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8 October 1997 Doc. 7948
ADOC7948
For debate in the Standing Committee Pour débat ŕ la Commission Permanente __________ See Rule 47 - Voir article 47 du Rčglement |
REPORT 1
on promoting small and medium-sized enterprises
in central and eastern Europe
(Rapporteur: Mr Ján Figel,
Slovakia, Group of the European People's Party)
_____
Summary
At the invitation of the Hungarian Parliament, the Committee on Economic Affairs and Development held a colloquy in Budapest on 28 and 29 November 1996 to exchange views on what steps need to be taken to encourage the creation and growth of small and medium enterprises, which the Parliamentary Assembly of the Council of Europe considers essential to the success of transition economies. This report endeavours to identify the principal findings of the colloquy.
I. Draft resolution
1. The Assembly, has taken note of the conclusions reached at its Colloquy on the promotion of small and medium-sized enterprises in central and eastern Europe held in Budapest in November 1996 as part of the overall effort of the Assembly to further economic reform in that region.
2. The Assembly welcomes the growth of small and medium-sized enterprises (SMEs) in central and eastern Europe in recent years, a feat all the more remarkable considering the region's heavy historical legacy and the painful transition process. It recognises the enormous effort expended by the several countries concerned to make this development possible, through measures such as legislation fostering SMEs, appropriate macro-economic policies, structural reform, decentralisation, new education and training policies and trade liberalisation. The rapid growth registered by many countries underlines the importance of SMEs in any economy for long-term growth, healthy competition, dynamism and innovation, particularly in today's world of rapidly changing markets and communications.
3. The Assembly is also, however, aware of some considerable difficulties still remaining. It identifies the following areas as being of particular importance for further creation and growth of SMEs in central and eastern Europe:
i. better access under privileged terms to investment capital for SMEs, not least through continued liberalisation of the banking sector;
ii. ensuring that privatisation of state companies does not give rise to new monopolies but rather to improved competition;
iii. shaping transparent, simple and stable legislation relieving SMEs of administrative and regulatory hurdles as far as possible and offering them, wherever possible, advantageous tax and social security conditions;
iv. providing adequate infrastructure investment in modern telecommunications, transport and other areas, and the use of modern telecommunications in particular to inform SMEs about matters of interest to them;
v. encouraging the formation of SME interest organisations capable of articulating the companies' particular concerns and wishes;
vi. taking resolute action to protect SMEs against the effects of corruption and racketeering wherever such may occur;
vii. ensuring that an adequate proportion of government procurement go to SMEs rather than big companies;
viii. ensuring that the educational system can develop a spirit of enterprise among young people, offer them a moral code encouraging them to shoulder responsibilities and prepare them practically for setting up their own business.
4. The Assembly recalls the duty of the countries in western Europe to promote free trade with the continent's central and eastern parts capable of assisting SMEs there, and to promote SMEs in their own countries in the economic interest of Europe as a whole.
5. Finally, the Assembly welcomes the contribution made in favour of SMEs through such institutions as the European Union, the European Bank for Reconstruction and Development, the World Bank and the Council of Europe's Social Development Fund. It encourages the Fund to enhance its support for SMEs in central and eastern Europe, notably through intermediary credit institutions and micro-credit programmes, and recalls the parallel interest of central and east European countries which have not yet done so to become members of the Fund.
II. Explanatory memorandum
by Mr FIGEL
Page
A. Introduction 4
B. Problems involved in setting up and developing small
and medium-sized enterprises in the countries of
central and eastern Europe 6
C. Lessons to be drawn from the Budapest colloquy 10
D. Conclusions 12
A. Introduction
1. The purpose of this report is to identify the conclusions reached at the Colloquy on the Promotion of Small and Medium-sized Enterprises (SMEs) in Central and Eastern Europe, held in Budapest on 28 and 29 November 1996 by the Parliamentary Assembly at the invitation of the Hungarian Parliament, and to make recommendations on the main objectives in this field.
2. Organised as part of the Assembly's Programme of Interparliamentary Co-operation with Countries in Central and Eastern Europe, the colloquy was attended by members of parliament from Council of Europe member states as well as countries possessing observer status with the Parliamentary Assembly, together with ministers and senior civil servants, representatives from interested international organisations and relevant experts.
3. The colloquy was a sequel to the conferences held by the Parliamentary Assembly in Budapest in 1990, in Helsinki in 1993 and in Warsaw in 1996, where stress was laid on the need to pursue economic and social reforms in central and eastern Europe and step up international co-operation in order to attenuate the negative socio-economic consequences of the transition process as much as possible.
4. Since 1990 the central and eastern European countries (CEECs) have been resolutely engaged in a transition to a market economy. They have also undergone political and economic upheavals. While it has been relatively easy to democratise their political systems, economic reform has proved more difficult in certain countries, and has not always brought the desired economic growth.
5. Now that certain essential initial steps have been taken in most countries — macro-economic stability policies (fiscal, monetary and exchange rate policies, etc.) and structural reforms (price liberalisation, elimination of subsidies, privatisation of the economy, etc.) — governments must strive to promote the growth of the private sector. Now that the dismantling of the major state firms has been partially completed, efforts must be made to give smaller firms a fighting chance, now and in the future. After seven years of economic reform, much still remains to be done in central and eastern Europe — and indeed in western Europe, where several countries suffer from excessive structural rigidity —, but the first part of the battle has been won: of the twenty-seven countries undergoing transition, the CEECs are the most advanced.
6. Although there is no reason in a smooth-running economy to encourage a specific activity, SMEs deserve special attention for two main reasons. Firstly, in economies undergoing sweeping changes, they are essential because of their readiness to experiment, to learn and to adapt to an ever-changing economic and political environment. Secondly, in the centrally planned economies there was severe discrimination against SMEs — when they were not indeed banned altogether — and those which have survived in spite of all the legal and economic pitfalls deserve special encouragement.
7. The 1995 annual report of the European Bank for Reconstruction and Development made it quite clear that the special role SMEs had to play in the transition to a market economy was due in part to the positive externalities they generated. The primary consideration — as Mr Davis, Chairman of the Committee on Economic Affairs and Development, pointed out in his opening speech — is the flexibility SMEs have to offer. Work organisation is more elastic in SMEs, which seem to adjust better than large firms to consumer needs and an increasingly unstable market, making industry and the economy all the more efficient. They are also very active when it comes to innovation, and their competitive spirit can help to keep prices down. They keep the market buoyant through constant innovation, encouraging the development of new products and improving production methods.
8. A large proportion of the manpower laid off as a result of the shrinking of the public sector — almost two-thirds in some countries — is now employed in SMEs. By their sheer number these firms help to create jobs and reduce unemployment, which soared from 1990 onwards, with the onset of the transition process and in particular the privatisation of the large state firms. Even in terms of working conditions, small and medium-sized firms, which at this early stage in the transition process already employ the majority of the active population, seem to give their employees more satisfaction than larger structures, thanks in particular to the greater flexibility they offer.
9. As Mr Mugler, Director of the Small Firm Management Department at the University of Vienna, mentioned, labour relations in SMEs are generally based not on contracts as such but on traditional standards of behaviour, custom, personal relationships and mutual trust between people who know each other. Working standards are affected first of all by factors linked to the firm and its environment and to the work station: technologies used, location, the firm's economic situation and the stage it has reached in its life cycle, regulations on working hours, and so on. Factors of a more subjective nature, related to the employee's position in the firm, also come into play: compensation for services rendered, labour relations, performance assessment, training and skills, working conditions and human resource management. A large number of non-financial benefits related to these different factors play a vital role in SMEs.
10. Today, seven years after transition began, there is no denying the tenacity and creativity of SMEs. Their success depends heavily on the efficacy of macro-economic policy at the national and international levels. But at the same time, an active network of SMEs can boost the economy. Flourishing SMEs are a sign of good health in a country, even in those with established market economies. Building up a strong private sector in a stable macro-economic environment paves the way towards the world economic mainstream. This link between macro-economic reform and enterprise renewal was highlighted at the first conference, in Budapest in 1990.
11. Measures are needed to strengthen the role of SMEs in the different economic sectors in central and eastern Europe. Steps could be taken gradually to phase out all the legal restrictions and negative prejudices, often to the advantage of larger firms, which prevent SMEs from realising their full potential. Creating a "world environment" placing all firms on an equal footing, particularly in terms of taxation and regulations, could help SMEs to make their essential contribution to economic growth and find solutions to some of the problems affecting the transition economies, including high unemployment.
12. Thriving SMEs in large numbers are a sign of a dynamic economy. Small-scale business is the market's research and development laboratory for new products and new ideas. SMEs therefore have immense potential in the countries of central and eastern Europe, but their situation at present remains precarious. Governments must therefore do everything in their power to promote SMEs in concrete ways. With the dismantling of the large state concerns, SMEs will have a key role to play in restoring the transition countries to economic health, growth and development at national and international level.
B. Problems involved in setting up and developing
small and medium-sized enterprises
in the countries of central and eastern Europe
13. The primary concern of "socialist enterprises" was to meet production targets set by central planners. In a centrally-planned economy firms attached little importance to profit, product quality and variety, service or innovation. They were protected from competition and operated in a sellers' market where consumers would buy anything they could produce.
14. Managers were judged on the basis of production and output rather than client satisfaction, even financial performance being rather secondary since profits and losses were redistributed between firms. The government set production targets and decided what raw materials and investments were needed. Furthermore, central planning concentrated more particularly on heavy industry, energy and capital goods to the detriment of consumer goods and services. And the firms concerned were characterised by inefficient structures, extremely slow administrative procedures and incongruous incentives.
15. In the early post-communist years the most important economic problem was no doubt the need to develop a closer relationship between industry and the consumer, based on market principles which were then unfamiliar. Relations between producers and consumers were obviously very different from those in countries with a market-economy tradition, for two main reasons. First, in the former communist countries, particularly in regions remote from major cities, local initiative was stifled by the omnipresent bureaucracy blocking any activity that did not tie in with its requirements. And secondly, firms were not allowed to act as middle-men between producers and consumers.
16. Healthy SME development contributes to economic growth and strengthens market economy mechanisms. Reforms in a number of fields are essential to improve the situation of SMEs in the transition countries and help them make up for lost time. Efforts must be made to promote balanced, sustainable economic development and to improve the economic, legal and social environment in which SMEs operate. Mrs Pissarides, Principal Economist at the EBRD, explained in her particularly interesting contribution that SME development in central and eastern Europe is seriously hindered by numerous difficulties in the fields of production, technology, work organisation, supplies, marketing, finance, infrastructure, regulations, taxation and services, for example. More serious still are the financial difficulties which prevent production from expanding, the frequent and unpredictable fluctuations in the prices of local products and the high cost of imported goods; these are the problems which require the most urgent attention.
17. In the financial field the problems facing SMEs in central and eastern Europe include a lack of capital, a lack of access to funds, particularly credit, and a lack of credit institutions, not to mention the mass of bad debts inherited from the old banking system. Access to capital can be improved by special interest rates and the introduction of an institutional system — a special bank — for financing SMEs. It is important to offer sounder guarantees to domestic and foreign investors; states must realise this.
18. Proper legal frameworks and standards are essential. The legal definition of SMEs is currently different in the CEECs and the European Union, but is now being harmonised. An excellent report published in 1994 by the Council of Europe under the title "The Promotion of Small and Medium-Sized Enterprises in Europe" stresses the key importance of clearly defined fundamental rights (freedom, justice, property rights).
19. Costs and taxes are often excessive. Taxes in all their forms and related administrative costs can be a heavy millstone round the necks of SMEs. Where the taxation system is too unwieldy, efforts must be made to streamline and simplify it. The existence of several VAT rates, for example, makes extra work for the tax authorities and encourages fraud. And the system is unevenly balanced, penalising SMEs more than large firms. The legislation governing SMEs must be made simpler, more balanced, stable and clear. A favourable legal environment which is simple, transparent and state-guaranteed is required for the smooth development of SMEs.
20. Speakers also called for the modernisation of the administration, and particularly for a streamlining of the administrative formalities to which SMEs are subject, in order to reduce the huge and often prohibitive administrative costs of these firms. Deregulation and simpler procedures are needed. The "one-stop" service solution was mentioned, but was rejected as inefficient since each department jealously guards its prerogatives and in general no single person is qualified to deal with every formality. Improved training in computer skills will no doubt help to make the "one-stop" solution a success.
21. Employment cannot be lastingly guaranteed without reorganising the economy to make it more efficient and profitable. The CEECs have embarked upon ambitious reforms in their transition to the market economy. In certain countries, however, the labour market, and wages in particular, have remained under state control. The contractual approach to incomes policy would appear to be the one most conducive to labour market flexibility and job creation in SMEs.
22. Where social protection is concerned, employees are perfectly entitled to expect a minimum guaranteed income, social security cover, maternity leave and so on. Increasing labour costs without a commensurate increase in productivity could force a number of firms out of business, and however desirable maternity leave may be, it is more difficult for an SME to finance it than for a large firm. Excessively strict regulations may therefore threaten the very survival of SMEs. Governments must make sure that regulations do not discourage firms from recruiting. As Mr Bannock, a well-known expert from London, pointed out, the international community must not be too harsh on SMEs in central and eastern European countries faced in recent years with the challenges of globalisation and competition from low-income countries. Social protection must not serve as a pretext for stepping up protectionism in Europe.
23. Healthy competition, too, is of the essence: carefully prepared privatisation helps to eliminate monopolies as well as reduce costs and improve quality by sub-contracting, thereby boosting the economy. Central and eastern European governments must take essential steps to improve the competitiveness of their SMEs.
24. Efforts must be made to change mentalities and develop a spirit of enterprise. The main purpose of SMEs should be regarded as achieving as large a profit as possible. The hitherto scorned image of the businessman must be refurbished, and SMEs must adopt the philosophy that "the client is king". SMEs in central and eastern Europe are often recently established family concerns; ownership is fairly concentrated and partnership rare. Governments must therefore support the spirit of initiative and enterprise, the delegation of responsibilities and team work, and encourage businesses to operate in accordance with a business ethic that was virtually unheard of in the communist era because of the strong distrust towards the principles of the business world.
25. Consultancy and training are necessary: would-be businessmen must receive basic training before launching into business on a large scale. The training dispensed to future managers is decisive: business training programmes as well as the basic content of general education must be defined. Sound business management skills and special training for businessmen starting out in business are essential if SMEs are to perform well. Learning how to run a business is a gradual process, based on experience and outside help.
26. The need for managers to adjust almost immediately to changes in supply and demand, combined with an increasingly competitive global business environment, obliges governments to invest in education as well as basic and further training. The problem is accentuated by the increasingly rapid pace at which technical skills become obsolete nowadays. Unfortunately, public funds are sadly lacking and SMEs have to make do with an insufficiently versatile workforce.
27. Other essential measures include:
—fo stering innovation (at present less than 1% of GDP in these countries is devoted to research, which is far too little);—
—pr omoting technology transfers and exchanges of experience between SMEs and also between SMEs and large firms, locally and at the national and international levels (in Hungary, for example, the government's industrial policy is designed to help SMEs to work with large firms);—
—su pporting the development of marketing services and better quality products in SMEs to contribute to social well-being (even if sub-contracting is frequent, SMEs still find it difficult to adapt to western standards);—
—se tting up the infrastructure needed for SMEs to develop (however, local authorities lack the necessary funds and attempt to pass on the bill to the firms themselves, through higher taxes, with adverse effects on the firms concerned).28
28. The international organisations must support governments in their efforts to promote SMEs. The CEECs need to be able to count on European and worldwide solidarity, especially on the part of the developed countries. A worldwide co-operation network would help them to gain access to international markets.
29. Even where measures to support and promote SMEs already exist, the firms are often unaware of their existence. The measures may take the form of the provision of non-financial services by public or private initiative for the benefit of people wishing to set up or develop a firm and the supply of counselling and training in such fields as finance, marketing or human resource management. Many of these services offer to assist firms in their applications for financial support (business plans, cash flow analyses, applications for loans, etc.).
30. Governments also help firms in various ways to start up in business, to invest and to prospect foreign markets, by direct grants or through tax incentives in favour of SMEs likely to succeed. To promote research, development and innovation, for example, there are schemes which enable SMEs to write off all or part of their annual spending on R&D. It should be noted that SMEs are not only potential borrowers, but also potential lenders. In seeking to join forces with other firms they become a valuable source of credit of which other SMEs are not always aware. They also offer credit to carefully selected clients of their own.
31. It is important, therefore, to improve the circulation of information so that SMEs are aware of all the advantages open to them. At present their main sources of information about market conditions are consumers, other SMEs in the region and the specialised press. Chambers of commerce and associations play a limited role thus far.
32. Furthermore, as Mr Mussati from the Bocconi University in Milan pointed out, joining forces and co-operating with other SMEs is an effective way of gaining credibility and stature on the market. At present there is not enough co-operation between SMEs in central and eastern Europe. These countries should follow the example of Italy, where networking has helped firms to be more competitive and benefit from technological transfers. Italian SMEs very often belong to export consortia made up of about twenty firms in the same sector. This is an interesting legal structure, somewhere between a management company and an economic interest grouping, which takes care of logistics, practical formalities and prospecting abroad, leaving managers free to concentrate on production.
33. The local partners must work in partnership with the centre — that is, with the government — and favour co-operation at the local level. The public sector can have a positive influence on local development. The emphasis must be placed on regional training programmes organised by business development centres — as in Germany and the United Kingdom. Managers need to improve their skills in the fields of accountancy, access to credit, financial investment, marketing, client relations and human resource management.
33. As Mr Elo of the Parliamentary Assembly rightly pointed out, when referring to the transition economies it is important to take into account the local specificities of each country, such as conditions of access to services and finances, which vary from one region to another. Some progress has been made in this respect, particularly with the implementation of decentralised policies which allow for local peculiarities — territorial and social inequalities, political difficulties, etc.
35. Finally, the results of government measures and policies must be rigorously assessed by reliable and accurate methods, in order to determine their real impact on the economic performance of SMEs.
C. Lessons to be drawn from the Budapest colloquy
36. From 1989 to 1996 there was unprecedented development in the manufacturing and non-manufacturing sectors, although the pace varied from one country to another. As we have seen, with the support of international organisations like OECD, the EBRD, the United Nations Economic Commission for Europe and, of course, the Council of Europe, governments still have considerable efforts to make in order to foster the development of SMEs, inter alia by supporting existing schemes to help SMEs. The countries of central and eastern Europe have new challenges to face on the road to membership of the European Union. So the Union will also have an important role to play in fostering the development of SMEs. Generally speaking, Europe must do its best to support them by doing away with all trading measures detrimental to their growth — tariff restrictions, quotas, standards, etc. It should also be noted that, for maximum efficiency, the different organisations should co-ordinate their efforts and provide adequate funds for the SMEs (under the PHARE programme, for example), as emphasised by Molnar, executive director of the Hungarian Foundation for Business Promotion.
37. In 1995 — as Mr Szabo, regional adviser in the ECE/UN industry division, pointed out — Hungary, Poland, the Czech Republic and part of Romania received large influxes of capital following sweeping privatisations in the telecommunications, banking, petroleum and electronics sectors. It is unfortunate, however, that the lion's share of this fresh capital has been earmarked for major construction projects, and only 10% for SMEs. This is one of the handicaps which prevent SMEs from expanding, which is why co-operation with multinational firms must be encouraged.
38. It is noteworthy that where SMEs have developed substantially, they already account for almost half of all employment in central and eastern Europe, compared with 66% in western Europe. SMEs are therefore the largest potential source of new jobs. The massive unemployment that set in following the liberalisation of the economies in these countries can be held in check only by economic growth and proper education and training. Public and private sectors must join forces in the effort to develop employment in such fields as the environment, energy, transport, the arts, sport and health. Mr Bannock suggested involving more SMEs in public works contracts, most of which at present go to larger firms.
39. SMEs, which are generally acknowledged to be flexible and competitive, with a potential for job creation, must be allowed to play their rightful part in economic revival in central and eastern Europe. However, as Mr Verebelyi of the Private Office of the Prime Minister of Hungary pointed out, legislative inadequacies, even in his own country — administrative difficulties, gaps in business law, identical legal and contractual obligations for small and large firms, lack of positive discrimination, lack of public aids in specific fields such as marketing, sales, management, etc. — tend to hold back economic advancement. Financial difficulties have delayed the modernisation of the public administration so essential to SMEs. As governments begin to understand the problem, they must do everything in their power to promote the further development of SMEs and not let financial problems undermine their excellent initial progress.
40. In this spirit, the Council of Europe's Social Development Fund — a multilateral development bank, presented by Mr Ratti, Chairman of its Governing Body — will strive to help the SMEs in central and eastern Europe to overcome the dual handicap of their small size and the country risk factor. In order to improve access to credit, the Fund grants long-term loans on advantageous terms: five- to ten-year loans at interest rates comparable to those enjoyed by large firms. The loans are granted subject to two conditions: the technical and financial feasibility of the project and the existence of a sound guarantee. International aid in general has helped to mitigate the initial negative effects of transition, but is unfortunately insufficient to support sustained economic development; the banks of central and eastern Europe must assume the role of long-term lenders to SMEs.
41. The persistence of high inflation in certain transition countries makes the situation even more delicate. High inflation is a burden not only on the population but also on SMEs. As Mr Bannock explained, inflation is socially destructive, for the worst hit categories are the poor and the elderly, with only a meagre pension to live on. From the economic view too, high nominal interest rates have a negative effect on SMEs' cash flow and access to credit: firms may be obliged to take out a second loan in order to repay the first, and thus find themselves trapped in a spiral of debt. Low inflation, on the other hand, is an incentive for firms to analyse their costs and weaknesses more carefully. An inflation rate of 2% to 3% at most would be ideal.
42. In addition to all the obstacles we have mentioned in terms of finance, infrastructure, access to markets, technology, etc, corruption and extortion, often considered as a "surtax" are also serious obstacles to economic and social development in countries moving towards a market economy. Crime is on the increase, and a recent survey in these countries found that fees were charged for access to credit and for "protection" of business premises. So Mr Kirilov from Bulgaria, a member of the Parliamentary Assembly of the Council of Europe, was quite right to suggest that careful consideration needed to be given to the influence of criminal structures and organisations on SMEs and on economic life in general.
43. Since 1990, in contrast to western Europe, where the trend is towards deregulation, the countries of central and eastern Europe have been drawing up labour regulations, with a view to promoting social justice. In Hungary a labour code was introduced in 1992. Many managers, lacking the necessary know-how, found it difficult to cope with the extra social costs and charges, the frequent changes to the rules and the fierce competition. As a result, to achieve greater flexibility, increasing recourse is being given to clandestine labour and the underground economy in Hungary and elsewhere. Apparently, the current level of taxes on profits, income and salaries is enough to deter many firms from operating legally and above board. Unlawful methods is increasingly widespread, depriving states of a large proportion of the revenues they would normally expect to collect. This is income that these already tax-starved states can ill afford to lose.
44. An illustration of how badly the SMEs need help is provided by the situation in Hungary: the boom which SMEs experienced following the initial reforms in 1989 abruptly came to an end in 1991. Today, 20% of the new firms are expanding, 30% are in difficulty and half have disappeared. The most successful firms are those which employ highly skilled labour and have developed long-term strategies.
45. Finally, Mr Veress, Deputy Head of the Private Office of the Prime Minister of Hungary, pointed out that the development of SMEs would determine not only the state of the economy as a whole but also the stability of the democratic system.
D. Conclusions
46. As we have seen in this report, the countries of central and eastern Europe are today faced with new challenges related to the globalisation of economies and markets, sweeping technological change and the need to be more competitive. The positive economic effects of a thriving network of dynamic SMEs no longer needs demonstrating. SMEs are an economic driving force and have a decisive role to play in developing new products and services, fostering economic growth, creating employment, helping to adjust to lasting changes in the international environment and favouring economic and social stability.
47. SMEs produce more than 45% of the region's GDP and have helped to raise the employment rate to 70%. Flexibility, creativity and competitivity are their three major assets. It is important, however, not to underestimate their vulnerability, particularly in respect of administrative costs and social regulations, as we saw earlier. Many SMEs — over 40% in fact — actually go out of business before the end of their third year. The main three obstacles they have to overcome are: an extremely complex legal, financial and administrative environment; a lack of access to funding at reasonable rates; and inadequate management skills. Accordingly, the governments of central and eastern Europe, with the help of worldwide support, through numerous international organisations and institutions, must take steps to create a favourable environment for SMEs in order to strengthen their position and foster their development.
48. It is essential that the governments of central and eastern Europe restore and guarantee macro-economic stability, without which there can be no possibility of harmonious development for SMEs. Their first objective should be to bring inflation down to a level conducive to sustainable economic growth. As stated earlier, inflation hits some population groups harder than others: the poor and the elderly are the first to suffer from the decline in their purchasing power.
49. Inflation also gnaws away at people's savings, reducing the amount of money available for investment in firms, especially SMEs, which rely heavily on investment. High inflation, therefore, undermines balanced and sustainable economic development, generates social tensions and places firms in financial difficulties. It can even plunge them into a spiral of debt, obliging them to take out new loans in order to pay back old ones. Low inflation is therefore preferable, especially as it obliges managers to keep a closer watch on their costs and weaknesses.
50. High interest rates, as Mrs Pissarides pointed out, are identified by managers as their greatest financial constraint, especially in capital-intensive production sectors — high technology, for example —, which require considerable investment and suffer increasingly as a result of high interest rates. Such rates deter managers from investing, even when this is essential to the survival of their firms, because the reimbursements are too costly. Governments must therefore lower interest rates in order to promote investment in SMEs.
51. Public debt is also too high and governments must do everything in their power to reduce it, so as to avoid putting their economies in a stranglehold. Some governments have issued bonds to cover their budget deficits; this solution can have, however, a negative effect on SMEs by encouraging investors to play safe and invest in bonds rather than risk their money on industry.
52. We have also seen how important it is to lighten the burden of regulations and administrative formalities on SMEs. In spite of all the laws on contracts and bankruptcy, SMEs still have great difficulty defending their interests through channels opened by the state. Progress remains to be made in the fields of production and import licences, price controls on raw materials and finished products, labour regulations, etc. A proper legal framework must be established and tax laws must be reviewed and developed in order to reduce taxation. SMEs are hampered by excessive VAT and taxes on profits and income. Moreover, to promote job creation, governments must take steps to provide SMEs with incentives to recruit.
53. Rules of fair competition, banning monopolies and repressing abuses by firms of their dominant situation, must also be introduced. The purpose of these measures is to create a healthy and competitive environment, favouring competition between firms and consequently the survival of the fittest, leaving the dead wood by the wayside. Competition is also conducive to stable prices and steadier supplies.
54. It is also important for governments to develop basic infrastructure projects: industrial estates where firms can conduct their business, quality transport facilities (road, rail, waterways, ports), electricity, telecommunications, etc., to provide SMEs with an environment conducive to their development.
55. Another course of action suggested at the colloquy was to simplify annual financial report procedures, which were expensive and time-consuming. However, with less detailed data available, banks might be less inclined to grant loans and suppliers more reluctant to extend credit to small firms without proper certified financial statements. This could result in cutting off the capital supply to those firms which most need it.
56. The main purpose of an annual financial report is to inform a company's shareholders of the financial situation of the company in which they have invested; this does not, however, apply to SMEs, where the managers are often also the owners. These annual reports are also a mine of information for rival firms. Where banks are concerned, therefore, strict financial discipline is sufficient proof of sound management in a firm.
57. The relationship between bankers and managers of SMEs is in fact a very close one, with personal contact helping the banker to form a clearer opinion of how accurately SMEs predict their cash flows and profits, how well they run their business and the general mood of the market. The banker can also check whether a downturn in the firm's results is attributable, for example, to a major investment in capital goods or staff or to an unexpected drop in demand for a particular product. Perhaps standardised and simplified reporting methods could be introduced for SMEs with a view to harmonising annual financial reports at the European level.
58. Participants in the colloquy also stressed the insufficient level of skills and qualifications among managers and executives in different countries of central and eastern Europe. Experience is an important ingredient of management learning, so schools should privilege the practical, professional approach in order to train businessmen who will be efficient and operational in the new market economy context. Increased economic co-operation between SMEs themselves as well as between SMEs and multinational corporations must be encouraged at the local, national and international levels, so as to promote the technology transfers necessary for their development.
59. It is clear today that centralised economic planning hinders economic recovery: decentralisation must be encouraged, not least because it fosters the implementation of regional policies essential to balanced economic development in every region. The effects of government policy are amplified when regional characteristics are taken into consideration.
60. One important issue debated at the colloquy was the uneven geographical distribution of industry. Geographical factors play an important part in the development of the private sector. As a result, sharp historical inequalities are exacerbated by an economic transition process that generates new imbalances. Mono-industrial regions and rural areas are particularly badly hit by the recession, while cities undergo rapid growth. It has become essential in states experiencing economic recovery to assist regions which are socially and economically underdeveloped. This means adapting policies on SMEs according to their geographical location. At the regional level the two most urgent priorities are: to develop a more competitive and more homogeneous industrial development policy and to introduce a system to encourage job creation, for regional assistance networks are largely lacking.
61. The PHARE programme regional funds are extremely important in this respect. They are generally devoted to the reorganisation of firms, the development of the private sector and infrastructure and human resource projects. However, sustainable economic and industrial growth is possible only if accompanied by a general improvement in the macro-economic situation.
62. In the long term, the painful efforts to re-establish better macro-economic conditions must be consolidated by special measures to promote investment. The most important challenge facing the whole region is to create an attractive environment for foreign investment in the private sector. This is vital for three reasons: foreign investment increases the capital available to firms; it also brings new technologies and new management methods; and, most important of all, policies that make investment attractive to foreign investors also encourage investment at home.
63. In conclusion, it is my belief that the countries of central and eastern Europe should considerably extend their policy of industrial co-operation with the European Union, in order to improve the general conditions for their industrial development, to support the reorganisation and modernisation of firms — particularly with regard to production methods — and to encourage long-term investment, especially in new technologies. This will benefit SMEs, too, in so far as such investment will help them to improve their products and compete more effectively on the international markets.
64. The Council of Europe has an important political role to play here, as do the EBRD and OECD — with which the Parliamentary Assembly and its Committee on Economic Affairs and Development are in close contact — as well as the Council of Europe's Social Development Fund, which all regularly invest in highly specific sectors. By producing goods that equal or surpass international standards, SMEs will enhance their image and reputation, and this will enable them to conclude long-term contracts, develop a wider range of products, launch marketing campaigns and conquer shares of the export market.
65. Finally, I should like to stress the importance for the countries of central and eastern Europe — in keeping with WTO principles — of promoting free trade with western Europe. WTO must do everything in its power to foster growth and economic expansion in the region, particularly by encouraging the countries concerned to open their frontiers and take their place in the world economy, as the protectionist reflex prevalent in central and eastern Europe is unconducive to the development of a thriving SME sector there.
Reporting committee: Committee on Economic Affairs and Development.
Budgetary implications for the Assembly: none.
Reference to committee: Reference No. 1641
Draft resolution unanimously adopted by the committee on 25 September 1997.
Members of the committee: MM. Davis (Chairman), Mrs Degn, MM. Blœtzer (Alternate: Columberg), Valleix (Vice-Chairpersons), Aliko, Andreoli, Behrendt, Bilinski, Billing, Mrs Blattmann, MM. Bogár, Bonet Casas, Mrs Bribosia-Picard, Mr Brunhart, Mrs Calner, MM. Cunliffe, (Alternate: Lord Grenfell), Cusimano (Alternate: Turini), Dumitrescu, Mrs Durrieu, MM. Elo, Eyskens, Figel, Frey, Mrs Frimannsdóttir, MM. Galanos, Galváo Lucas, Mrs Gatterer, MM. Gonzalez Laxe, Gusenbauer, Gylys, Kacin, Kamhi, Kiratlioglu, Kirilov, Koucký (Alternate: Ms Paleckova, Kuznetsov, Lambergs, Le Grand (Alternate: Valleix), Leers (Alternate: Blaauw), Liapis, Malinowski (Alternate: Wielowieyski), Merkushov, Mitterrand, Muravschi, Obuljen, Pereira Coelho, Poppe, Puche (Alternate: Ramirez Pery), Rigo, Rippinger, Rutskoy, Sceberras Trigona, Siebert, Mrs Squarcialupi, Mrs Št_pová, MM. Szalay, Mrs Stoyanova, MM. Telgmaa, Townend, Tripunovski, Vasile, Verivakis, Mrs Verspaget, MM. Wallace, Yavorivsky.
N.B. The names of those members present at the meeting are printed in italics.
Secretaries to the committee: MM. Torbiörn, Bertozzi and Ms Ramanauskaite.
1 . by the Committee on Economic Affairs and Development