Friday, July 01, 2005
Argentina's Market Reforms Overlooked Small Business
By: Paul Holden
For: The Wall Street Journal, 1998
An Argentine merchant sits alone in his small appliance shop in a middle-class Buenos Aires suburb. He is anxious, angry and bitter. Before the market reforms of the 1990s, there used to be a steady stream of customers through his door. Protected from competition by cozy distribution arrangements, he made a living that was good enough to send one of his sons to college in the U.S. Today he is an uncompetitive player in a fast-paced, changing economy.
The combination of trade reform and stringent macroeconomic policy wiped out many small Argentine businesses, such as retailers, agricultural producers and manufacturers, that had flourished under protectionism. While high growth rates are back for the economy as a whole, there are few signs of recovery in the small-business sector. This has cost the government substantial political support and there is growing concern about a potential backlash against the market-oriented reforms.
While populists blame the reforms for the 14% unemployment rate and wealth disparities, the real problem is the fact that the second generation reforms--changes in Argentina's institutional and legal systems that relate to business--are yet to be tackled. These reforms are critical to grass-roots economic growth, a prerequisite for employment expansion. As large multinational companies become more productive, their work forces become leaner. Meaningful job growth will primarily come from a robust small-business sector.
Although the problems of the small-business sector have largely been attributed to a failure of the government to assist struggling enterprises, there is currently no shortage of small-business programs in Argentina. An audit by the newly created Secretariat for Small and Medium Sized Enterprises unearthed over 50 financial guarantee programs that have small-business components and another review of small-business programs by the Ministry of the Economy identified several hundred aimed at assisting small businesses. However, nearly all are ineffectual. Few small businesses even know about them. Both the Inter-American Development Bank and the World Bank have loan programs amounting to hundreds of millions of dollars that are supposed to assist the SME sector. In the meantime small businesses fail at unprecedented rates.
Apparently the government recognizes that additional small-business assistance programs are not necessarily the answer. Undersecretary of the Interior Dr. Rodolfo Vacchiano is in charge of coordinating small-business programs with the 24 provinces. He is working to ensure that decentralization does not lead to a mushrooming of uncoordinated and fiscally irresponsible local small-business assistance initiatives.
Yet, the small-business sector faces additional problems beyond ineffectual or uncoordinated assistance programs. Many small businesses in Argentina are simply unequipped to compete in the increasingly globalized business environment. Accustomed to being insulated by high tariff barriers and regulation that protected the inefficient, they now find themselves exposed to powerful competition, not only from imports but also from larger, modernized Argentine companies. The retail sector, for example, is going through a process of consolidation, with new shopping centers and supermarkets forcing smaller retailers out of business. This phenomenon is an inevitable part of Argentina's transition from a high-cost, inefficient, inward-orientated economy to one that can compete effectively in international markets. That this transition is being successfully made is evidenced by the sharp increase in exports over the past few years.
Small businesses' problems are compounded by the fact that the financial markets are effectively unavailable to them. Carlos Srebrow, a prominent small-business consultant in Buenos Aires, observes that he has been overwhelmed with requests for help in restructuring businesses since the advent of economic reform. Once he has improved their operating efficiency, however, the owners ask him to help them find financing to take advantage of the new opportunities. At that point he feels helpless. "Taking a client to a bank to obtain a loan is extremely difficult," he says. Underlying this problem is not an absence of guarantee programs or directed-credit programs for small businesses but rather an institutional inadequacy which makes it risky to lend to any but large companies or those with large real estate holdings. Long term growth for successful businesses is also limited by the absence of structured venture capital markets.
The legal framework for the pledging of business assets to secure loans is insufficient. As a result, accounts receivable, capital equipment and inventory cannot be used as collateral for business loans. Since owner equity of many small and medium- size businesses has been eroded as they struggled to survive in the newly competitive business environment of Argentina, it is no wonder that there have been record numbers of small business failures.
There are some stirrings of a revival in the small-business sector. Foreign banks, with more sophisticated lending technology, have entered Argentina and are more willing than the domestic banks to make loans to small businesses. Some progressive government officials recognize the need for institutional reform and are attempting to persuade a reluctant Congress to change the legal framework. But progress is slow. Laws to reform the secured transactions framework have been drafted but they are languishing between the bureaucracy and the legislature. The World Bank is implementing a judicial-reform project, but it is not clear that there is political will for such changes. Labor laws are still very restrictive by international standards although they have been relaxed for small companies. High payroll taxes and the cost of firing workers place heavy burdens on small businesses.
When the barriers to establishing new businesses are minimized and the constraints to small business growth are eliminated, this sector appears set to create countless jobs. More special assistance programs are not needed. Rather, the government should eliminate regulatory and legal constraints that hurt the small-business sector. It is an effort that will take several years but the reward should be a vibrant small-business sector in Argentina.
Mr. Holden is the director of the Enterprise Research Institute for Latin America, a Washington-based think tank.
Copyright © 1998 Dow Jones & Company, Inc. All Rights Reserved.
For: The Wall Street Journal, 1998
An Argentine merchant sits alone in his small appliance shop in a middle-class Buenos Aires suburb. He is anxious, angry and bitter. Before the market reforms of the 1990s, there used to be a steady stream of customers through his door. Protected from competition by cozy distribution arrangements, he made a living that was good enough to send one of his sons to college in the U.S. Today he is an uncompetitive player in a fast-paced, changing economy.
The combination of trade reform and stringent macroeconomic policy wiped out many small Argentine businesses, such as retailers, agricultural producers and manufacturers, that had flourished under protectionism. While high growth rates are back for the economy as a whole, there are few signs of recovery in the small-business sector. This has cost the government substantial political support and there is growing concern about a potential backlash against the market-oriented reforms.
While populists blame the reforms for the 14% unemployment rate and wealth disparities, the real problem is the fact that the second generation reforms--changes in Argentina's institutional and legal systems that relate to business--are yet to be tackled. These reforms are critical to grass-roots economic growth, a prerequisite for employment expansion. As large multinational companies become more productive, their work forces become leaner. Meaningful job growth will primarily come from a robust small-business sector.
Although the problems of the small-business sector have largely been attributed to a failure of the government to assist struggling enterprises, there is currently no shortage of small-business programs in Argentina. An audit by the newly created Secretariat for Small and Medium Sized Enterprises unearthed over 50 financial guarantee programs that have small-business components and another review of small-business programs by the Ministry of the Economy identified several hundred aimed at assisting small businesses. However, nearly all are ineffectual. Few small businesses even know about them. Both the Inter-American Development Bank and the World Bank have loan programs amounting to hundreds of millions of dollars that are supposed to assist the SME sector. In the meantime small businesses fail at unprecedented rates.
Apparently the government recognizes that additional small-business assistance programs are not necessarily the answer. Undersecretary of the Interior Dr. Rodolfo Vacchiano is in charge of coordinating small-business programs with the 24 provinces. He is working to ensure that decentralization does not lead to a mushrooming of uncoordinated and fiscally irresponsible local small-business assistance initiatives.
Yet, the small-business sector faces additional problems beyond ineffectual or uncoordinated assistance programs. Many small businesses in Argentina are simply unequipped to compete in the increasingly globalized business environment. Accustomed to being insulated by high tariff barriers and regulation that protected the inefficient, they now find themselves exposed to powerful competition, not only from imports but also from larger, modernized Argentine companies. The retail sector, for example, is going through a process of consolidation, with new shopping centers and supermarkets forcing smaller retailers out of business. This phenomenon is an inevitable part of Argentina's transition from a high-cost, inefficient, inward-orientated economy to one that can compete effectively in international markets. That this transition is being successfully made is evidenced by the sharp increase in exports over the past few years.
Small businesses' problems are compounded by the fact that the financial markets are effectively unavailable to them. Carlos Srebrow, a prominent small-business consultant in Buenos Aires, observes that he has been overwhelmed with requests for help in restructuring businesses since the advent of economic reform. Once he has improved their operating efficiency, however, the owners ask him to help them find financing to take advantage of the new opportunities. At that point he feels helpless. "Taking a client to a bank to obtain a loan is extremely difficult," he says. Underlying this problem is not an absence of guarantee programs or directed-credit programs for small businesses but rather an institutional inadequacy which makes it risky to lend to any but large companies or those with large real estate holdings. Long term growth for successful businesses is also limited by the absence of structured venture capital markets.
The legal framework for the pledging of business assets to secure loans is insufficient. As a result, accounts receivable, capital equipment and inventory cannot be used as collateral for business loans. Since owner equity of many small and medium- size businesses has been eroded as they struggled to survive in the newly competitive business environment of Argentina, it is no wonder that there have been record numbers of small business failures.
There are some stirrings of a revival in the small-business sector. Foreign banks, with more sophisticated lending technology, have entered Argentina and are more willing than the domestic banks to make loans to small businesses. Some progressive government officials recognize the need for institutional reform and are attempting to persuade a reluctant Congress to change the legal framework. But progress is slow. Laws to reform the secured transactions framework have been drafted but they are languishing between the bureaucracy and the legislature. The World Bank is implementing a judicial-reform project, but it is not clear that there is political will for such changes. Labor laws are still very restrictive by international standards although they have been relaxed for small companies. High payroll taxes and the cost of firing workers place heavy burdens on small businesses.
When the barriers to establishing new businesses are minimized and the constraints to small business growth are eliminated, this sector appears set to create countless jobs. More special assistance programs are not needed. Rather, the government should eliminate regulatory and legal constraints that hurt the small-business sector. It is an effort that will take several years but the reward should be a vibrant small-business sector in Argentina.
Mr. Holden is the director of the Enterprise Research Institute for Latin America, a Washington-based think tank.
Copyright © 1998 Dow Jones & Company, Inc. All Rights Reserved.