share of SMEs with loss of revenue >20%  

Source: Own elaboration based on five ways of business surveys

The Belarusian government was substantially restricted in terms of financial resources as well as fiscal and external loan opportunities to extensively support businesses suffering from the COVID-related economic crisis. According to experts’ estimations, Belarus lags behind other Eurasian Economic Union members (Russia, Armenia, Kazakhstan, Kyrgyzstan) in terms of the estimated share of GDP spent on crisis response measures – 1.5% (Russian Academy of Foreign Trade & Research Institute of VEB, 2020). While the most suffering sectors (trade, transportation, hotels, restaurants, tourism, education, leisure, sport, etc.) could benefit from the deferral of profit, real estate and land taxes, as well as rental fees till the end of 2020, obtaining any type of support appeared bureaucratically challenging and imposed exigent obligations for the future. Overall, the support was perceived as negligible and far below expectations both in terms of financial resources saved by businesses and coverage. Thus, in May-October 2020, about 50 thousand businesses (incl. sole proprietors) received cumulative support for a total amount of $26 Million or $536 per business (National Center of Legal Information of the Republic of Belarus, 2020). According to the Covideconomy project, in May-July, less than 5% of SMEs reported getting support from the state.

What Affected Belarusian SMEs?

Motivated by the specific reaction of the Belarusian government and its very limited support to SMEs, we explore what enterprise- and country-level factors affected SME revenues across industries during the pandemic. In pursuit of this objective, we use data obtained from five waves of the business survey conducted within the Covideconomy project (2020) on 359 SMEs amounting to 947 observations, and perform a regression analysis with a set of ordered logistic models. Particularly, we test whether the (i) self-isolation of population, (ii) currency devaluation, (iii) volume of loans provided to SOEs, and (iv) new business models implemented by Belarusian SMEs impacted their revenues.

These hypotheses are based on the following arguments:

  1. In the absence of restrictive measures and lockdowns, entrepreneurs and citizens made conscious decisions about self-isolation and remote work. To minimize personal contact, many people reduced the number of visits to public places as well as various group activities. Such responsible behavior could hurt business income, primarily in the areas of catering, hotels, entertainment, transport, and consumer services, in which SMEs are widely represented.
  2. The sharp devaluation of the Belarusian ruble is, and has traditionally been, a significant problem for Belarusian businesses. The rise in prices of imported goods and services, inflation, and the fall in household incomes in dollar terms harm domestic demand, leading to a drop in sales in many sectors. The exceptions could be export-oriented enterprises, which mostly use materials and supplies produced in Belarus, as well as enterprises that are suppliers and contractors of exporters.
  3. To minimize the impact of the pandemic-related shocks, the Belarusian government continued its habitual practice of providing soft loans for SOEs to maintain their production volumes and pay wages. Arguably, this could bolster demand for SMEs’ goods and services from the side of SOEs’ employees and prevent a deeper recession. In addition, SMEs that were suppliers and contractors of SOEs could also benefit from this policy measure.
  4. The pandemic significantly accelerated SMEs’ processes of finding and realizing opportunities to develop. This became key in the survival of many businesses. We thus expect that the implementation of new business models could have had a positive impact on revenues of SMEs.

In our models, we use the size of SMEs, location in the capital city, and whether a firm belongs to one of the most suffering sectors (HoReCa, Transportation, Leisure & Sport) as control variables. To capture the effect of factors across different sectors, we use interaction terms between the aforementioned factors and dummies indicating different sectors.

The results of the regression analysis (summarized in a stylized way in Table 1) demonstrate that the impact of the selected factors is not consistent across sectors and that none of the factors appear significant when considering the entire sample of SMEs.

Table 1. Impact on SMEs’ revenues

Source: Own estimates based on 947 observations from 359 SMEs.

Not surprisingly, self-isolation behavior negatively affects only the HoReCa and Leisure & Sports sectors. Currency devaluation does not significantly influence the revenues of SMEs. Only the ICT sector, which is export-oriented and does not depend on imported materials, easily adapted to remote work and increased demand for IT-related services and experienced a positive shock. The state policy that provided soft loans to SOEs helped SMEs in the manufacturing and construction sectors that are, supposedly, contractors and suppliers of SOEs. The implementation of new business models did not result in an increase in the revenues of Belarusian SMEs, at least not in the short run. A possible explanation for this finding could be that firms responded by adopting new business models only if they experienced a very steep fall in revenues.

As for the control variables, we find that larger enterprises better adapted to the crisis and their decrease in sales appear smaller. Interestingly, SMEs located in the capital city –  Minsk – suffered more from the crisis in 2020, likely, due to a higher concentration of SMEs in the most affected sectors and a quicker reaction of citizens to economic and political shocks.

Conclusion

Based on our analysis, we can deduce that Belarusian SMEs were left on their own with the COVID-related economic challenges. Only a small share of enterprises could benefit from the state support measures and only two sectors (Manufacturing and Construction) derived advantages from soft loans provided to SOEs.

At the same time, the absence of lockdowns and other restrictions – the laissez-faire approach (Bornukova et al., 2021) – propped up most of the sectors except those that suffered from voluntary self-isolation of customers (HoReCa, Leisure, Sport, Beauty).

The ongoing crisis substantially changes the economic landscape, management practices, and business models of SMEs. The most flexible, competitive, and proactive businesses have been capable of identifying and exploiting the emerged opportunities. From this point of view, Belarusian businesses and entrepreneurs have outstanding experience in surviving and developing during recurrent crises (Marozau et al., 2020). This must be an important pre-condition for the future economic recovery of Belarus.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Financing for Development: Two Years after Addis

Posted on June 12, 2017 | Policy Brief

20170611 Development Day

At the Third International Conference on Development Finance in Addis Ababa on July 13—16, 2015, the world committed itself to an action agenda to raise resources to realize the 2030 sustainable development goals. The question is how much progress the world has achieved two years down the road, when the initial enthusiasm and commitments are no longer in the immediate spotlight. This policy brief reports on the discussion from a conference on this topic, Development Day 2017, held in Stockholm on May 31.

The year 2015 has been lauded as a landmark year for sustainable development. As many as three major global agreements were negotiated and signed: the 2030 Agenda for Sustainable Development; the Paris Agreement on Climate Change; and the Addis Ababa Action Agenda (AAAA) on Financing for Development. The latter may be less known, but is essential to the ambition to achieve the first since it concerns how to finance the necessary investments to achieve the Sustainable Development Goals (SDG). The AAAA identified seven action areas spanning both the public and the private sectors, and involving both domestic revenues and international transfers (domestic public resources, domestic and international private business and finance, development cooperation, trade, debt and debt sustainability, systemic issues and science, technology and innovation). This event focused primarily on international commercial private capital flows, and indirectly on development cooperation as a facilitator and catalyst for such private transfers.

Combining good business and good development

A major theme of the conference was combining good business with good development. Should private companies also take responsibility for environmental and social sustainability, or is the “only business of business to do business”? If firms do engage in sustainability investments, does it eat into profits or does it rather create a competitive edge? Reading business journals, it is easy to get the impression that there is a win-win situation. This picture is, however, based on rather limited information and the relationship is fraught with methodological challenges as both profitability and sustainability investments may be driven by other factors (such as competent leadership), and firms performing well may have the capacity and feel the obligation to invest part of their surplus into corporate social responsibility (CSR). Hence, there may be a question of reverse causality.

At the conference, new research was presented using data on investments in low and middle-income countries from the International Finance Corporation that includes both measures of financial rates of returns and subjective ratings of environment, social and governance (ESG) performance. Simple correlations suggested a significant positive relationship, or a win-win situation. However, once care was taken to identify a causal effect from ESG on profits, the results became insignificant. That is, the causal effect of ESG investments on profits seemed neither positive nor negative. However, when looking at broader measures of private sector development, the results suggest that both profits and ESG investments have a positive impact on sector development. This implies that there are good reasons for the public sector to encourage ESG activities even beyond the direct sustainability benefits through for instance public-private partnerships but also regulations that encourage good behavior.

How should results like these be interpreted? The presentation spurred an interesting debate on what are reasonable expectations and whether “the glass is half full or half empty”. It was emphasized that systematically beating the market should not really be expected from any group of investments, so a half-full interpretation seems more plausible.

This debate also came up in a panel discussion on institutional investments in developing countries, and where the growing success of green bonds was presented. Though still small in absolute size (1-2% of the bonds coming to the market are green bonds), there has been an impressive growth in the last 3-4 years. Currently, the Swedish bank SEB is cooperating with the German government in developing a green-bond market in emerging markets. Some of the lessons emphasized from the green-bond market were the importance of being clear towards investors about the motivation and the value proposition, to package the information in a credible way emphasizing independent verification, and to continuously monitor and give feedback to investors.

From the institutional investor side, it was mentioned how important it is to tell investors a compelling story. This may be easier with regards to environmental sustainability relative to social sustainability, both in terms of conveying the urgency and in developing indicators that can be monitored and communicated. It was also argued that even though there are initiatives out there, emphasizing how sustainable investments can be competitive in terms of profitability (such as green bonds), it would also help to change the relative price on the other end of the spectrum, i.e. through regulations, taxes or other instruments that can make investments with particularly negative externalities less profitable.

Finally, an overarching theme of the discussion was the challenge to have institutional investments reach the places with the most needs, i.e. the fragile and least developed countries. If this is to happen, pension funds and insurance companies have to be allowed to take on more risks, and it would be essential to reduce the corporate risk in public-private partnerships (more on this below).

In a second panel discussion, different Swedish corporate initiatives, emphasizing sustainability, were showcased. For example, the Swedish steel producers’ association, Jernkontoret, showcased the Swedish steel industry’s vision 2050 with the target of domestically based steel production using hydrogen and with zero CO2 emissions. Another example is the Sweden Textile Water Initiative, launched in 2010 by major Swedish textile and leather brands together with the Stockholm International Water Institute, has created the first guidelines for sustainable water and wastewater management in supply chains. Currently working with 277 suppliers in 5 countries, the initiative features clear win-win situations and is now self-sustaining and in the process of going private.

Skandia, a major Swedish insurance company, emphasized the business costs of socially unsustainable situations with examples from the costs in Sweden of sick leave, and the costs for protection and security for Swedish retailers and mall developers. Positive preventive work focusing on rehabilitation and the development of blossoming and inclusive neighborhoods were featured. These examples showcased how the SDGs are feeding into the thinking and planning of the private sector in Sweden, and how important it is to identify the business cases for thinking about sustainability in order for this to become mainstream.

However, the case for private capital to be the panacea for reaching the SDGs is by no means obvious. The non-governmental organization Diakonia pointed out that for every dollar flowing into a developing country, more than two dollars are lost. The biggest loss is coming from illicit financial flows, and within this category, tax evasion is the biggest problem. While the private sector is key to development, the main contributions this sector can do for development is to pay taxes where they are due, abide by international standards, and be transparent and accountable to the citizens and governments in the countries where they operate.

Swedwatch, used two examples from Borneo and what is now South Sudan, to illustrate how investors at times turn a blind eye towards human rights and environmental abuses by private multi-national companies. Transparency, due diligence in evaluating human rights risks prior to investment decisions, and a readiness to push for compensation and remedy if abuse is still unearthed were pointed out as key components to avoid this type of malpractice.

Development cooperation as facilitator for private flows

The second main theme of the day dealt with the ability to use development cooperation as a catalyst for private investments.

Swedfund, the Swedish government’s development financier, emphasized the need to move fast and find a business model in which one dollar spent becomes ten dollars on the ground. Based on a business model around three pillars (societal impact, sustainability and financial viability) Swedfund focus on areas with relatively high risk and where private capital are in short supply, with the hope to foster job creation, inclusive growth and poverty reduction.

Sida, the Swedish main aid agency, showcased their guarantee instruments. Through partnerships with bigger actors such as the International Finance Corporation (IFC) of the World Bank group as well as local banks in developing countries, Sida can shoulder part of the default risks involved when trying to reach more high-risk investors (such as small and medium sized enterprises) with great potential development impact. In this way, one dollar from the public aid budget can lure a multiple of dollars in private capital towards sustainable development.

The OECD Development Assistance Committee (DAC) emphasized that governments generally lack a policy for how to deliver official development assistance (ODA) in a sustainable way and a strategy for how to enable capital flows from the private sector. A DAC initiative to better track all financial flows going towards development, beyond just ODA, was presented.

From the Center for Global Development, the case for using public resources to facilitate private sector insurance mechanisms against human disasters was presented (concessional insurance). Benefits emphasized from explicit insurance contracts included faster and better-coordinated payouts, more certainty that compensation will come, incentives to invest in disaster prevention (to reduce premiums) and involvement of commercial insurance professionals.

Importantly, though, it was emphasized that it is crucial that aid money are truly complementary in the sense that they crowd in private investments that otherwise would not have taken place (and not end up subsidizing private investors in donor countries). It was also emphasized that donors must not forget about the focus on the poorest and people in fragile states.

In some environments donors must shoulder 100% of the risk to lure private capital. In those cases alternatives must be considered. Sida emphasized the importance to match financial instruments with the appropriate context, i.e. there is a need to identify where different instruments should be used. For instance, big institutional investors need investments that are manageable, predictable, and of a reasonable size. Aid agencies can help through subsidized risk management, but also by helping build strong institutions in partner countries that can work as counterparts, and encourage public-private collaborations to package investment deals and reduce information asymmetries.

Where are we now?

Turns out that this is not a simple question to answer. The Ministry for Foreign Affairs presented the Swedish government’s priority areas – strengthening the implementation of SDG 5, 8, 14 and 16 (all goals can be found here: https://sustainabledevelopment.un.org/?menu=1300) – and reported from a recent follow-up meeting at the UN.

In principle the Addis Agenda identifies action areas and connects areas and actors, which makes it possible for systematic follow-ups, and an inter-agency task force produces an annual report of the general state of the implementation of the Addis Agenda. The Swedish government has produced a report on the implementation of the AAAA covering all seven action-areas with examples of progress. This initiative was commended at the UN meetings, and together with the private sector engagement, as showcased during the 2017 Development Day, it paints a rather positive picture of progress and engagement in Sweden.

However, globally, there are many uncertainties and challenges. The Center for Global Development reported on the budget proposal of the US president, which among other things includes a 32% cut to topline funding for the Department of State and Foreign Operations. There are also plans to eliminate the Overseas Private Investment Corporation and to zero out US food assistance. On the other hand, in this fiscal year, the US Congress (controlled by the Republicans) increased the amount going into foreign aid compared to what previous president Obama suggested. What will eventually come out of the current president’s budget proposal for the coming fiscal year is thus highly unclear.

Participants at the conference

  • Rami AbdelRahman, Sweden Textile Water Initiative
  • Frida Arounsavath, Swedwatch
  • Owen Barder, Center for Global Development
  • Eva Blixt, Jernkontoret
  • Magnus Cedergren, Sida
  • Penny Davies, Diakonia
  • Raj Desai, Georgetown University and the Brookings Institution
  • Ulf Erlandsson, Fourth Swedish National Pension Fund (AP4)
  • Måns Fellesson, Ministry for Foreign Affairs
  • Charlotte Petri Gornitzka, OECD-DAC
  • Anna Hammargren, Ministry for Foreign Affairs
  • John Hurley, Center for Global Development
  • Lena Hök, Skandia
  • Måns Nilsson, Stockholm Environmental Institute
  • Mats Olausson, SEB
  • Anders Olofsgård, SITE
  • Anna Ryott, Swedfund
  • Elina Scheja, Sida

The Role of Belarusian Private Sector

Posted on January 19, 2015 | Policy Brief

The development of a private sector and the expansion of its role in the economy is one of the key goals repeatedly announced by the Belarusian authorities. The reforms carried out in Belarus in 2006-2014 moved the country from 106th to 57th position in the World Bank Doing Business ranking. The official statement is that reforms boosted the rapid development of business initiatives and its impact on economic development. Unfortunately, there is no clear confirmation of this statement. The absence of a transparent and clear methodology in Belarusian statistics on how to evaluate the role of the private sector makes it difficult to evaluate the exact input of the Belarusian business in the economy and compare its role to other countries.

In the last 5 years, the Belarusian authorities have repeatedly highlighted the need to develop the private sector, perceiving it as the main source for sustainable economic growth and competitiveness of Belarus in the future.

However, it may be difficult to assess the real role of the private sector in the Belarusian economy. First, existing data do not allow a clear identification of the boundaries between the private and state-owned sectors in Belarus. Furthermore, there are certain methodological differences in identifying and evaluating the private sector between Belarusian official statistics, the World Bank approach and alternative methodologies. These methodological variations combined with data limitations result in significantly different estimates of the role of the private sector for the Belarusian economy. The problem concerns both the evaluation of the role of small and medium enterprises (SMEs) and the private sector in general.

Small and Medium Enterprises

One good example of the abovementioned data issue is the statistics for SMEs sector. Unlike the EU, Belarus does not include individual entrepreneurs to the micro organizations in the SME sector. This results in highly different estimates for the number of SMEs per 1000 inhabitants (Figure 1). If we follow the methodology of the National Statistical Committee of the Republic of Belarus (Belstat), the number is 9.7 firms per 1000 people. However, switching to the EU methodology (IFC report, 2013) raises the number significantly up to 35.9. Moreover, the inclusion of unregistered self-employed individuals involved in the shadow economy (which according to estimations of the authorities amount to at least 100,000 inhabitants) increases the number to 46.5 firms per 1000 people, which is above the level of many European countries.

Figure 1. SME density

figure1Source: own estimations from Belstat data, Eurostat.

Private Sector

As for the private sector in general, the problem here is that the official statistics counts enterprises with mixed form of ownership and state presence to the private sector. This makes it difficult, if at all possible, to obtain the exact input of the private sector to the economy and see the dynamics of its change.

More specifically, there are three potential ways to assess the contribution of the private sector. Unfortunately none of them provides reliable estimates of the role of business. The first method is to use official data. The main problem here is that the private sector according to official statistics includes enterprises with state presence as well as large private companies that are under state control and not totally independent. Thus, the contribution of the private sector calculated based on these figures is likely overestimated.

The second method is to look at enterprises that do not report to the Belarusian ministries, following the methodology of the World Bank used in their evaluation of Belarus machinery industry (Cuaresma et al., 2012). Here, non-ministry reporting enterprises work as a proxy for a private firm, as in this case it doesn’t have to report directly to Belarusian ministries and is independent from the state.

The problem is that the majority of large private enterprises, even though there is no state share in them, are not in this list. In Belarus these enterprises often form a part of state concerns on the one hand and are independent on the other. The example here is JSC “Milavitsa”, one of the largest lingerie producers in EE, which is a part of the Bellegprom concern. Therefore, this methodology likely underestimates the role of the private sector.

The third way is to try to exclude state presence from the official data of the private sector. According to official statistics, the private sector includes several groups of enterprises, such as individual entrepreneurs, legal entities with/without state/foreign presence, etc. However, the absence of a clear distinction between these sub-groups allows for only rough estimates, through the extraction of the state presence.

As a result, all obtained numbers are qualitatively different from each other and there is no clear answer if any of them reflects the real picture.

For example, the contribution of the private sector in total employment according to the three different methods (Figure 2) provides the following results. Officially, in 2013 around 53% of the active labor force worked in the private sector. However, the exclusion of state presence in private property changes the results significantly and the share of the active labor force involved in the private sector drops to a level of 31%, while the non-ministry reporting enterprises employ around 18% of the active labor force.

Figure 2. Private sector in employment (%)

figure2Source: own estimations from Belstat data.

The input of the private sector in the total production volume (Figure 3) is also very diverse depending on the method of evaluation. Official data show that the private sector is responsible for 80% of total production volume. However, the exclusion of state presence decreases the value to a level of just 26%, which is similar to the result demonstrated by the non-ministry reporting enterprises (25%).

Figure 3. Private sector in total production volume (%)

figure3Source: own estimations from Belstat data.

At the same time, the absence of a clear definition of the private sector does not allow for obtaining reliable information about its effectiveness. If we take the rate of return on assets (ROA), again, there is a significant gap in the results of the different methods of estimation (Figure 4). ROA of the private sector according to official statistics is significantly lower than similar indicators based on the data obtained by the other two methods (in 2013: 1.17 vs. 2.4 and 1.3 respectively). Thus, the lower the “measured” state presence, the higher is the productivity of the private sector, especially in comparison with the effectiveness of the state sector (0.25).

Figure 4. Return on Assets (BYR/BYR)

figure4Source: own estimations from Belstat data.

Conclusion

The above discussion has illustrated that diffuseness of data and the definition of the private sector is likely to create troubles for understanding the importance of the private sector in Belarus. This, in turn, may undermine the effectiveness of economic and political measures targeted towards this sector.

The implementation of a clear, unified and transparent methodology of how to estimate the role of business and what exactly can be treated as a private sector in statistics would allow for a better understanding of the obstacles and barriers that the private sector is dealing with, as well as to help developing effective measures of business support. Until then, the official statistics should not stick to just one definition of the private sector. Instead, it can use all three abovementioned gradations, as a better reflection of the realities of Belarusian business.

References

  • Cuaresmo, J., Oberhofer, H., Vincelette, G. (2012).‘Firm Growth and Productivity in Belarus: New Empirical Evidence in the Machine Building Industry’, World Bank, Policy Research Working Paper No. 6005.
  • ‘Business Environment in Belarus 2013.Survey of Commercial Enterprises and Individual Entrepreneurs’, IFC, Report.

Becoming Entrepreneur in Belarus: Factors of Choice

Posted on November 19, 2012 | Policy Brief

20121119 Becoming Entrepreneur in Belarus Image 01

This policy brief summarizes two papers by Maryia Akulava on entrepreneurship development in Belarus and outlines which factors affect the choice of becoming self-employed in Belarus. While one of the papers, “Choice of Becoming Self-Employed in Belarus: Impact of Monetary Gains”, focuses on the role of pecuniary benefits, the other paper, “Portrait of Belarusian Entrepreneur”, adopts a broader perspective by accounting for individual, sociological, and institutional factors. 

Although the Belarusian government has repeatedly declared the importance of private entrepreneurship for the national economy, its role remains rather modest. In terms of private sector development, Belarus lags severely behind other post-socialist countries. Yet, over the last decade, some positive dynamics have been recorded. In particular, the number of small and medium enterprises (SMEs) per 1,000 people increased from 2.5 in 2003 to 7.2 in 2010. Still, this ratio is rather small in comparison with other post-socialist economies (Table 1) [3; 4; 5; 6].

Table 1. Number of Small Enterprises (SEs) per 1,000 People

Number of SEs per 1000 people
Belarus 7.2
Russia 11.3
Ukraine 17
Kazakhstan 41
United Kingdom 46
Germany 37
Italy 68
France 35
EU countries 45
United States 74.2
Japan 49.6

Regarding the growth rates of SEs and individual entrepreneurs (IEs), the numbers leave much to be desired. Specifically, in 2009, the number of SMEs and IEs amounted to 62,700 and 216,000 respectively, while in 2011 – to 72.200 and 232,000. Therefore, despite the efforts of the authorities to encourage the development of private initiative, the number of SEs and IEs only increased by 15.2 and 7.4%, respectively.

Next, private sector employment remains rather low. It amounts to approximately 13%, while in the developed economies this figure varies between 60 and 70%. For instance, in the U.S., it amounts to 60%, in Germany and in France – around 65-70%, and in Japan – 85%. On the other hand, transition economies have smaller shares, including Russia – 17%, Kazakhstan – 20.6%, and Ukraine – up to 28.8%, [7].

Some important indicators are provided in Table 2 [8].

Table 2. Share of Small and Medium Business in Economic Indicators of Belarus

 Share of small sector 2003 2008 2009 2010
GDP 8.2 11.2 11.4 12.4
Volume of industrial production 8.4 8.3 9.2 9.4
Exports 18.2 31.4 34.3 38.9
Retail trade turnover 9.2 27.8 29.5 28.2
Economically active labor force 13 13 13 13.1

Table 2 reveals an increased contribution of private entrepreneurs to the national economy. At the same time, the share of labor employed in the private sector remains unchanged at the level of 13%. This fact suggests that self-employment remains relatively unattractive for salaried workers.

So, what are the drivers of people’s choice? On the one hand, people might be reluctant to become entrepreneurs because of the prevailing social and cultural attitudes, or the lack of necessary experience. Post-socialist economies all share the legacy of planning and suppression of private initiative. On the other hand, government’s policies and regulations might ‘cool down’ enthusiasm or people simply have had or heard of some bad experiences. Thus, it is important to think of the reasons behind people’s choice and formulate policies to encourage entrepreneurship development in Belarus.

Who Is a Belarusian Entrepreneur?

In Belarus, entrepreneurs are active mainly in the non-manufacturing sector, including trade (30% of all entrepreneurs), provision of different services (16.5%), construction (13%), logistics (7%), and real estate (7%). The most common reasons to start your own business include a sudden, but attractive, business opportunity (66%), and the availability of funding for project implementation (33%).

As for the gender and age profiles of Belarusian entrepreneurs, 64% are men and 36% are women, with an average age of around 40-42 years. The majority of entrepreneurs is religious (54%), married (69%), and has children (75%). Around 65% have higher education, and about one third of them were among the top 10% students of their classes. Entrepreneurs report a good health status: 64% of them consider themselves as ‘healthy’. This is not surprising, given that entrepreneurship in Belarus is ‘survival for the fittest’. An entrepreneur has to be ready to take risks, be energetic, active and to continuously search for new business opportunities. Moreover, entrepreneurs are optimists, who evaluate themselves as successful (77%) and happy (81%) people.

Sociological characteristics reveal strong reliance on social networks. In general, the number of relatives or friends involved in the business activities is about two times larger than for salaried workers. Besides that, a much larger share of entrepreneurs consider their parents wealthy and successful (45% and 82%), compared with employees (34% and 37%, respectively).

Belarusian entrepreneurs stay in business because they like what they do (53%), and think that their work is important for society (29%). Profits and income remain a strong, but are not a decisive reason (25%).

Although entrepreneurs and employees do not differ substantially in terms of their attitudes towards family, friends, health, financial stability, religion, and so on, there is still a notable distinction. Specifically, entrepreneurs tend to praise work, power and influence over other people, and also like political freedom. In addition, they value their function of a service provider to other people.

Moreover, entrepreneurs have more trust to colleagues, other business people and subordinates than salaried workers. This is not surprising, given the importance of horizontal networks mentioned above. It is important to note that more than 30% of respondents expressed their trust to political authorities despite the government-induced difficulties for entrepreneurship development in Belarus.

Analysis of institutional infrastructure for doing business detects a negative relationship between a publicly-stated favorable attitude of authorities towards entrepreneurs and their decision to work in the private sector. This can be explained in following way: a priori, the government’s stance on entrepreneurship is evaluated positively, or at least considered as not harmful. Moreover, a person considers himself as being too small to attract the ‘extractive attention’ of the authorities. However, a posteriori, entrepreneurs revise their initial views. Their experience tells us that the government’s attitude is far from welcoming.

As for corruption, the attitude is ambiguous. On the one hand, entrepreneurs generally disfavor corruption. On the other hand, those who seek to expand their businesses consider corruption a way to avoid ‘unnecessary troubles’ and to overcome barriers created by the excessive ‘red tape’ in the economy.

What Are The Obstacles For Doing Private Business In Belarus?

Belarusian entrepreneurs consider the following factors as barriers to business development: (i) inflation and macroeconomic instability (55%), (ii) lack of financing (31%), (iii) high taxes (27%) and complexity of tax system (18%), (iv) legal vulnerability (23%), and (v) toughness of state administrative regulation inspections, licensing and certification requirements (19%). These barriers are largely of macroeconomic and regulatory nature. Moreover, authorities conduct a policy of close-to-full formal employment. This policy is aimed at securing jobs for people even at loss-making and poorly performing companies, which are kept afloat by subsidizes and directed loans. As a result, employees prefer to trade risks of working in the private sector, for a stable employment in the sector of state-owned enterprises.

As for the main barriers, which impede business start ups  financial constraints are the most common factor (33%), followed by high risks (25%), the lack of necessary business skills, a clear understanding what to do in the market (15% and 13% respectively), and unwillingness to work a lot (16%). In other words, financial constrains along with the lack of business education are the two most important domestic barriers.

These findings correspond to the results of the research on the impact of pecuniary benefits on entrepreneurs. In that study, education does not appear to have a significant influence on the level of earnings by entrepreneurs. The latter are ‘self-trained’ by the experience of starting a business in the uncertain environment of the 1990s and matured in the course of doing their business in unfriendly conditions. However, as the economy evolves, activities and contracts become more sophisticated. To survive in the changing environment, entrepreneurs have to acquire new skills and learn new methods and concepts of doing business.

So far, it appears that the quality of education obtained by the entrepreneurs does not match the skills required in the Belarusian economy. Thus, it is important to organize seminars, to hold training and to run business education programs for the future and current entrepreneurs in order to upgrade their skills and thus to contribute to their improved performance on the market.

Conclusion

An efficient development of the private sector in Belarus requires a drastic improvement of the domestic business environment. In order to encourage domestic entrepreneurship, the authorities should improve macroeconomic management and cut much of the ‘red tape’. Entrepreneurship possesses a great potential to contribute to growth and development. Surveys reveal that government policies constrain the development of the domestic private sector. Moreover, the high tax burden should be reduced, and some fiscal ‘sweeteners’ could be offered for business startups. In addition, a somewhat higher priority should be given to the improvement of the quality of business education,  and make it more accessible for the current and future business people. If implemented, all these measures would supposedly have a fostering impact on the development of a dynamic private sector in Belarus.

▪

References

Akulava M. 2012. “Choice of Becoming Self-Employed in Belarus: Impact of Monetary Gains”.

Akulava M. 2012. “Portrait of Belarusian Entrepreneur”. Work in progress.

Djankov S., Miguel E., Qian Y., Roland G. and Zhuravskaya E. 2005. “Who are Russia’s Entrepreneurs?” Journal of the European Economic Association, MIT Press. Volume 3 (2-3), 04/05.

Djankov S., Miguel E., Qian Y., Roland G. and Zhuravskaya E. 2006. “Entrepreneurship in China and Russia Compared” Journal of the European Economic Association, MIT Press. Volume 4 (2-3), 04/05.

http://netherlands.mfa.gov.by/_modules/_cfiles/files/sme_belarus_2011_1670.pdf

http://www.tambov-rosnou.ru/monograf/files/ind4.htm

http://www.erce.ru/internet-magazine/magazine/27/389/

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http://netherlands.mfa.gov.by/_modules/_cfiles/files/sme_belarus_2011_1670.pdf