D smes one shot magazine sept mba students 2013 2015

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D-SMEs ONE Shot Magazine

SEPT MBA Small Enterprise Promotion and Training

Students 2013-2015

DECEMBER-2014

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WORDS FROM THE MAGAZINE BUILDERS

Write is a way of sharing. This magazine shares knowledge and insight of SEPT

MBA students through 10 articles. These articles come directly from the blog of our

generation 2013-2015, without any edition of the content and in the most similar

way our peers posted them (septleipzig.wordpress.com).

We thank everybody in SEPT, we all made this magazine

possible.

Special thanks to the writers, we understand writing is

a tough task. It demands time, and effort. Moreover,

one exposes to the world. Thank you for writing.

Thank you for reading!

CONTENTS

Do Patents Encourage or Discourage Innovation? Ernesto Guzman 6-8

Local Economic Development As The End And Means Of Recovering From Natural Disasters. Jun Piong 9-11

Certification: Competitive Advantage or Barrier? Lukman Haris 12-15

Benefits of Adopting Drone-technology (UAV) in SMEs. Alan Tovar Prado 16-19

How diaspora can contribute to the Venezuelan economic development. Fernando Rodríguez 20-23

B Corporations: Evolution of Capitalism? Martin Kempf 24-28

Industrialization as the stages of development – Textile Industry in Egypt. Jomana Ismail 29-32

Governance in the value chain: the case of Namibian beef value chain. Rodney Seibeb 33-37

Entrepreneurs and the concept of anti-fragility. Alan Tovar Prado 38-40

Forceful Formalization – Is it Panacea? Ketevan Morgoshia 41-65

Words From The Magazine Builders

D-SMEs Magazine, One Shot SEPT MBA Students 2013-2015

http://www.septleipzig.wordpress.com/

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LE

TT

ER

FR

OM

TH

E T

EA

M

There are times in life when we meet a lot of people that inspire you at once. We arrived in Leipzig in 2013 to start our SEPT MBA Program. The first two semesters were unforgettable. Now we have friends from nearly all the continents in the world with diverse expertise and experiences. There are many reasons why each of us came to Leipzig, but we believe this is the right moment to start making a wave in this world. We realize our encounter here in Leipzig have a huge potential for the future. We started with a blog. This is very simple yet

powerful tool to connect our thoughts, experiences and expertise from every continent in the world. We

started to fill our blog with our topics of interest and we found them good. Two of these international fellows, Mr. Guzman from El Salvador & Mr. Haris from Indonesia, thought the richness of our blog’s contents should reach broader range of readers. That was the time when we came up with this magazine idea. The world of SMEs is very challenging, promising and surprising. Platform technologies such as 3D printing and many customized online services have made it easier to create anything you wanted. Internet has made knowledge of what and how to become easier to be accessed. That includes the knowledge to create a company and entrepreneurships. These have fostered the birth of thousands of new startups. They are potential disrupters that start small even too small to be considered dangerous by the incumbents, but we know they have the potential to be giants.

We thank you to our marvelous fellows for their contributions to our magazine.

Ernesto Guzman & Lukman Haris Magazine Team

Letter from the Team


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Article Contributors In the order they posted in the blog

Jun Piong: “I am a strike-anywhere kind of person

with great passion for travel. I want to become a

Consultant specializing on SME development and

assistance.”

Lukman Haris: “I am raised in a family business

environment, an industrial engineer and have worked

in standard and certification for two years. In the

future I see myself as entrepreneur and investor in

SMEs especially in technology based sector.”

Alan Tovar Prado: “Stay open about learning new

things and work on building your reputation through

discipline.”

Fernando Rodríguez: “My passion: To help other

people by providing the tools and skills acquired

during my professional, academic and personal

experiences.”

Ernesto Guzman: “Make things happen is better than

talking”


Article Contributors

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Martin Kempf: “I'm a journalist and I worked for 6

years if different areas related to communication and

marketing. My idea in the future is to help and push

SME's to start and develop in my country but with an

environmental and social responsibilty approach.”

Jomana Ismail: “Eager to help start-ups to start and

small business to grow.”

Rodney Seibeb: “I have a deep passion for poverty

reduction and rural development. I believe that

innovative small and medium enterprises (SME) can

effectively drive the city's or region's development.

Thus, I would like to help people to establish

sustainable SME's and actively guide them to innovate

new products and services.”

Ketevan Morgoshia: “I am graduate of the Ivane

Javakhishvili Tbilisi State University. Major interest

comprises in macroeconomic planning, international

commercial law, taxation policy creation for SME

development.”


Article Contributors

Meet all the Septies 2013-2015! In https://prezi.com/wykv9zbx15kj/septies/

https://prezi.com/wykv9zbx15kj/septies/

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DO PATENTS ENCOURAGE OR DISCOURAGE INNOVATION?

By Ernesto Guzman [email protected]

There is any conclusive answer, but tendencies. Those tendencies relates with: (i) The patent´s quality; (ii) Type of innovation; (iii) State of development of a country; and (iv) Size of the enterprise. Based on those trends, I propose the following model:

This model explains how patent’s quality, type of innovation, state of development of a country, and size of the enterprise may discourage innovation. The model is a circle divided if for slices, with the logic that its center is a discouraging area for innovation (therefore, the negative

signs on it), and that the outlying is an encouraging area for innovation (thus, the positive marks on it).

Despite that, the “+” and “-” symbols not only indicate the areas that encourage and discourage innovation, respectively. They also show how to interpret every slice. For instance, the patent’s quality slice is read like: The more (+) patent’s quality, the more patents encourage innovation; the less (-) patent’s quality, the less patents encourage innovation.

Speaking clearly, it is a matter of how centered we are. The more in the center we are located in the four slices, the more patents may discourage innovation for us and vice versa.

The Findings

First, it seems that the less patent quality is, the more patents may discourage innovation. When the


Do Patents Encourage or Discourage Innovation?

http://septleipzig.wordpress.com/2014/07/01/do-patents-encourage-or-discourage-innovation-2/



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patent lack quality it means that it was granted for obvious and no novel inventions, blocking the real innovator and adding licensing fees. Furthermore, such poverty in quality increase the risk of demands coming from trolls. So, patents increment the cost and risk of introducing a product in the market. Conversely, a higher quality in patents leads to make true the utilitarian argument and the spillover effect limiting the negative effects of the monopoly (Jaffe and Lerner, 2004; OECD, 2004).

Secondly, it seems that the less radical the innovation is, the more patents may discourage innovation. Less radical means more incremental; and incremental innovation builds on previous innovations. Thus, patents impede new attempts and approaches coming from others innovators. Also, complex industries get affected because they have to pay several licensing fees for the different technologies they need to build on, that discourage innovation. In addition, patents promote the trolling behavior on first innovators, discouraging innovation efforts because of licensing fees efforts. The other way around, the monopolist protection that patents provide seems to be effective when the innovation requires a high investment; secrecy does not work, and it is easy to imitate, in other words when it is more radical (Boldrin & Levine, 2013; Rai & Jagannathan, 2012; Llanes and Tranto, 2010; Bessen and Maskin, 2009).

In Third place, it seems that the less developed a country is, the more patents may discourage innovation. The technological improvement of developing countries through imitation and adaptation is hampered by patents because they prevent precisely that imitation. Likewise, import-based developing countries can even have problems importing different technologies because of property rights of foreign companies. Moreover, the whole process of technology transfer for developing countries can be seriously damaged or stopped for patents protection. However, scientifically advanced developing countries seem to be benefited on their leading industries as whichever other multinational company, indicating that patents are more beneficial when the country is more developed (Dornberger, 2013; Ray, 2012; Tvedt, 2010; Vaitsos, 1972.).

Lastly, It seems that the less the size of the enterprise is, the more patents may discourage innovation. Patenting activities and monitoring its compliance requires resources the SMEs lack, for them to focus on those activities works on detriment of innovation because of the relocation of resources. As well, patents have high direct and indirect costs and truly expensive consequences if infringing one. So, patents reduce the spectrum of possibilities to innovate. Notwithstanding, for high-tech SMEs the usefulness of patents relies on attracting venture capital, what is related with the radical innovation traits. Beyond that, for large SMEs the




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patents reduce the risk of reverse engineering based on their products, thus from copy. All these draw the idea that patents may encourage innovation as the size of the enterprise increase (Holgersson, 2013; Jaffe and Lerner, 2004; OECD, 2004).

Assembling the puzzle, those four pieces form the Patents Encourage-Discourage Innovation Model (PEDIN). This model is a visual abstraction of the four previous observations; it makes easy to understand and present when patents may discourage or encourage innovation. It is my wish that the innovation community finds it useful and provocative.

References

Bessen, J., & Maskin, E. (2009). Sequential Innovation, Patents, and Imitation. RAND Journal of Economics, 611-635.

Boldrin, M., & Levine, D. K. (2013). The Case Against Patents. Journal of Economic Perspectives, 3-22.

Dornberger, U. (2013). Fostering Technology and Innovation in SMEs The Linkage Approach. Leipzig, Germany.

Holgersson, M. (2013). Patent management in entrepreneurial SMEs: a literature review and an empirical study of innovation appropriation, patent propensity, and motives. R&D Management, 21-36.

Jaffe, A. B., & Lerner, J. (2004). Innovation and Its Discontents. MIT Press.

Llanes, G., & Stefano, T. (2010). Patent policy, patent pools, and the accumulation of claims in sequential innovation. Econ Theory, 703-725.

Organisation for Economic Co-operation and Development. (2004). Patents and Innovation: Trends and Policy Challenges. Paris: OECD Publications.

Rai, R. K., & Jagannathan, S. (2012). Do Business Method Patents Encourage Innovation? Boston College Intellectual Property & Technology Forum.

Tvedt, M. W. (2010). One Worldwide Patent System: what’s in it for developing countries? Third World Quarterly, 277-293.

Vaitsos, C. (1972). Patents Revisited: Their Function in Developing Countries. Journal of Development Studies, 71-97.




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LOCAL ECONOMIC DEVELOPMENT AS THE END AND MEANS OF RECOVERING FROM NATURAL DISASTERS

By Jun Piong [email protected]

It is said that when natural disasters and calamities strike, everyone is equal. Nobody is exempted from its wrath. It minds no social status and everyone has an equal footing – no rich and poor, no developed or developing countries, no big and micro enterprises, no businessman or farmer – everyone is a victim.

This is what happened in 1996 when a 6.8 magnitude earthquake rocks Kobe, Japan that damaged properties specifically the physical infrastructures and in 2010 when 7.0 magnitude earthquakes put Haiti to ruins that slashed more than 220,000 lives from its population. Similarly, in 2005 Hurricane Katrina devastated the coast of New Orleans in the United States of America leaving an estimated property damage of $81 billion and $105 billion of reconstruction and repairs. And just last year typhoon Haiyan swiped the central region of the Philippines claiming more than 6,000 lives and leaving the survivors miserable and hungry causing them to loot the commercial buildings and warehouses. In economic language, the catastrophe reveals one thing – it is a threat that could alter the

economy and the behaviour of the market in an instant.

How one could brace from the natural disasters then? The answer depends on how the territory basically reacted from the previous crisis, learned from other territory’s lessons and used this crisis to prevent or minimize the degree of damages. And how one could move forward after the disasters? The development experts have varying views and suggestions. But altogether these questions point to one thing: the pre- and post-disaster measures. What is in it for a common resident and what does it mean for a business individual? The answer can surprisingly draw these two worlds separated by wealth and income together in one common cause through the emergence of the generally untapped concepts of social capital and local regional economic development (LRED).

Why RED?

Local Economic Development As The End And Means Of Recovering From Natural Disasters


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Buying the idea that LRED approach must be the end and means of a post-disaster recovery needs a lot of explaining, if not supporting theories and facts. The big question to expect is why it should be LRED when things can proceed as they were before. Why initiate LRED when even the term itself is unpopular?

Disaster has its optimistic side as it open up unique opportunities that, if properly understood and managed, could spring development and unlock potentials either at the individual level representing the people who embraces entrepreneurship for momentary survival or at the large-scale where international community pull together to offer assistance to the country affected. In a complex perspective these opportunities could also mean invigorating the social capital and produce a collective outcome that benefits not only a

certain community but the locality or the national level in general.

How?

Although different in generation and approach, the disaster proved a different thing to the case of Lisbon which owes its present economic condition from the colossal damage caused by the chain reaction of earthquake, tsunami and blaze. The Portugal’s capital learned its lessons by proactively positioning its recovery efforts on its competitive advantage: strategic location anchored on the flourishing shipping industry at that time. With the right intervention from the monarchy facilitating resources for its rebuilding coupled with the merchants bracing their businesses towards the direction of reinvigorating the naval trade, Lisbon rise from the rubble and made it an important trading hub until today.



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This seems to be the path envisaged by the World Vision when they decided to forge partnership with the Mesopartner to align their humanitarian intervention with local economic development. The organization believed that there is more beyond the short-term stance of international organizations providing relief efforts and government’s pouring of resources in physical reconstruction. And that is investing in social capital by engaging the various multi-sectoral stakeholders in identifying the opportunities for action. The World Vision championed the cause in cognizant of the burdened government without disregarding the latter’s role. In fact, through Mesopartner’s coordinating role, both public and private stakeholders work together effectively and proceed towards a common goal.

Taking into account the preceding discussions leads to important points that the present day decision-makers can learn from. One, start recognizing the social capital and harness its potential to effect change. This means that the participation of stakeholders in identifying solutions and courses of action that they themselves will implement works better than the one-tier top-down approach. Two, anchor the post-disaster recoveries on the competitive advantage of the locality or region. As in the case of Lisbon, organizing its effort in the rebuilding of its economy based on the competitive advantage of the city prompted the stakeholders to become proactive by

aligning their present actions to long-term gains. Three, a champion (take the case of World Vision) is necessary to advance the identified actions or initiatives. The SMEs for this matter having the wide scope of influence, vested interest, and resources can take the lead role.

The end and means

All these important points are the essence and combinations of LRED which can be revealed through a natural disaster. The destruction could mean starting anew –to do better and change the old ways. If this opportunity is recognized by the stakeholders (especially the government) then the post-disaster recovery can be more than reconstruction and rebuilding of physical infrastructure, it can also be an amalgamation of the sectors working together to produce proactive and long-term measures against disasters. If the government accept the challenge of involving the stakeholders to extract the potential of its social capital, the post-disaster recovery could serve as a chance to initiate LRED and reap the benefit of it in the long run and withstand any storm that will come.

Indeed, natural disasters are engines of development and economic growth and the territories challenged by natural disasters should learn to seize this opportunity by making LRED the end and means of it.



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CERTIFICATION: COMPETITIVE ADVANTAGE OR BARRIER?

By Lukman Haris [email protected]

Certifications are thought to be the

source of competitive advantage.

As small and medium enterprises,

having a certification is considered as

one of a competitive advantage to

compete in the global market.

Together with different kinds of label

on the products, the customer can be

assured of the various qualities of the

products. One is the quality of the

product itself. The other is quality of

the processes regarding the

environmental issue or the child labor

issue. With these certifications and

labels the SMEs are positioning their

products superiority.

On the other side of the coin,

certification is also seen as a

barrier. The local SMEs are excluded

from the global market because of the

imposed standards and certifications.

These terms challenge the

sustainability of SMEs that are

focusing their activities on products

with limited sources. Even though the

products of the SMEs are good, they

cannot compete because they don’t

have enough resources to proof their

quality through certification. It costs

not only the certification process, but

also preparation and maintaining the

certificate.

So, certification has two faces. It is

like a sword, with which one can kill or

be killed. It is a tool but it is neither

the barrier nor the source of the

competitive advantage itself.

Why it is not competitive

advantage?

Discussing about competitive

advantage and entry barrier, let’s visit

the work of the scholars who have

generated firm understanding about

these two phenomena. To name a

few, competitive advantage has been

discussed by Barney and Michael

Porter. In his book, Competitive

Strategy, Porter describes competitive

advantage as the outcome of the

value a firm delivered to its customers

that exceeds the creation cost. The

question now is then how to have

such an advantage and where does


Certification: Competitive Advantage or Barrier?

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this advantage come from? In 1991

Barney answered these questions. He

pointed out that a firm should have a

resource that has four particular

criteria that can give competitive

advantage. These criteria are:

First is valuable in the sense that it

makes firm able to develop and

implement strategy that improve firm’s

efficiency & effectiveness, exploit the

opportunities and neutralize threats at

the same time.

Second is imperfectly imitable. A

firm’s resource is imperfectly imitable

if other firms can not acquire this

resource because of special historical

events, ambiguous causal

relationship (between resources and

competitive advantage) and complex

social phenomena that is beyond

firms control.

Third is rare. If every firms possesses

the same resource, this resource is

not giving any competitive advantage.

Fourth is no substitute for the

resource posses by the firm.

Then, if certification gives a

competitive advantage then it should

fulfill the four criteria above. Let us

check each and every criterion.

First certificate is partly valuable

because it can improve firms’

effectiveness and efficiency, but it

does not neutralize other firms’ threat

of obtaining the same certificate and

have the same process efficiency or

product quality.

Second, because certification can be

acquired by competitor, it is imitable.

Third certification is to some degree

rare. Most certifications are openly

offered to every firm but access to it

are not equal because of financial and

knowledge difference across firms.

Fourth, certification is substitutable.

There are competing certification

schemes available and in case the

certificate is used to communicate

quality, there are other mechanisms

to do so such as users testimony or

direct product demonstration.

In conclusion, certification is not a

resource of competitive advantage.

Why it is not a barrier?



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Now let’s visit the work of the scholars

about entry barrier. McAfee, Mialon, &

Williams (2004) defined barrier to

entry as:

“An economic barrier to entry is a cost

that must be incurred by a new

entrant and that incumbents do not or

have not had to incur” (pg. 463).

What does it mean for the SMEs?

This definition says that if an industry

require all the suppliers to have a

certain certification regardless the

size of the company or their

cooperation time, there is no barrier to

entry. Normally the industry is trying

to protect the consumer from bad

products. In case of the food industry

in European Union, the certification is

imposed to increase the track-ability

of the food’s origin and to control the

safety and health requirements.

And then the next challenges are

raised, the SMEs do not have the

money, knowledge and skill to be

certified. That’s totally true. For SMEs

the cost to prepare the certification

process (setting up documents,

adjusting processes and procedures,

buying the required machines and

tools) can be very expensive. Then

even if they have the money, they

should struggle for “the know how”

and “the who” to do it.

Now take a look at these money,

knowledge and skill problem from

different angle. If we look from the

helicopter perspective, these three

challenges occur in every decision-

making processes in SMEs. From

struggling to exist to growing, from

expansion to innovation, the SMEs

are always facing these three

constraints. Taking the ideas further

we can see that these constraints

apply also any-sized organizations.

In conclusion, certification is not a

barrier.

Then what is it?

Certification is neither a barrier nor a

competitive advantage. Certification is

a tool. It is a tool to serve the goals of

firm and the governing institutions.

For the firm, it is a tool to show to the

customers the quality of the products

or processes. The processes to get

and to maintain the certification are

learning opportunities to acquire

proper processes to enhance their

capability. It is a tool for the managers



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to convince customers in new

markets.

For the governing institutions in value

chain or government, certification is a

tool to protect the market from

incapable producers. It is a tool to

assure the quality of the products or

the processes through third party

assessment. Through this third party

assessment, governing institutions

are able to manage the quality of

products produced through

cooperation and collaboration among

thousands of supporting firms.

It is a tool. It can give the users

advantages and also disadvantages.

And there is the time when the tools

can no longer work.

Use the tool wisely, for there is a

saying “a fool with a tool is still a fool.”

Reference:

Barney, J. (1991). Firm Resources

and Sustained Competitive

Advantage. Journal of Management ,

17 (1), 99-120.

McAfee, R. P., Mialon, H. M., &

Williams, M. A. (2004). What Is a

Barrier to Entry. The American

Economic Review , 94 (2), 461-465.

Porter, M. E. (1998). Competitive Strategy. New York: The Free Press.



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BENEFITS OF ADOPTING DRONE- TECHNOLOGY (UAV) IN SMES?

By Alan Tovar Prado [email protected]

According to the Department of

Defense of the Unite States (2003),

unmanned aerial vehicles (UAV), also

known as unmanned aerial systems

(UAS), pilotless aircraft, robot planes

or simply drones are powered aerial

vehicles that do not carry human

operator, use aerodynamic forces to

provide vehicle lift, can fly

autonomously or be piloted remotely,

can be expendable or recoverable,

and can carry a lethal or nonlethal

payload. This definition is descriptive,

since it refers to a general conceptual

frame of what a drone is, but vague at

the same time because it covers lots

of other flight objects.

Based on the latter concept, the first

unmanned aircraft registered so far

was Germany’s V-1, flying bomb, but

it was in during the Vietnam War

when UAVs equipped with cameras

and sensors played a key role by

doing surveillance and monitoring

flights. Since then, the term drone

connotes a high-technology-war

instrument. Eventually in late 1970’s

and 1980’s the Israeli Air Force

successfully used UAVs during

military operations in Lebanon. Since

conflicts in Kosovo, military agencies

have been using these robot planes

for intelligence gathering. Later on,

throughout the war in Afghanistan and

Iraq, broadcasting means covered the

military effectiveness of UAVs in

battle areas, where they showed two

advantages above manned-aircraft:

risk minimization at considerable

lower price.

Most of the people not involved in

aeronautical issues know few about

unmanned aerial vehicles. Some

years ago, UAVs were only known for

their efficiency and promising

capabilities as a war device. This

technology was mainly used for

armament delivery and for

surveillance purposes. As

aforementioned, for a long time the

evolution of this technology remained

strictly linked to military agencies.

They did the basic research according

their interests with little concern on

other commercial applications.

Benefits of Adopting Drone-technology (UAV) in SMEs


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Eventually, UAV technology has

evolved hastily with the maturing and

miniaturization of its application in the

1980’s and 1990’s. It is becoming

more popular, available and

affordable for many other usages

besides military purposes. Lucintel

Consulting Group (2011) reported that

half of the expenditure of UAV’s

marketing was spent for procurement,

the other half on research and

development activities.

Afterwards, early adopters started the

process of modification of the UAV

technology and the creation of new

applications. Grant (2002) described

this phase as the creation of new

products and processes through the

development of the new knowledge or

from new combinations of existing

knowledge. Most inventions are the

result of novel applications of existing

knowledge.

Nowadays, UAV technology already

entered the phase of popularization or

early majority, in which innovations

encompass the production or

commercialization of a new product or

service. In other words, drones could

be adapted to an existing business

model. Innovation occurs when the

combination of technologies takes

part in the value proposition and

SMEs are in process to do it.

Some industries have become early

adopters of this technology,

agriculture, commercial surveillance,

oil & mineral exploration, transport of

materials and communications. These

industries were able to integrate the

UAV technology into their practices

because they had other components,

which work much better mounted on a

drone. The example in the agriculture

sector is clear: infrared and

hyperspectral sensors have been

used for a long time for the same

purpose.

One can suppose that any other

device, which can be attached to a

drone, will upgrade its performance.

SMEs will profit from this technology

as much as they will be able to

combine gadgets. So UAVs must be

seen as a complementary technology.

SMEs can benefit from this

technology in two ways. In primis, by

developing new applications while the

research process becomes

increasingly affordable. Some SMEs

are able to incursion as UAV

producers. Most of the inputs needed

are available in the market and will be

cheaper in the next years. The

flexibility of this technology makes it

very easy to combine with other easy-

to-find and existent tools. The term

drone does not always connote a



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high-technology product. There are

endless possible niche-markets

waiting for an application to detonate

new capabilities.

In secundis, by embracing existent

tools into their process like recently

happened in some industries. This

essay documented the agriculture

sector improved its practices by

reducing costs and maximizing the

value of the crop. The surveillance

sector is upgrading from the

monitoring business to the information

management. The innovation process

of this technology leads to mass

production and digitalization.

To sum up

SMEs need to encourage innovation

by creating and adding value through

their products and services. Every

time more SMEs have the opportunity

to include UAVs into their businesses

as prices fall. UAVs will change the

way many activities have been done

and will improve user experiences.

They can foster innovative ideas that

lead to changes in how businesses

are done in a wide range of activities

like processes, services, marketing

and products.

In effect, drones technology is used in

most of the activities conforming a

value chain. From logistics facilitating

the transportation of materials saving

time, automating request processing

and inventory management, and

delivering emergency loads; in

operations like in agriculture and

surveillance taking part in the core

business procedure increasing

efficiency and quality expectations; as

a marketing tool to create video

advertisements; and in some services

like search and rescue.

However, despite legal regulations,

lack of awareness of UAV’s

capabilities and their benefits are the

main barrier for the successful

implementation of this technology. It

also includes the shortage of

knowledge and expertise on how to

employ these devices, and the false

perception that these technologies

are unaffordable and dangerous.

Yet, national aerial authorities have

not decided the set of rules to

integrate UAVs into their airspace

systems. Legislation is mandatory to

ensure the safe and peaceful use of

drones without disconcerting personal



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privacy. It is matter of time before one

get use to see drones working all

around.

Soon, one could see drones picking

up garbage on the street, painting

walls, taking dogs out for a walk, or

even reading emails for people while

jogging. One will reach the moment

when drones will be individual or at

least familiar objects, meaning this

not only to get use to them but also to

incorporate them as personal devises.

It could happen within the next

decade.

Reference

Federal Aviation Administration

2013 Integration of Civil

Unmanned Aircraft Systems (UAS) In

the National Airspace (NAS)

Roadmap. The U.S. Department of

Transportation. First Edition.

Asghari, N. (2011) Creating the

Equation for Growth. Growth

Opportunity in Global UAV Market,

Lucintel Brief. Retrieved 30.01.2014,

from http://www.slideshare.net



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HOW DIASPORA CAN CONTRIBUTE TO THE VENEZUELAN ECONOMIC DEVELOPMENT

By Fernando Rodríguez [email protected]

Venezuelan diaspora is growing and

should be used as potential resource

for economic development in the

country. Those skilled professionals

living out of the country represent an

option for their home country

progress. However the question is

how these capable individuals could

help Venezuela from abroad? The

possible answer for this query is to

understand what have been doing

other emerging countries with similar

situations to turn this diaspora into a

helpful resource for the nation.Several

developing states with mature and big

diaspora around the world such as

India, Armenia and China are

obtaining constructive contributions

from their expatriates. Though the

causes and realities of diaspora in

these countries are different, some

strategies could be replicated and

implemented in the Venezuelan case.

How diaspora can contribute to the Venezuelan economic development


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Networking

Indian diaspora has been a key factor

for the country´s high-tech

development since information

technology sector grows rapidly.

Without adequate infrastructure for

the software industry and no

government policy for high-tech

investment, expatriates networks

serve as facilitators between

international corporations in OECDs

and India (Devane, 2006). In other

words, individuals from Diasporas are

potential enablers to generate

business contacts, networking and to

find new sources of investments for

LDCs.

In the Venezuelan case, this

approach would be useful to recover

the oil industry which has been

heavily damaged since 1998. In 2002

after an economic strike, thousands of

professionals from the Venezuelan

state-owned oil company (PDVSA)

were forced to leave their jobs, and

most of them finally migrated looking

for new working opportunities. As a

result the oil production decreased

from 3.25 million barrels per day in

2001 to 2.55 in 2006. Nowadays most

persons from this high-skilled

diaspora are employed in Colombia,

Canada, and even Saudi Arabia; and

have acquired new business contacts.

Eventually if the governmental and

institutional conditions in Venezuela

change positively, these professionals

abroad could serve as communication

bridges between oil companies in

OECD countries and PDVSA, in order

to support recuperating the

performance of the national oil

industry .

In addition, the creation of an

expatriate knowledge network would

be convenient since at the moment

there is no such way of linkage. This

will facilitate to set up connections

among capable expatriates and

Venezuela.

Transfer of technological expertise

and know-how

When capable migrants have the

opportunity to live, work or study in

developed countries, generally

acquire additional technical

knowledge and expertise which could

be useful back home. This statement

could be only applied if adequate

high-tech infrastructure and sufficient

investment in research and

development is previously established

in countries of origin. South Korea

once a developing country and now

part of the OECDs is an example how

this strategy can be implemented to

foster economic development. Broad

exchange programs with the United

States in the high-tech field,

aggressive investment in education



22

and R&D, allowed South Korea to

adopt western business practices

which contributed to the its economic

expansion.

Skills and expertise acquired in

developed countries by the

Venezuelan diaspora is a potential

source of knowledge which sooner or

later will foster the productive capacity

of the country, driving it into the

development way.

Direct Investment

The most direct option for a qualified

diaspora to contribute with the country

of origin is investing in existing

companies or becoming

entrepreneurs back home.

Israel is an excellent sample on how

diaspora community did support the

acceleration of the high-tech industry

in the country. Numerous technology

companies were created in the 1990s.

After a large immigration of Jewish

scientist from Russia, the country had

the highest per capita concentration

of engineers in the world (Devane,

2006). This allowed a potential growth

of the technology sector, and

attracted direct investment from

Jewish diaspora mainly established in

the United States. Additionally public

investment in research and

development increased and

government venture capital stimulated

such progress.

In Venezuela opportunities for direct

investment are enormous in all

sectors. The saving capacity of

diaspora professionals living outside

the country is by far higher than the

offered by the low salaries of local

professionals. Eventually this

represents a chance for high skilled

migrants to create new enterprises in

Venezuela which would fulfill needs of

the local market.

However, there is a precondition for

this alternative, business environment

must be ideal. Stability in social,

politic and economic situations is a

prerequisite to reduce risk and

guarantee a return on investment.

Conclusion

Although the general circumstances

in Venezuela are forcing most local

professional individuals to migrate,

looking for better opportunities in

other countries, this situation could be

turned into positive. This capable

diaspora which is dispersed around

the world can contribute to the

country’s economic development in

many ways. As mentioned above,

diaspora could serve as



23

communication bridges between

companies in OECDs and home

countries through expatriates

knowledge networks. Another

possible way to support is through the

transfer of expertise and know-how

acquired by intellectual diaspora

abroad. These competences and

capabilities learned outside the

country are potential resources to

transform the economic development

of the nation. Direct investment is

seen as the most suitable option of

contribution to the economic growth of

the country by high-skilled

Venezuelan diaspora; however, it is

necessary to create appropriate

political, economic and social

conditions in order to generate a

favorable business environment for

local investments.

To sum up, the Venezuelan diaspora

commitment with their own country’s

development is seen as a critic

resource that will determine future

opportunities of progress and

economic growth for the nation.

References:

Vega, I. D., & Vessuri, H. (2008).

Science and mobility: Is physical

location relevant? Technology in

Society.

doi:10.1016/j.techsoc.2007.10.003

Devane, R. (2006). The Dynamics of

Diaspora Networks: Lessons of

Experience. In Y. Kuznetsov (Ed.),

Diaspora networks and the

international migration of skills: How

countries can draw on their talent

abroad. Washington, DC: World

Bank.



24

B CORPORATIONS: EVOLUTION OF CAPITALISM?

By Martin Kempf [email protected]

The “B Movement” (referring to

Benefit Corporations and Certified B

Corporations) is a global concept that

was born in U.S.A. in 2007 with one

clear objective: redefine the “success”

in business. What will happen if

companies start to compete not to be

the best company of the world, but to

be the best company for the world?

B Corps are companies that,

voluntarily, meet rigorous standards

of social and environmental

performance, transparency and

accountability; aspects that will lead

them to create benefit not only for

shareholders, but also for all

stakeholders (community, workers

and environment). The main purpose

is that business should aspire to do

no harm and benefit all (including

the decrease of poverty, rebuild of

communities, preservation of

environment and create proper places

to work).

Some people say, B Corps might

“turn out to be like civil rights for

blacks or voting rights for women –

eccentric, unpopular ideas that took

hold and changed the world”,

(Richardson, J, 2010). Why? The

traditional way of doing business

today is known by everyone.

Basically, a company is created to

make profit for their shareholders, and

a lot of them don’t care much about

the whole chain of stakeholders that

have participation in the every day’s

process of that company. To show

this with a practical example, there

will be no questioning by a directive

board of a certain company if the

manager decides to move a factory

from U.S.A. to China because the

costs are lower and the company can

B Corporations: Evolution of Capitalism?


25

make a higher profit by doing that. In

fact, this is a very common strategy.

But what about the thousands

workers from U.S.A. who will be

“kicked out”? As Richardson points in

his article, “corporations are legally

prevented from being decent and

humane”, because in the same

example of moving a factory from

U.S.A. to China, if the corporate

leader “decides to make profits

secondary to the well-being of his

workers and neighbors, his

stockholders can sue him (…).

Corporate laws are written so that a

company’s fiduciary responsibility is

to the stockholders. Nothing else

matters. If the choice was between

the survival of the corporation and the

survival of America itself, the law

would compel him to pick the

corporation”, (Richardson, J., 2010).

So, we are living in a capitalist world

where these types of practices are

normal. However, B Movement is

advancing relatively fast with a

different conception of capitalism;

some people say, this is the evolution

of capitalism, which uses the power of

business as a force of good to solve

social and environmental problems.

What is a B Corporation?

This idea of B Corporations sounds

very idealistic and maybe utopian,

isn’t it? Can this really work in a world

where the prevailing capitalism rules

the way of making business? Are

shareholders truly willing to adopt

new policies inside their companies

which could harm their wealth and

decrease their profit, “only” for the

good of the environment, society and

the community?

Well, it seems that there are

companies, shareholders and also

investors who are willing to redefine

the way of doing business in favor not

only for shareholders, but also for

stakeholders. In fact, the number of

these types of companies (Benefit

Corporations and Certified B Corps)

ascends to over 900 in 32 countries

and in 60 different industries with only

4 years after the beginning of the B

Movement. And Chile is the third

country with more B corporations,

accounting 4.2% (after USA with 673

and 74.3% and Canada with 98 and

11%).

But how can Benefit Corporations

differentiate from Traditional

Companies and Non-profits? A

Benefit Corporation is a new legal

status form of corporation created in

the United States that voluntarily



26

meets higher standards of corporate

purpose, accountability and

transparency; a triple bottom line that

considers workers benefits,

community and environment -along

with profits- in every decision process,

with the objective of create general

public benefit.

To understand the main differences

between these two business forms, it

is relevant to mention that until

recently (before the benefit

corporation legal structure was

passed in several states of U.S.A.)

“corporate law has not recognized the

legitimacy of any corporate purpose

other than maximizing profits. That

old conception of the role of business

in society is at best limiting, and at

worst destructive” (Gilbert, J. C.,

Houlahan, B., Kassoy, A., 2013.

These authors are the founders of the

B Movement).

Basically, the idea is that corporate

law requires only profit maximization,

leaving aside any attempt of social

responsibility or social impact, which

means that entrepreneurs or

company owners with a mission-

driven business may be “reluctant to

accept outside capital from investors

who may not share their long term

vision (…). The ability to register as a

benefit corporation empowers these

entrepreneurs, not only to take their

company to scale while maintaining

mission, but to clearly identify

themselves as purpose-driven

companies”, (Gilbert, J. C., Houlahan,

B., Kassoy, A., 2013).

Conclusion

Is this the evolution of capitalism? Is

this really a movement that can

change the traditional way of making

business, leaving aside the obsession

of profit-making and focusing in a

social mission?

Personally, I think the answer to those

questions is yes; it could be. I believe

some business people (from now, still

a minority group) are having these

change of paradigm inside their

heads, willingly to make a difference

in the way of making business. And

the reason why I think this is possible

is because the ideology of B

Corporations still haves a capitalist

base; still cares about profit; and still

operates as a business (I mean, they

need to be competitive in the market,

they need to improve constantly

because they still can fail or go

bankruptcy if they perform badly), but

in a logical way.

Why in logical way? Because at least

for me, sounds logical that a company

may have other purposes than only

maximizing profits for shareholders.



27

Business, as one of the most powerful

man-made force on the planet, can

contribute to create value for society

and for the environment.

It also sounds logic that a company

should worry about the community

where she is inserted; to put the

workers as a priority; and to take care

about the environment. But with legal

and real commitment; not just with a

handful of CSR activities at the end of

the year.

“Capitalism is becoming less

obsessed with revenue and more

focused on creating social value (…).

If 20th century was obsessed with

maximizing financial returns, then the

21st century will be all about creating

social value”, (Balch, O., 2012, citing

Andrew Kassoy).

Of course there are opinions saying

that the impact of B corps will not be

big for the worlds or America’s

economy, but I think every big idea

requires some time to mature.

Forbes Magazine published an article

on 12th April of 2010, written by

Susan Adams, called “Capitalist

Monkey Wrench”, where one of the

topics discussed was that the

Rockefeller Foundation gave US$ 1

million to develop a new rating system

for social and environmental effect.

“Wealth advisors and private banks

are hungry for such a standard, says

Antony Bugg-Levine, a managing

director at Rockefeller: ‘Credible

ratings unlock a whole new source of

capital’. But can it unlock wealth? So

far all the B corps are privately held,

and none has revenues exceeding

$200 million. David Vogel, a

business ethics professor at the Haas

School at UC, Berkeley, who has

written extensively about corporate

responsibility, doubts the potential is

that great. “It’s a moderately nice

thing,” he says, “but it won’t be

transforming American business”,

(Adams, 2010).

But is really “unlocking wealth” the

main purpose of the B Movement? I

don’t think so, and the article “Today

marks a Today Marks A Tipping Point

In The Evolution Of Capitalism”

provides an overview about why. “(…)

And for investors, it mitigates risk,

reduces transaction costs, creates

additional rights to hold management

accountable, and accelerates the

growth of a big market opportunity to

meet the needs of people who want to

invest to both make money and

make a difference.”



28

Make money and make a difference…

that’s the key. They are not talking

only about profit maximization; here

one must understand that the

proposal of B Corporations includes a

change of paradigm in the way of

making business. The main objective

(unlike the traditional capitalist way) is

to contribute with social benefit, and a

Benefit Corporation or a Certified B

Corp must have that purpose clear in

their statutes.

“To truly live in a more egalitarian

society, with less poverty and with a

healthier environment, we don’t need

only companies that put people in the

center of it; we need investors to

start investing in a different way.

We need public policies that are

friendlier; we need universities

teaching this issue so that new

entrepreneurs come out with this

‘chip’ in their heads. We need every

single actor of the economy in this,

and that’s why we have ally with more

organizations”, (M.P. Salas, 2013).

References

Adams, S., 2010. Capitalist Monkey

Wrench. Forbes [online], 12 April.

Available at:

http://web.archive.org/web/20100328

155935/http://www.forbes.com/forbes/

2010/0412/rebuilding-b-lab-corporate-

citizenship-green-incorporation-

mixed-motives.html [Accessed

February 2014].

Salas, M., 2013. Las empresas B

utilizan el Mercado para resolver

problemas sociales. Y no solo están

en alza, sino que cada día son más

valoradas. cl [online] 29 November.

Available at:

http://www.eldefinido.cl/movil/actualid

ad/lideres/1461/Sistema_B_empresas

_que_no_buscan_ser_las_mejores_d

el_mundo_sino_para_el_mundo

[Accessed February 2014].

Gilbert, J. C., Houlahan, B., Kassoy,

A., 2013. Today marks a Today

Marks A Tipping Point In The

Evolution Of Capitalism. Forbes

[online], 17 July. Available at:

http://www.forbes.com/sites/skollworld

forum/2013/07/17/today-marks-a-

tipping-point-in-the-evolution-of-

capitalism [Accessed February 2014].

Balch, O., 2012. Are B Corps

redefining business for the 21st

century? The Guardian [online], 3

October. Available at:

http://www.theguardian.com/sustaina

ble-business/b-corp-redefining-

business [Accessed February 2014].

Richardson, J., 2010. Saving

Capitalism from Itself: Inside the B

Corp Revolution. Esquire Online

[online], 23 August. Available at:

http://www.esquire.com/blogs/politics/

b-corp-082310 [Accessed January

2014].



29

INDUSTRIALIZATION AS THE STAGES OF DEVELOPMENT – TEXTILE INDUSTRY IN EGYPT

By Jomana Ismail [email protected]

One of the theories that identify

frequent social change and the idea

of development is Walter Rostow’s

concept of economic growth in his

book “The Stages of Economic

Growth” 1960. He identifies five

growth stages: the traditional society,

the preconditions of take-off, the take-

off, the drive to maturity and the age

of high mass consumption. “These

steps are linear and towards

evolutional higher development”

(Mallick, 2005, p.5).

The first stage, the traditional society,

is characterized by limited production

functions; therefore the main focus is

on agriculture. The political rule is

centralized in the traditional society.

The preconditions of take-off, a

process of transition from traditional

society to take off. It is characterized

by more dynamic society which is

reflected in more production

functions. The society is more open to

trade and it is the beginning of

expansion and internationalization.

The take-off stage begins with

overcoming the old blocks and the

resistances to steady growth. At this

phase growth becomes the normal

condition. The rate of investment is

increasing and the technological

development is expanding. Also there

is an expansion in urban areas and

building new industrial areas.

Moreover, new techniques in

agriculture and industry are used and

the farmers begin to accept the

changes.

The drive to maturity is characterized

by extension of technology over the

whole front of economic activity. The

economy finds its place in the

international economy: goods

formerly imported are produced at

home; new import requirements

develop, and new export commodities

to match them. The society develops

new values and revises the current

institutions to support the growth

process.

Industrialization as the stages of development – Textile Industry in Egypt


30

The age of high consumption the

society looks for welfare. The leading

sectors shift towards durable

consumers’ goods and services. In

addition to that, the structure of the

working force is changing; more

people are working in offices or in

skilled factory jobs.

According to Rostow’s theory of

economic development,

industrialization happens through

several development stages to make

the shift from traditional economy. In

early stages, there should be a

surplus which is generated from a key

sector to provide funds for investment

in the manufacturing industries which

means that the output exceeds the

need of the local need which leads to

exporting the surplus. The revenue

from the exported surplus would be

spent in several directions.

Infrastructure is one of the primary

ways to invest the revenue like

railways, roads and roads which

serve the exporting activity and at the

same time their availability will foster

industrial activities. Moreover the

revenues may be used in

manufacturing industries. This

prepares the economy for the first

step of industrial development (Meier,

2000, p.180-185).

Industrial development has two main

stages. The first one is import

substitution while the second one may

be market inward orientation or

outward orientation.

1 “Easy” Import Substitution

“The first step of industrial

development is “the first stage of

import substitution”. This stage

requires some tariff or quota

protection to accelerate the process

of industrial development,” (Hawash,

2007, p.1).

The developing countries start to

substitute imported goods which

doesn’t need skilled labors, is not

effected by low production in sense of

cost and don’t need sophisticated

technology. These goods are usually

clothing, shoes, household goods

which are made of leather, wood and

textile fabric (Meier, 2000, p.180-185).

Therefore, this stage is called the

“easy” stage of import substitution. In

addition to that, external economies

are generated through production of

these commodities. It increases the

human capital and the spread of

technology. Therefore, the increase of

production will be more than the

increase in consumption of the

economy (ibid).



31

2 Inward or Outward Orientation

There are two ways for an economy

to continue increasing its industrial

growth rates. The first way is the

second stage of import substitution

which is inward looking industrial

development strategy or the outward-

oriented strategy, the exportation of

manufactured goods (ibid).

The first strategy, inward industrial

development, in based on substituting

imported products by domestic

production. The problem with this

strategy is that developing countries

have low physical and human capital

and unskilled labor, “highly physical-

capital-intensive intermediate goods

and skill-intensive producer and

consumer durables” is challenging

(ibid).

The other strategy is the outward-

oriented strategy. This strategy

focuses on international trade and

exporting the goods and services that

the country can be competitive at.

Examples of these economies are

Hong Kong and Taiwan.

Countries applying outward-oriented

development strategies performed

better in terms of exports, economic

growth, and employment than

countries with continued inward

orientation (ibid).

Industrialization in Egypt

In the end, according to Rostow’s

economic growth concept, Egyptian

industrialization in general and textile

industry in specific, has passed by the

‘take off’ and now in the ‘drive to

maturity stage.’ In other words, the

textile industry has passed the import

substitution phase and the inward

market orientation and now struggling

in the outward orientation phase.

The textile industry in Egypt first

started mechanization in the 1899 by

the European commission who lived

in Alexandria and then was adopted

by the government which led the way

afterwards in 1952 to the import

substitution stage. When Gamal Abd

El Nasser ruled, he applied the

‘Inward Industrial Development’

strategy. All the production of the

cotton was purchased by the

government and subsidized the textile

products for the domestic market.

Afterwards in the early 70s, when El

Sadat has come to power, open door

policy was adopted which shifted the

strategy from inward orientation to

‘Outward Industrial Development.’



32

The challenges in this phase are

huge. On one side the industry is not

efficient; the backward and forward

linkages are weak, the technology

used is old and the labour need

intensive training. On the other side

the policies and the institutions need

reform; the corruption is high, the

public companies customizing the

rules and laws to their benefits and

the private companies are not well

presented and involved in the

decisions and policies that is taken by

the government. These challenges

make it difficult for the textile industry

to compete internationally.

By making reforms in the policy level,

improvements in the domestic

capabilities and adjustments in the

market strategies, the Textile industry

in Egypt will be able to fully adopt the

‘drive to maturity’ level and be able to

compete internationally which will

have a huge impact on the Egyptian

economy because of the Textile

industry role in the economy.

References

Hawash, R., 2007. Industrialization in

Egypt: Historical Development and

Implications for Economic Policy. [pdf]

Cairo, Egypt: Faculty of Management

Technology, German University.

Available at:

<http://mgt.guc.edu.eg/wpapers/001h

awash2007.pdf>

O. B., 2005. Development Theory:

Rostow’s Five-Stages Model of

Development and ist Relevance in

Globalization. [pdf] School of Social

Science, Faculty of Education and

Arts, The University of Newcastle.

Available at:

<http://202.202.111.134/jpk/data/gjzrz

ygl/web%20prepare20110608/paper/

Rostow%20Development%20Model%

201960.pdf>

Meier, G. M. & Rauch J. E., 2000.

Leading Issues in Economic

Development, 7th ed. [pdf] New York:

Oxford University Press. Available at:

<http://econweb.ucsd.edu/~jrauch/lea

dingissues/leading.pdf>



33

GOVERNANCE IN THE VALUE CHAIN: THE CASE OF NAMIBIAN BEEF VALUE CHAIN

By Rodney Seibeb [email protected]

Globalization and global

interdependence has provided

opportunities to businesses in

developing to access and profit from

lucrative markets beyond their border.

However, they are expected to meet

high standards and demands from

governments and consumers. Thus,

effective governance of the value

chain is required for a developing

country’s value chain to be able to

maintain access to pricey markets.

The Technical Centre for Agricultural

and Rural Cooperation (CTA) which is

a jointly established international

institution of African, Caribbean and

Pacific (ACP) Group of Countries and

the European Union (EU) revealed

that from the 79 ACP countries which

are granted duty free access to EU

markets, only Namibia exports beef

constantly to the EU. This fortunate

situation for Namibia has been

attributed to the fact that it can meet

the governance requirements set by

the EU (CTA, 2013).

Namibia was granted preferential

access to supply 13 000 tons of beef

to EU, however the country has been

unable to supply that amount due to

numerous challenges facing the beef

sector. One main factor is

governance, because 51% of the

cattle are resident in the communal

areas north of the VCF, thus EU

cannot accept any meat products

from those areas, due to potential risk

Governance in the value chain: the case of Namibian beef value chain


34

of the foot and mouth disease, hence

Namibia is unable to take full

advantage of the 13 000 tons duty

free access granted to its beef

exports under the Economic

Partnership Agreement.

Namibian beef value chain

Source: Deloitte & Touch, 2013

Moreover, due to the access to EU

market, Namibia is subjected subject

to rigorous inspections and audits

from the EU and other entities. EU

required the implementation of a time-

consuming computerised traceability

system from the Namibian meat

industry, and in response the industry

has implemented the Namibia

Livestock Identification and

Traceability System (NamLITS). The

requirements from institutions in

developed countries are changing

from time to time. However, Namibia

has proved that with effective

governance even the most stringent

requirements can be met by

developing countries, though at a high

price.

Disease zoning with the veterinary

cordon fence and strict control of

animal movement by DVS has helped

parts of the country to be to be free

from food and mouth disease.

However, 51% of Namibia’s cattle

population are resident in the

communal areas north of the VCF

and can therefore not be exported to

overseas markets. Thus, the country

is faced with a challenge to have the

areas declared disease free by the

international authorities, such a

declaration will shift the VCF

northward to lesser risky areas and

enlarge the FMD free zone and thus

integrate some cattle farmers into the

mainstream economy. This

integration will unlock the economic

potential of the communal areas north

of the VCF as it will not only boast

Namibia’s cattle production for export

but it will also enable these producers

to benefit from the high returns from

export to the EU and other lucrative

markets.

Veterinary zones in Namibia

However, the realization of this dream

requires very close cooperation from

between all the stakeholders to

anticipate potential risk and thereby

avoid coordination failures, because

coordination failure might result in the

suspension the country’s beef

exports.



35

Source: Adopted Gawande, et al, 2007



36

The Meat Board plays a coordinating

role in the beef value chain, all key

stakeholders are represented on the

Meat Board, its platform is used to

raise and discuss important

governance issues and workout

national strategies to implement

requirement of Supranational

institutions. The Meat Board was

instrumental as it ensured that

Namibia meet the EU’s 90/40

residency and the traceability

requirements. Meat Boards’ FAN

Meat scheme ensures that Namibia’s

claim that its beef is naturally

produced from healthy free ranging

cattle is maintained internationally.

Farmers that subscribe to the FAN

Meat scheme are closely monitored

as they are expected to maintain high

standards in terms of farm

management, environment, animal

welfare, animal health, feed and

traceability.

Namibian cattle producers have

established Meatco and developed

the corporation over the years into a

multinational company. As a result,

the producers have indirectly

upgraded in the value chain

collectively. Therefore, they are

benefiting directly from the returns

from the lucrative markets. Meatco

has been able to meet and maintain

multiple standards, thus it has earned

trust in foreign markets. Due to the

capacity which Meatco has developed

the corporation is able to strengthen

and empower cattle producers to

improve the quality and quantity of

cattle which they supple to it.

Finally, Meatco has been able to

tighten co-ordination, and thereafter it

upgraded in the value chain from a

beef processor/trader to a beef

marketer. By developing a strong

brand and appealing packaging

Meatco has yielded positive returns

for the producers (Members).

Moreover, Meatco also owns

subsidiary companies in Europe and

South Africa. Therefore, this can also

serve as a model for primary product

exporting companies in developing

countries. Beef producers in other

ACP countries should organised

themselves under one entity and

engage other stakeholders in order to

strengthen value chain governance.

Once the value chain governance

mechanisms are firmly in place then

successes in terms of upgrading,

exports and higher returns will follow .

References

Animal and Plant Health Inspection

Service (APHIS). (2005). “APHIS

Evaluation of the Footand-Mouth

Disease Status of Namibia (Site Visit

Report and Risk Analysis).”

Veterinary Services, National Center

for Import and Export. Retrieved from

https://web01.aphis.usda.gov/db/mtad



37

dr.nsf/2f5c87c0140172cb852564bf00

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006cc523/$FILE/

Chiriboga, L., Kilmer, C., Fan, R. and

Gawande, K. (2008). Does Namibia

have a comparative advantage in

beef production? Texas A&M

University Retrieved from

http://kishoregawande.net/wp-

content/uploads/2008/12/finalreporti.p

df

CTA. (2013). Executive Brief Update

2013: Beef sector. Retrieved from

http://agritrade.cta.int/Agriculture/Com

modities/Beef/Executive-Brief-

Update-2013-Beef-sector

CTA. (2012). Executive Brief Update

2012: Beef sector. Retrieved from

http://agritrade.cta.int/Agriculture/Com

modities/Beef/Executive-Brief-

Update-2012-Beef-sector

Deloitte and Touche. (2013). Draft

Joint Vision of the Livestock & Meat

Industry of Namibia. Retrieved from

http://www.nammic.com.na/index.php

?option=com_jdownloads&Itemid=14

6&view=viewdownload&catid=8&cid=

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Gawande, K., Cabrera, R., Cochran,

K., Dangelmayr, L., D’aguilar, G., Lee,

J., Speir,I., & Weigand, C. (2007).

African Capacity Building For Meat

Exports: Lessons From The Namibian

And Botswanan Beef Industries.

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2010. Retrieved from

http://ssrn.com/abstract=1979233

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governance. Briefing Paper. USAID.

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nks/files/resource/files/vc_governance

_briefing_paper.pdf

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Handbook for value chain research, A

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tripna5/Meatco%20Annual%20Report

%202011%202012.pdf



38

ENTREPRENEURS AND THE CONCEPT OF ANTI-FRAGILITY

By Alan Tovar Prado [email protected]

Have you ever wondered what is the

exact reverse concept of fragility?

One might think of peripheral ideas

about what is not fragile and consider

robust, solid or resilient as possible

answers.

First, it is necessary to define what

makes a package fragile. Usually, you

can see that something is fragile,

when you find the “handle with care”

stamp on the box. According to the

Oxford dictionary, fragile is an

adjective that refers to an object

easily broken, damaged or

threatened, or a delicate and

vulnerable person.

Second, lets characterise a fragile

object, person (dispositions,

behaviours, personalities) or systems.

A clear example is a wine glass,

which is better preserved, well kept

and protected; it is an object which

would be at its best unharmed.

Another good example could be the

current financial system; the more

stable and the less risk the better.

Third, all the concepts

aforementioned (robust, solid,

resistant, etc.) could be

representative qualities of anti-fragile

products or systems, however they do

not cover the substantial attribute of

the phenomenon.

Nassim Nicholas Taleb, a Libanesse-

American scholar and statistician, has

created the neologism of Antifragility.

He, an uncertainty and risk expert in

the fields of Philosophy and Finance,

points that some things benefit from

shocks; they thrive and grow when

exposed to volatility, randomness,

disorder, and stressors and love

adventure, risk, and uncertainty. That

is what he called Antifragility.

So, antifragile has the exceptional

property to become better; it evolves

from errors, it manages to deal with

the un-know, and it does things

Entrepreneurs and the concept of anti-fragility


39

without completely understanding

them; to say, stressors and volatility.

One can guess, that the analysis

around the concept of antifragility is to

become aware of what is fragile and

its better understanding. Taleb

himself explains that you can

measure how fragile a system can be,

but risk is not measurable and one

cannot predict the occurrence of a

stressful event that could harm it. In

the long run, the antifragile wins from

prediction errors.

So, how is this conception translated

into personal domains? There is a

name for them: Fragilistas. These

individuals usually take the role of the

victims of the system, a bad boss, a

bad mood. Further, they are

characterized by their attitude towards

errors and variability; after making a

mistake, they feel defensive and

embarrassed rather than moving on,

introspect and learn. They are

nonaction types.

On the other hand, the Entrepreneur

is that one, who gains from innovation

and conviction, and –not always-

speculation. But, how to innovate?

Get in trouble -recommends the

author- real and serious trouble but

not terminal. Innovation is usually a

consequence of necessity more than

the outcome of bureaucratic

academy.

Contrary to fragility, entrepreneurship

may be considered a risky and heroic

activity, necessary for growth or even

mere survival for the Economy, says

Taleb. Still after a failure, the

Entrepreneur is still alive, though

morally and financially broken, and it

is the high rate of failure –a necessary

high failure rate- what makes the

economy to be antifragile.

However, the Entrepreneur may not

regret its activity of constantly and

rationally modifying its targets as

he/she acquires information; this is an

opportunist predilection, which has

significant consequences in business.

The Fragilista believes in the illusion

of thinking that others, too, know

where they are going, and that they

will tell you what they want if you just

asked them. The Entrepreneur denies

this assumption.

The strength of the computer

entrepreneur Steve Jobs was

precisely in distrusting market

research and focus groups –those

based on asking people what they

want- and following his own

imagination. Taleb interprets the

famous “stay hungry, stay foolish” as

“be crazy but retain the rationality of



40

choosing the upper bound when you

see it”.

This simplistic orientation towards trial

and error (seen as the expression of

an option so long as you could

identify a favourable result and

exploiting it), with no comparative

shame in failing, starting again, and

repeating failure triggers whole

economies. Indeed, U.S.’s largest

generators of wealth are based on

real estate (financial optionality) and

technology (based on disruptive

innovations). In contrast, Japan or

Germany hide risk by making small

contributions, adding small benefits.

According to Taleb, technology is the

result of antifragility, exploited by risk-

takers in the form of tinkering and trial

and error, with nerd-driven design

confined to the backstage, to say

emphasising in the implementation

more than in the innovation.

Also, the Entrepreneur shows the

distinctive quality to control fragility in

four ways:

1. Detecting fragility (more than

prediction) by understanding the

dynamics of causal-effects and

forecasting errors. How to benefit

when you make a mistake?

2. Focusing on make things -your

company- more robust to defects

and exploit these errors (both

internal and external). Do not try

to change the world for now.

3. Considering time as the mother of

all stressors. Antifragility is

necessarily how things move

forward under time.

4. Understanding innovation as a

concept of options and optionality.

How can you take the upside if

you like, but without the

downside?

The model of Antifragility covers well-

known dilemmas about risk and

chaos from a very peculiar

perspective. The idea is not try to

solve or shield something against

disorder agents or volatility but rather

understand and learn from stressors.

Entrepreneurs may consider his

advice to face a world full of

uncertainty, where randomness

seems to be the only constant. Be

able to gain from disorder.



41

Forceful Formalization – Is it Panacea?

By Ketevan Morgoshia [email protected]

Modern economic picture shows

highly complex and interconnected

trends, which creates challenges to

identify the root of the problems that

developing countries usually stand in

front of. Among those ambiguous

economic challenges, the most eye-

catching one – informal sector,

attracts attention among the

economists’ circles, especially in the

standpoint of development

economics. The current discussion

over the topic divides those circles for

and against informal sector which is

still growing in the Third World. The

proponents share the idea that

informal sector fills the gaps of formal

sector “among the poorest of the

poor” and helps to maintain the

baseline in the “survival economics”

(ILO, Geneva). They argue that not all

developing countries are prepared to

root the informal sector out

completely, as long as various social

and institutional processes are

involved aside economic ones.

Hence, Structural Adjustment

Programs (SAP), initiated in 1980-

1990 by the World Bank (WB) and

International Monetary Fund (IMF),

along with the Washington

Consensus policies of 1989 do not

necessarily result in expected

economic growth, but the other way

around (Stiglitz, 2000). Thus the topic

is complex due to the fact, that it

involves not only the economic

concepts and discourses explaining

development economics, but

sociological and anthropological

aspects as well (Rand, Torm, 2011).

The proponents of informal sector

usually refer to the “rigidities of labour

market” and “voluntary choice of

informality” as a result of costly labour

market regulations, often leading the

labour force voluntarily join the

informal sector. Such critical

standpoints have to be taken into

consideration while dealing with the

transition economies, which mostly

suffered from the “shock therapies”

during 1990s resulting in high inflation

rate and growing number of

“underground economy” that was later

labeled as “informal economy”.

On the other hand, SAP proponents

suggest the formalization to sustain

economic growth and high

performance in a state’s economy.



42

Elimination of informal economy will

reduce the level of crime, exploitation,

industry inefficiencies and

unemployment as long as public

records of registered businesses

would let governments tackle directly

with the shortcomings. Formalization

increases the level of social

protection, access to financial

support, government services, growth

rate and Foreign Direct Investments

(FDI) (ILO, 2013).

The concept of informal sector stems

from early 1970s, when economic

anthropologist Keith Hart conducted

his research in Ghana having found

out it not only existed but expanded.

Later it was accepted by ILO,

(International Labour Organization)

perceiving the range in which

marginal workforce turned into the

profitable enterprises. It was followed

up with the International Labour

conference in 2002 broadening its

concept to an economy wide

phenomenon involving the jobs and

workers inside (ILO, 2013). There are

also various definitions incorporated

by the various economist and

sociologists, but ILO Resolution of

2002 delivered the one commonly

applied in many states: «The informal

economy comprises half to three-

quarters of all non-agricultural

employment in developing countries.

Although it is hard to generalize

concerning the quality of informal

employment, it most often means

poor employment conditions and is

associated with increasing poverty.

Some of the characteristic features of

informal employment are lack of

protection in the event of non-

payment of wages, compulsory

overtime or extra shifts, lay-offs

without notice or compensation,

unsafe working conditions and the

absence of social benefits such as

pensions, sick pay and health

insurance. Women, migrants and

other vulnerable groups of workers

who are excluded from other

opportunities have little choice but to

take informal low-quality jobs (ILO,

2002)”.

Various socio-anthropologists and

economists define informal sector in

their own particular way. Meagher

(2004) introduces following

categories: survival informal group,

dependent workers and

entrepreneurs. House (1984)

investigates the motivation triggering

entrepreneurs start a business which

accordingly lines up in three

categories: dynamic IS (Informal

Sector) with subcontracting

arrangements with the formal sector;

poor, marginalised workers trying to

survive; transitional subsector

stretching between the previous ones

(Ishengoma, 2006). ILO has recently

stratified the manifestations of

informal economy, which differs from

country to country and from region to

region. It discusses the peculiarities of



43

each and every single type of

manifestations giving the detailed

explanation of the cause and effect

ending in the informal economy.

The list of actors in the informal

economy ranges from street vendors

up to Micro, Small and Medium

Enterprises (MSME), which usually do

not involve contractual relationships

and thus do not participate in creation

of decent work. The underlying

causes of informal economy, listed by

ILO, may be poverty, poor absorption

capacity of industrial sector, the drive

of flexibility, changing production

structures, economic restructuring,

the labour regulation and economic

crisis (ILO, 2013). All these

challenges that are present in the

developing countries closely relate to

the Structural Adjustment

Programs and Washington

Consensus, giving recipes of liberal

economic organization to let the free

market function.

The debt crisis in Latin America of

1980s let IMF (International Monetary

Fund) and WB (World Bank) to think

about solutions for the indebted

governments to maintain economic

stabilization and issue even more

loans to repay existing debts and

avoid international banking crisis. The

policy set the preconditions for the

borrower governments to earn credit

from WB and IMF, named

afteWashington Consensus. It

required governments to liberalize

trades and open markets, change

state owned industries to private-

owned ones, and let FDI freely flow in

the countries ending in the total

deregulation of their economic

systems (Woods, 2003). Structural

Adjustment Loans were repeatedly

given to the same countries to make

“adjustment” viable, though

sometimes ending the zero level of

“adjustment with growth”, for instance,

in Argentina, Ghana, Senegal and

Malawi. They suffered from the same

black market premium and inflation

rate, the same real overvaluation and

real interest rates among the 1980s to

1990s. The primary demand to

ensure intensive lending from WB,

was tax reform, enhancing property

rights and increasing formalization

policies to enforce law over the

private sector. The overall negative

outcome could be observed on the

post USSR countries, named as

“transition countries”. Only Poland

and Hungary had success along with

Georgia, but the latter showed the

worst case of output due to the civil

wars in 1990s.

The paper will analyze the relation

between informal sector, formalization

outcomes and macroeconomic

structural changes. The analysis is

based on the three country examples:



44

Brazil,Vietnam and Georgia. Those

countries were selected due to their

experience to cope with the informal

sector, i.e. Brazil was chosen for its

successful public and financial policy

ending in the rise of formal sector;

Vietnam for its partly successful

formalization, but more for its

successful informal institutions and

lastly Georgia, conducting all

necessary structural adjustments, but

ending in decrease of formalization

incentives.

Brazil – Successful Formality

Brazil’s economic reforms took off in

1996 and over a decade after it

reaped the harvest of dynamism in

social-economic composition. The

first phase was distinguished with the

macroeconomic policy changes and

handling internal crisis of currency

fluctuations and high inflation rate.

The devaluation of Real in 1999

ended up in the increased value of

Dollar and substantially increased

production costs. Due to the dollar

rise, public debt stood on the agenda.

At the same time, opening markets

defined the prices at the international

level, which was followed by the

privatization of public services and

became also dependent on the

general price index of the

commodities. To combat the inflation

rate and maintain purchasing power,

the government introduced minimum

wage policy along with the inflation

target policy. It kept going to

devaluate Real, increase export share

and create better conditions for

domestic producers to compete with

the international ones. Interest rates

were kept high, but public spending

low, to prevent the speed-up in

inflation. Public debts forced

government to increase taxes

throughout 1990s which was resulted

by the costs of the newly projected

social security system in the country.

In addition, the National Congress

detached a part from its revenue

(20%) implementing Fiscal

Responsibility Law to contain

expenditure and pay a portion on the

interest of the debt. It also involved

public funds and public financial

institutions to absorb a portion of the

public debt at the same time to keep

rolling over the debt to finance the

economy. Due to the international

loans and open domestic markets,

large companies started to invest in

Brazil, placing the debt securities and

property titles in national currency.

The GDP growth was accelerated by

the appreciation of Real in 2004 after

increased consumption and

investment. Raising international

reserves and lowering external debt

stock led to the decrease of the loans

by the banking system in GDP from

33.7 to 24.2%. The state became able

to invest in infrastructure. Though

trade and finance prospered,

industrial sector was still lagging

behind as long as aggregate value did



45

not increase and other sectors lacked

dynamism to advance.

The next Government of Lula

maintained the same macroeconomic

policy, but increased the cost of social

security, restored public investments

to enhance infrastructure, supported

by the national business groups and

investment funds from public

enterprises. The response to the

financial crisis in 2008, Brazil

launched the Selic (lowering basic

interest rates); IPI (reduced taxes);

simplified bank reserve requirements

and used international reserves to

strengthen export abroad; ensured

lending money to the MSMEs. Formal

employment start to grow after

devaluation of local currency and

intervention of Ministry of Labor and

Employment to supervise

formalization of the labor contracts.

Increasing formal jobs changed the

composition of total labour income in

terms of occupational status leading

to the positive development of

employment and raising up the real

wages. Labour regulation involved

“protected employment”, the term

describing jobs validated by the work

cards. Only the owner of the work

card could access the social security

program. Labour rights included paid

holidays, maternity leaves, the

minimum wage and the “thirteenth

salary” – added bonuses in the end of

the year. The most vulnerable

working groups were converted

formal with temporary contracts both

in public and private sector, though

the employment growth derived from

the open-ended contracts raising it to

60% throughout the decade. Although

employment grew, it did not eliminate

other forms of contracts respectively

outsourcing, internships and labour

cooperatives. To control and

supervise labor contracts, or to

unravel informal workplaces the

following public institutions were

created:

1. “Super Receita” (Super

Revenue): social security and tax

revenue auditing systems;

2. Mobile inspection groups: child

labour eradication program and

national plan for slave labour

eradication in partnership with

ILO in order to create a decent

work.

3. Public Ministry of Labour:

monitoring compliance with laws.

Its competence also includes a

resolution of collective labour

disputes. It revealed fraudulent

practices demanding work card

registration to eliminate fake

cooperative members, which

became the trend to evade taxes,

and regulate labour laws.

The growth of formal enterprises was

identified in two initiatives: recognition

of employee status (cooperator,



46

judicial person, individual worker) and

recognition of accountability. First

initiative helped government to

identify the characteristic of

employment relationship and root out

possible fraud. The second initiative

forced employment relationships to be

monitored from one of the involved

parties and thus avoid future labour

liabilities. Trade unions played

important part to increase

formalization as it helped vulnerable

workers: earn bargaining power;

pushing public institutions to fight

against fraud. In the end, labour

market configuration paved the way to

decrease poverty level: 61.4 million

people were living in poverty in 2003

which reduced to 41.5 million in 2008

(Monteiro et al, 2011).

Source: IBGE-PNAD. IPEADATA See

at: http://www.ipeadata.gov.br/

Another research of Brazilian case

suggests, that the reforms only

affected retail trade, manufacturing,

though the SIMPLES Nacional law is

uncertain in manufacturing and

service sectors. The research

revealed the fact that SIMPLES law

was working in definite sectors, like

retail trade. The incentives to

formalize was mainly frequent

inspections, especially for the firms

highly exposed on the street markets.

Another revelation referred to old

procedures of registration of business

taking 15 steps and visiting several

institutions, which reached 152 days

according the Doing Business

estimates (World Bank, 2004). The

authors argue that different economic

activities need other initiatives to

experience lower level of informality

(Monteiro et al, 2011). The most

recent policy development for MSMEs

started in 2009, initiated by the

Ministry of Development, Industry and

Foreign Trade introduced EI –

Individual Entrepreneur policy to

formalize individual entrepreneurs.

Here the formal status was required

from workers employed from 400

occupations and earning USD22.000

annually. Before registering EI one

has to register for the Simples

Nacional which represents unified tax

regime for small and micro

businesses. Attraction to formalization

was triggered by the pension and

other employee benefits (insurance,

maternity leaves) covering at least 10

to 12 months. Formalization also help

MSMEs to have access to better

prices and suppliers, that does not

happen before the registration as the

company is not accountable.

Registration with the CNPJ (National

Register of Legal Entities) exempts

from certain taxes as PIS (social

integration tax), COFINS (social

contribution tax), Income Tax and IPI

(tax on industrialized products). The

Trade Ministry also initiated

formalization via Internet spreading

the access possibilities to every

region of the country as long as

IBGE1 documents 11 million sole



47

proprietors working on their own and

not collecting taxes. Support to

formalize is delivered from SEBRAE2

giving the course in management to

entrepreneurs and endowing them

membership of the organization

(Pires, 2011).

Table 2. Macroeconomic Indicators in

Brazil, 1980-2011.

Another study shows that economic

revival stemmed from the underling

macroeconomic strategies that

reinforced in 1980-1990s. It paved the

way the further economic growth and

development, namely, restrictions for

the foreign banks to enter local

financial markets, sheltering domestic

banks from the international

competition. Regarding labour market

regulation, minimum wage policy was

successful to reduce income

inequality and create lower middle

class. It helped raise the purchasing

power among the population,

although it imposed burdens for

MSMEs to contribute social security

system making up 50% for their gross

profit. The study revealed 9%

contribution of pension funds to the

GDP, which is a high figure for the

developing country. On the other

hand, it do not show sustainability,

reflected on demotivation effect on

companies with low skilled workers to

formalize. Moreover, unemployment

insurance system results high

turnover of the workforce and

demotivate businesses to invest in

professional training and development

of their labour force. The study claims

that Brazil became successful with

the energy and oil reserve, which

spurred the country to export rather

than import raw materials ( Minassian,

2012).

Consequently, time consuming

structural reforms shook 25-year-

stagnated GDP and 15 years of

liberal economic restructuring

stabilized labour market and created

the longing for formal economic

activities despite the policy

shortcomings in certain sectors. The

country can strive to better

adjustment policies and utilize its

accumulated financial resources to

resolve industrial challenges and

reach infrastructural advancements.

Vietnam – Successful Informality

During 1990s Vietnam as a transition

country has faced various challenges

with structural adjustment programs.

It has opened markets and converted

to liberal economic policies. Though

the period marked with unique trends

in entrepreneurial risk management to

establish connection between various

actors of the market. The chapter will

review the trends in formal/informal

institutions and the scope of informal



48

institutions played to strengthen and

smoothly convert to formalization. The

study by Steer and Sen (2008)

reveals specific trends in Vietnam

between 1990s and 2000s, the former

period was marked in high level of

informal transactions, while the latter

period transformed to the formalized

business relations between

customers and suppliers, suppliers

and manufacturers. The survey took

305 sample firms to measure the role

of informal institutions working at

place when the legal recognition was

weak during the first phase of

transition to the market economy.

Private enterprises recognition took

place in 2000 after the enactment of

the Enterprise Law. It was followed by

the considerable number of company

registrations. Unlikely 2000s,

enterprises operating in 1990s

suffered from scarce information

about markets which was earned by

the informal institutions and

connections in order to manage

interaction with trading partners and

learning “rules of the games.” As we

can see from the chart below,

Vietnam was lagging behind its

regional competitors in terms of

contract enforceability in 2004,

although progress in formalization

and in legal institutions was made

early in 1990s.

Rule of Law Index 2004

Source: Kaufman et al, 2005.

Transaction risk measurement is

discussed in two economic

perspectives: asset specificity and

credit risk. The first implies safe

redeployment ability of the assets

among different users and the second

implies credit risk extension, whether

customer pays in cash at site or

delays payment after delivery of the

certain product. In Vietnamese

business reality of those measuring

variables were closely related to the

informal institutions to verify scope of

the investment made by the foreign

producers or suppliers in the country.

The survey brought significant

comparisons between earlier

research on informal institutions by

McMillan and Woodruff in 1995 (MW).

Below the chart shows dynamic of

monitoring customers in absence of

formal facilities in 1990s and in 2004

(conducted by Steers et al). As we

can see numbers show little

difference confirming the assumption

that informal way of communication

was still prevalent in 2004 after the

market liberalization and progress in

communication mechanisms:

Source: VBS3 2004, MW4 1995



49

The same applies to the investigation

process of customers before entering

in business transactions. As we can

see below friends and personal

relationships still hold first place in the

chart although resources of market

research considerably improved.

Source: VBS 2004, Steer et al.

Another finding of VBS 2004 survey

was that formal contracts play a

limited role in Vietnam, though 70% of

transactions were established on

contracts. In MW survey this number

was approximately 60%, but less than

10% believed it could be enforceable

by the court. What has changed since

2004 is that laws and courts became

trustworthy though they played a

minor role to resolve disputes

translated in the fact that formal legal

system is not considered as a mean

to protect commercial contracts.

Vietnamese enterprises use contracts

mainly for relational and social

purposes, fostering cooperation. They

are primary records of agreements,

source of building trust and a way

forward to the market economy. The

case of Vietnam apparently exposes

that assumptions on informal

institutions are working, namely:

1. Informal institutions such as

social and business contacts can

help solve the problem, where

formal institutions do not exist or

function loosely;

2. Informal institutions are resistant

to change and often stabilize

economy if there is dynamism in

the formal economy; They serve

as a complement to guarantee

economic transactions when the

formal laws are out of date or

unviable to conform (North,

1990). In this regard the next

case of Georgia will shed the

light, how the structural

adjustment programs i.e. «shock

therapies” weakened those

institutions and triggered the

growth of informal economy after

the collapse of the Soviet Union.

Georgia

Everyone agrees on the importance

of human capital in the development

of capitalist economy, which mainly

stands on two milestones: individual

risk and the responsibility of taking

risks. In this regard, Soviet reality was

totally the other way around, where

the human aspect of decision making

was ignored and the state bore all the

responsibilities for the ongoing

economic processes. The collapse of

the Soviet Union originated the crisis

of the mindset in people unaware of

new economic structure and unused

to the demands from the market

economy. Georgia was one of the

countries to be the pioneer aparted



50

from the Soviet Union. After gaining

independence the government of

Georgia tried to enforce structural

adjustment policies to catch up with

the European counterparts. The

ensuing processes of democratization

and trade liberalization did not pass

without significant loss and mistakes

from both the government and IMF

side supporting Georgia with the

transition from command to the

market economy.

Liberal Reforms in Georgia

Liberal economic reforms took off in

2003, when the corrupted government

and officials were ousted by the Rose

Revolution due to the continuing

budget deficits and hyperinflation

caused by the former government

manipulations presided by

Shevardnadze. Though the strong will

to reform the state emerged in 1990s

in close relationship with IMF and

WB. By that time Georgia suffered

civil war and ethnic adversities with

Abkhazeti and Samachablo, currently

labeled as a dead conflict regions of

South Caucusus. On the other hand,

the inheritance of the Soviet Union

was directly given to the successor

country of Russia, preserving

inherited institutions and statehood.

Other countries, emerging from the

Union, had to construct their own

social and state institutions almost

from a Tabula Rasa (Papava, 2013).

The preceding economic

development could be divided into the

following stages:

1. The stage of naive

comprehension,1989 – starting

new economic concepts of

development after independence;

2. The stage of reform stagnation,

1990 – enacting laws for

economic reforms, though not

effective;

3. The stage of populist economic

reform, 1991-1992 – government

transferred land to people without

compensation as a form of

support to the population, though

there was no legal basis for

private ownership of land, no

property rights enforcement

bodies and no legal framework

(Papava, 2013).

The most favorable “Shock Therapy”

for transition economies to convert to

the market economy was suggested

by the former Polish finance minister

Leszek Balcerowicz. According to the

example of Poland, the following

agenda had to work:

1. Price increase, temporary inflation

to maintain market equilibrium;




51

2. Restrictions on incomes of the

population;

3. Restrictions on money supply and

increase of nominal interest rates;

4. Increase of interest rates on

deposits, stimulation to save;

5. Cuts in public spending and

subsidizing unprofitable

enterprises;

6. Covering budgetary deficits via

issued bonds by the government;

7. Tax system regulations,

uniforming the taxes;

8. Establishing common customs

duties restricting import and

stimulating export;

9. Social assistance for population

though in government abilities;

10. Fighting against monopolies and

quitting administrative intervention

in private sector activities (CASE,

2003).

There were several distorted legacies

both in the government and society

after the collapse of the Soviet Union.

Corrupted government stemming from

the old so called Nomenklatura,

plunged into the bribes in every

sphere of economic activities.

Criminal bands, so called Thiefs in

Law, using racketeer bribed the

government and took bribes from

ordinary people instead of safety

guarantees both in business and

social life. No social and state

institutions existed to guide people in

the functioning principles of market

economy; no national currency and

no knowledge to manage national

finances; no macroeconomic planning

and tax administration, which finally

led population to the enormous

shadow (later informal) economy

growth in 1990s. Thus, there were

definite tasks to be accomplished by

the new government of the newly

established small country:

1. Eliminating corruption in public

authorities;

2. Dealing with the criminal groups

and revealing corrupted officials

backing up those criminals;

3. Establishing clear tax

administering and collecting

bodies;

4. Establishing monopoly and law

enforcement bodies;

5. Modernizing accounting system

and standards;

6. Modernizing enterprise

management according the

market economy demands and

modern legal statuses;



52

7. Creating culture for taxpayers to

administer tax liabilities and pay

those taxes respectively.

The growing shadow economy

culminated in 1999-2007 reaching

68.8% of the official GDP (Torosyan

et al, 2012). Additionally, there

emerged two-tier labour market: paid

employees working for the state

institutions in the urban area and self-

employed mostly informal, working in

agriculture and petty trade in rural

areas. Even paid employees, working

for the formal institutions, used to

engage themselves in informal jobs

as a second source of revenue with

verbal agreement and short term

work. The reason for informal job

seeking was the miserable wages in

the public sector. In 1999 about 80%

of public sector was formal, but

almost 70% of private sector was

informal:

Source: Georgia Labour Force

Survey, 1998, 1999.

Empirical studies show that poor tax

administration and law enforcement

along with the complex tax system

increase informal economy for which

the year of 2005 appeared crucial for

Georgia. Ideal taxation system is

based on the following principles:

simplicity, plainness, rate,

universality, comprehensiveness,

evenhandedness which became the

incentive to structure new taxation

system to manage unscaled informal

sector and generate budget revenues

(Papava, 2013). One has to keep in

mind the fact, that experience of

doing businesses was absent by that

time, not to mention the absence of

tax payment traditions. Moreover, the

sense of responsibility to pay taxes

was technically zero. Most of the time,

so called Homo Sovieticus preferred

to pay bribes to the government

officials, than to pay

incomprehensible taxes and indulge

themselves in further

misunderstandings with the corrupted

government. The number of taxes

and the rates was reduced from

twenty to seven and gradually refined

in the following way below between

2003-2009:

Number of Taxes in Georgia:

Source:

http://arrow.hunter.cuny.edu/research/

papers/HunterEconWP439.pdf

Innefective taxes were eliminated

resulting a 450% increase in tax

revenues by 2008. In 2005 the

country switched to a flat income tax

at a rate of 12%. The new tax code

applied the same rate to all business

types. The government also

strengthened tax collection

procedures, re-organizing tax

administration, including the



53

inspectorates at central and regional

levels. Corruption among public

officials was addressed via increased

salary coupled with strict penalties

including firing those found to be

engaged in corruption. In addition,

increasing public awareness on the

taxpayers’ rights and obligations also

helped to eliminate bribery and

ignorance from the law enforcement

bodies (World

Bank, 2012). Another positive change

was introduced by the “single window”

public registry system, which

considerably decreased the process

of registering business. Multiple

authority involvement was replaced

by a single state institution (Public

Service Halls) in every city and every

region of the country enabling

entrepreneurs register business

spending maximum three days. This

public institution also facilitated the

process of property legitimation and

thus creating one space to encrypt

the land details and all available

credentials of the land owners (Public

Service Hall).

Positive change was introduced by

the new labor code which

considerably empowered employers

and limited the rights of employees. It

was intended to support businesses

to develop and employ the labor force

as much as possible, though it bore

certain risks discussed in the next

chapter.

Since 2011 New Tax code united

customs and tax code, which meant

the change in attitude towards the

taxpayers, diversifying the taxes in

terms of size of the business entities.

The government established Revenue

Service after the unification of tax and

customs administrations, offering the

following services to the taxpayers:

private tax agent, preliminary

decision, tax payment agreement,

small and micro business tax regime,

tax ombudsman, production loss

identification, neighborhood tax

officer, Tax Free, Business Map,

special taxation regime for fixed rate

taxpayers. One of the prominent

achievement of the reforms was the

Principle of Mediation. Here the

taxpayer is enabled to go through the

first steps of mediation in the

Department of Audit. The special

commission hears the case from both

sides: a taxpayer and a tax auditor.

The process is transparent for the

taxpayer, where he can bring all

possible arguments to convince the

commission and finalize the case to

his benefit. Electronic administration

introduced with the Business Map

was one of the revolutionary initiatives

enabling tax inspectors to control and

administer tax payment electronically.

System is fully automated, excluding

human factor in risk criteria of

subjectivity, as the selection of




54

potential companies for inspection is

anonymous. It allocates taxpayers

according the geographical areas and

assigns the tasks to the respective tax

inspectors in the region. In the end, if

there is any violation to the

regulations, the entrepreneur is given

deadline by which he has to correct

the gaps (Gogiashvili, 2013). Despite

above mentioned improvements in

business environment the reality does

not seem as attractive as the experts

expected due to the shortcomings of

the new tax code and the overall

social euphoria caused by the

changes at work.

Post Formalization Realities

The private sector development is

considered to be the main source to

reduce informal sector in developing

countries. In global economy it

creates nine out of ten working place

and thus makes investment climate

attractive to push new start-ups

appear on the market. Though

Georgia still lags behind in SME

development and its share in the

country’s economic performance. For

instance, the share of SMEs in GDP

consists less than 20%, which is

much higher in neighbouring states.

In Armenia its share is 42% in the

GDP, in Central Asia and Europe this

figure shows average 60% share

(BPI, 2013). After the liberal reforms,

the effect of formalization does not go

over expectations, rather lags far

behind the target. Here we will

compare statistical surveys from 2008

and 2012 which somehow gives a

clear picture, that SME employment

dynamic is not as high as the number

of businesses newly registered. In the

chart below, one has to observe the

figure of registered limited liability

companies and Individual

enterprises/entrepreneurs, who

mostly represent informal businesses

converted to formal entities. As we

can see, the number of LTDs doubles

in 2012, figuring 118.531 business

units comparing to 2008, figuring

62.110 business units. The number of

Individual Entrepreneurs almost

triples, though the percentage of its

share in employment figures does not

reach even the 50% in sum when we

put together the figures of Small and

Medium Enterprise

Dynamics of Formalization, 2008-

2012

Source: Geostat, 2012

The data cannot be fully trusted as it

is provided by the department of

statistics, a governmental institution

which normally tend to be under the

influence of political sentiments.

According the data of Georgian Public

Registry (2010) the number of

registered business units was 80.000,




55

but the number of liquidated ones was

approximately 26.000 units, almost

40% of the registered businesses

ceased their existence (Kharadze,

2011). The question here is whether

the rest of the units actively continued

their activities and grew to reach the

next level of their development.

Unfortunately, national statistics does

not give us the chance to evaluate

current condition of the MSME

development, but one can presume

the presence of high level of inactive

companies, which are unable to

liquidate their businesses due to the

complicated procedures with

authorities to approve the liquidation.

MSMEs often do not have proper

resources to finance all the

procedures linked to the liquidation,

sometimes they are careful to reveal

their violation to the tax code due to

the ignorance and insufficient

knowledge of it including procedures

to deal with tax inspectors. Some of

them do not even have proper

accounting system to justify their

commercial activities as long as

accounting services are expensive

and needs additional funds to hire

professional accountant.

The recent surveys of 2014 from

World Bank shows considerable

advancement of Georgia in terms of

doing business both regionally and

globally. It is allocated in the top ten

of the global list of countries in

regards to simplicity to start and do a

business, even overtaking Norway

and the UK. In the regional scale,

Georgia took the first place in Central

Asia though nothing is mentioned

about the life cycle of those

businesses that presumably do not

last longer than five years. Moreover,

the WB survey of 2012 reflected the

allegations that only 2000 newly

registered business will survive out of

42 000. Thus we face high level of

insolvency and inactivity from the

start-ups (WB, 2014)

Status of Georgia in the report of WB,

Doing Business, 2014

Source: WB, Doing Business 2014,

Europe and Central Asia

Source: WB, Doing Business 2014,

Global Ranking

The fact that import exceeds export

almost by 78%, speaks about the

regression of MSMEs in its share of

overall production and industry of the

annual turnover of the country, it is

partly explained by the fact that they

do not know how to position their

product in international markets, they

do not have the tools and necessary

knowledge to negotiate. However, we

have taken into account minimum




56

standards which EU and other

developed countries impose on

foreign suppliers to enter their local

markets.

Import and Export Dynamic in

Georgia, 2014

Source: Revenue Service, 2014

Another research findings show that

most challenging point in business

environment of Georgia is the

ambiguous tax code, particularly its

administrative part. It is still hardly

comprehensible and understandable

by both SMEs and tax inspectors.

Thus disputes are often taking place

between entrepreneurs and tax

inspection authorities. Most of them

consider dispute resolution

mechanism extremely awkward

process of doing business and

appraise it negatively as long as the

majority of disputes are resolved to

the benefit of the tax authorities. On

the other hand, entrepreneurs find

themselves vulnerable to the frequent

changes in tax code. For instance, 45

to 61 changes went into effect

between 2003 and 2004. Small

enterprises, not able to hire qualified

tax advisors, cannot get aware of

those novelties and observe

alterations taking into effect in the

renewed tax code. Such obstacles

trigger businesses to leave the formal

sector and engage themselves in the

informal activities.

The same study revealed the need in

proper education and training to

manage business in the market

economy. The majority of the

entrepreneurs (81.25%) is willing to

study business disciplines. Among

them 50% expressed their interest in

strategic business planning, 34.37%

wants to enhance skills in

negotiations and 31.25% is willing to

develop skills and knowledge in

establishing agreements and

expertise in production efficiency

(Gogiashvili, 2013).

Discussion topic here raises, whether

the inactivity of the registered

businesses lays in the lack of proper

education and skills which could

guide them in market economy

regulations and prepare to compete

their local and international peers.

Papava in his observations

incorporates the trend of

“Necroeconomy”, translated into the

passiveness of the entrepreneurs

whenever they have to stand in front

of the challenges operating on the

market. Here we have to deal with the

social and psychological distortions of

the entrepreneurial mind-sets

inherited from the command economy

of the USSR. “Routine” that was

prevalent in the command economy

reproduces “Necroeconomics”.

Command economy never recognized

any kind of competition both

domestically and internationally and it




57

never interacted with countries from

market economy. Thus farms and

companies were not stimulated to

produce good quality products and

services, ignoring the most important

stimulus of economic development.

Lipowski called it “misdeveloped”

which was proved after the collapse

of the USSR. The product and

services could not compete Western

production, suffering no market space

and hopeless to ever exist. The

“Routine” forces companies to use the

old behavior patterns which was

mostly depended on governmental

leadership and did not take

responsibility of their own to create

economic affluence. The government

on the other hand was expected to

issue “tax amnesty” to write down the

debts accumulated by the companies.

Papava here brings the new

phenomenon of Homo

Transformaticus, transition from

Homo Sovieticus into the western

type of Homo Economicus. This kind

of human is liberated from the state

control, but still dependent on it

because of his behavioural patterns

shaped during the long standing

Soviet governance. However, planned

and centralized economy could not

totally repress individual market

economy functions. That was the

incentive for natural entrepreneurs

turn to the “shadow economy” and

manage their commercial activities

covertly, evading the state control

(Papava, 2002).

Entrepreneurs often seized their

activities after expropriation and

sequestration of their property from

the authorities despite the fact of

preceding privatization process. They

were vulnerable as long as could not

go to the local arbitrage and hire

qualified lawyers to defend their

property rights. Such occasions grew

insecurity among newly established

companies and raised the chance

from them to keep inactive which

mostly means quit business activities.

Accordingly, excessive fear of the

government and the absence of

relationship culture with the public

authorities in a simply market

economy sense, derives from the past

negative experiences. The challenge

nowadays still exists in the mind-sets

of the Georgian population to totally

alter their attitude to do the business

and start to think in an entrepreneurial

way, where one has to be resilient

and think strategically before entering

the market.

The same trend can be observed in

the projects initiated from the various

governments. They somehow follow

old patterns of behaviour to meet the

expectation of the people by

subsidizing businesses and creating

jobs, though those projects do not

engage market economy concepts.

The first failure to employ people took

place in 2006 as a National

Employment Program. It forced small

and medium size companies to give



58

three-month jobs to unemployed

people. The budget for the project

was estimated USD85 to be paid

monthly from the national budget.

Overall cost reached USD 12.7 million

though there was no demand from

those companies to employ the

additional workforce. The underlying

motif from government side was to

give people training on the workplace.

Side effects were not beneficial in

terms of overall economic value as

the businesses made a contract with

employees pretending to employ

them. In reality people got salary of

USD255 in three months for doing

nothing. In the worst case,

businessmen agreed to sign contracts

with employees to get the share from

their salaries in turn. In theory

USD12.7 million spent on salaries

should generate goods and services

of USD60 million. But it presumably

employed only 10 percent of the

expected number meaning that USD

12.7 million was spent from national

budget for the goods and serviced

worth only USD 6 million. Another

project started in 2007 which

employed students in Summer Jobs

paying USD 250 monthly salaries,

though the outcome was similar to its

predecessor (Papava, 2013). As a

consequence, targeted outcomes

were not achieved, but it contributed

to the macroeconomic destabilization.

Conclusion

Formalization of informal economies

took decades to reach relative

economic growth in comparison with

the industrial economies of the

developed world. Initiatives, taken by

the pioneering states, to help poor

economies grow and catch up with

them ended in some cases with

success and mostly with failures. In

the paper we discussed three cases.

The first case was presented by Brazil

as a success story of Structural

Adjustment Programs, leaving many

developing countries far behind and

getting closer to the developed world.

The case clearly revealed the

importance of right macroeconomic

planning and its gradual

implementation by the government on

the initial stage. One could also see

the efficient policy preferences to

trigger economic activities and

incentives to reduce informal sector.

Here, the government adjusted SAPs

to the specific needs of a country and

its specific development potential.

Preferences were chosen taking into

consideration the aggregate resource

potential and relevant sectors of

economic activities to be treated.

Finances were accumulated and

allocated intermittently generating

surplus lump of funds to subsidize

SMEs. Labour rights were taken as a

priority in policy making to stimulate

poverty reduction and create social

layer with the middle income workers,




59

eventually increasing purchase power

and stimulating vulnerable groups to

convert formal.

The second case was presented by

Vietnam as an example of informal

institutions complementing and not

undermining formalization process.

The case assumed the possibility

from informal economy to moderate

formal economy distortions and take a

burden of alternative solution

whenever formal economy failed to

provide population with the enough

economic opportunities. We could see

that Vietnamese indulged themselves

in informal interactions whenever

formal institutions were absent or

weak to perform check-and-balance

duties. Informal ties and institutions

here played a decisive role to keep

economy going and fill the gaps

before the newly introduced

adjustment programs shaped form.

They enabled informal sector create

the conditions under which the

working poor in the informal economy

were entitled to the benefits of

formality while, at the same time,

being enabled to comply with the

duties of formality. Lastly, the case of

Georgia revealed the problems of

formalization after considerable

efforts to finance SAPs and whole

restructuring of existing economic

system. Here the WB and IMF missed

the social realities which started to

shape after the disintegration of

Communist countries. They did not

pay attention to the underlying cause

of the economic underperformance

after the SAPs were applied. The

country still suffer high unemployment

and poverty rates, businesses soon

decide to leave the markets and

shrink the general life cycle of the

companies. Many experiments and

changes in taxation, in other words,

the attitude of trial-and-error,

demotivates entrepreneurs to stay in

business and be resilient on the

market. Thus, we get double

challenges from informal workers to

convert formal and then stay formal.

In most cases the projects

implemented by the government lack

macroeconomic planning. Most of

them do not end up with the

successful result as long as economic

concepts are almost ignored to

generate public wealth. We can see

the old behavioural patterns in the

measures by which government try to

solve problems, generally the results

of their misleading policies. On the

other hand, population is not ready

enough to take the risk and follow

written guidelines from IMF and WB,

whenever there is no baseline on the

local level to inspire them to convert

formal. Governments do not take

measures to finance strong

educational system for the young

generation and provide necessary

practical opportunities for them to



60

develop skills while operating on the

markets. Most of the entrepreneurs

wish to get additional trainings and

earn practical skills to run the

business, which is not totally absent

but lags far behind the western

countries to prepare qualified labour

force. Though the transition countries

crave for such kind of support from

the government.

In case of Brazil, the success came

first from the right macroeconomic

planning and then from relevant

projects to enhance education and

raise awareness of the new system

among the population, with the

nation-wide initiatives as Brazil

conducted successfully. In case of

Vietnam, informal sector

complemented formal sector when

the country was in the transition

process, introducing new laws and

regulations. It was not considered to

be illegal as we practice it in Georgia,

though no study was undertaken

about the informal institutions so

prevalent in the beginning of 2000s.

IMF and WB usually did not take into

consideration of local economic

trends and background of the trends

before SAP application. This

analogue repeated in Georgian case

suffering from various socioeconomic

shortcomings and not being ready to

accept new economic restructuring.

First, they had to realize that the

population used to live in totally

different economic realm from the

realms SAPs were intended for.

“Shock Therapy” was too intense to

roughly apply to the country still inert

to the geopolitical changes and

ending in vast share of shadow

economy. The program could be

implemented without much costs if

they prepared the population for the

changes by the means of higher

education for younger generation and

vocational training schools for existing

informal entrepreneurs in order to

raise awareness how the market

economy works. Reforms in

education could have been prior to

the changes in economic system,

though it took place simultaneously

with the structural reforms. It is

obvious that SMEs’ function will be

realized only after then, when the

results of entrepreneurial activities are

closely linked to the capacity for the

management of one’s own business.

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