Small and Medium Enterprise Development in Fragile Contexts: Analyzing the Experience of Afghanistan

 
PIIS086919080012643-4-1
DOI10.31857/S086919080012643-4
Publication type Article
Status Published
Authors
Occupation: lecturer at World Economy Department
Affiliation: Moscow State Institute of International Relations (University) under MOFA of Russia
Address: Moscow, Vernadskogo avenue, 76
Journal nameVostok. Afro-Aziatskie obshchestva: istoriia i sovremennost
EditionIssue 6
Pages65-77
Abstract

The article analyzes small and medium enterprise (SME) development in Afghanistan as one of the fragile contexts as defined by the OECD. State fragility is characterized by the combination of exposure to risk and insufficient coping capacity of the state, system or communities to manage, absorb or mitigate those risks and, as shown in the article, may be an impediment to entrepreneurship. However, private sector and SME development has been prioritized both by the Afghan government and international donors as an important driver of economic growth in the country. In our analysis we apply fragility framework to SME development in Afghanistan to show how state fragility affects Afghan SME and whether action taken by the government and donors helps resolve the problems faced by Afghan businesses. The article finds that as Afghanistan is simultaneously fragile across multiple dimensions appropriate policies should be in place to mitigate negative effects of state fragility. Despite that, Afghan government has only recently accelerated business environment reforms, with donor projects yielding only mixed results and failing to account for their sustainability. Our analysis of the problems faced by the Afghan SMEs indicates that action taken by the government and international donors has not been effective. Increasing violence and lack of capacity of governmental institutions to enforce and implement regulation in due form, as well as limited access to resources, remain a source of uncertainty and increased risk for businesses, creating incentives for them to operate informally or adopt risk-averse strategies that do not contribute to economic growth. We argue that there is a need for further reforms to produce better outcomes for Afghan SMEs.

KeywordsSME development, Afghanistan, economy of Afghanistan, state fragility, fragile states
Received19.11.2020
Publication date11.12.2020
Number of characters32468
Cite  
100 rub.
When subscribing to an article or issue, the user can download PDF, evaluate the publication or contact the author. Need to register.
Размещенный ниже текст является ознакомительной версией и может не соответствовать печатной
1 According to the Organization for Economic Cooperation and Development (OECD), small and medium enterprises (SMEs) constitute around 99% of businesses globally and account for 60% of total turnover [OECD, 2017(1), p. 36-56]. They are defined as «non-subsidiary, independent firms which employ fewer than a given number of employees» [OECD, 2005]. In Afghanistan the applied definition of SME denotes businesses that have from 5 to 99 employees, with investment in physical capital of less than AFN10 mln for manufacturing sector and less than AFN5 mln for services sector [OECD, 2019, p. 99]1. 1. We refer to the OECD publication here for technical reasons, as the relevant page at the Ministry of Industry and Commerce of Afghanistan website is unavailable.
2 SMEs are likely to be of greater importance in the developing economies and, particularly, in low-income and fragile states. Their contribution to GDP in low-income countries is on average lower than in high-income ones (29% of GDP and 45% of total employment), however, taking into account underreporting and informality2, their contribution to GDP and employment may be as high as 37% and 48%, respectively [Teima et al., 2010, p. 11]. Up to 24% of the world population lives in fragile states [OECD, 2018, p. 98] which are characterized by the lack of strong governmental institutions and vulnerability to internal and external shocks and crises [Ault and Spicer, 2019, p. 2]. They tend to perform poorly in economic terms and are viewed as a particularly unfriendly environment for investment and business. At the same time private sector and SME development has been viewed as a way forward for these countries and prioritized by the international community, as it could boost economic growth and employment generation and provide additional livelihoods for population, while also establishing a more stable environment [Naudé, 2011, p. 123, 328]. Despite the attention, the progress achieved by the fragile states in SME development has been uneven and demands a thorough research, particularly on a state-based level. 2. As suggested by existing research, low per capita income is a significant predictor of the size of the informal sector [Hassan and Schneider, 2016].
3 We therefore seek to analyze SME development in Afghanistan as one of the fragile contexts as defined by the OECD. We apply fragility framework to SME development in Afghanistan, noting that there is a distinct connection between fragility and entrepreneurial outcomes in the country. The author argues that the experience of SME development in Afghanistan has been rather discouraging, which stems from inadequate state capacity to promote their development and other problems related to state fragility.
4 The article primarily relies on a thorough study of existing scientific literature on SME development in fragile states and in Afghanistan, in particular. We also scrutinize available statistical data and data on SME support donor projects in Afghanistan to draw our conclusions, acknowledging that data availability has been a major constraint for this research.
5 SME development in Afghanistan has not been extensively studied by the researchers, but there are some publications that cover the topic. The literature is primarily concerned with women entrepreneurship [Beath et al., 2013; Ritchie, 2016], noting that gender discrimination in Afghanistan is widespread and women face severe restraints in their pursuit of starting and doing business. Researchers also studied the effects of instability on entrepreneurial outcomes, finding that it has been «institutionalized» and has limited impact on entrepreneurial activity [Ciarli et al., 2015], however, Afghan SMEs tend to remain informal and engage in low-productive low-risk activities that may be viewed as a means of subsistence [Hoffman and Lange, 2016]. Mashal [2014] studies SME development in Afghanistan from historical perspective and analyzes the problems Afghan SMEs face. This article aims to contribute to the existing literature by studying SME development measures in Afghanistan and their implications.
6 The article covers several topics and is divided into several sections. Firstly, we provide some insights into how fragility affects SME development. Subsequently, we proceed with our analysis of the SME support efforts in Afghanistan after 2001, providing some relevant background information on the economic development of the country. Then, we discuss challenges for SME development in Afghanistan emphasizing their links to state fragility.
7 How fragility affects SME development?
8 The concept of «state fragility» is a transition from previously applied rather categorical concept of «state failure» [Ault and Spicer, 2019, p. 5]. Following OECD, fragility is understood as a continuum of situations, when «the combination of exposure to risk and insufficient coping capacity of the state, system and/or communities to manage, absorb or mitigate those risks» may lead to negative outcomes including violence and conflict, humanitarian crises and other emergencies [OECD, 2016, p. 73]. The countries which are faced with these problems are referred to as «fragile states».
9 The OECD fragility framework distinguishes five dimensions of fragility (each represented by a number of corresponding indicators), which are presented in a table below (see Table 1).

Number of purchasers: 0, views: 1555

Readers community rating: votes 0

1. Acs Z.S., Autio E. and Szerb L. National Systems of Entrepreneurship: Measurement issues and policy implications. Research Policy. 2014. Vol. 43. No. 3. pp. 476-494.

2. Afghan Chamber of Commerce & Investment. Business Monitor 2018. 2019. URL: http://www.acci.org.af/media/Business%20Climate%20Monitor%204th%20Quarter%202018%20English.pdf (accessed 19.06.2020).

3. Anosike P. Entrepreneurship education as human capital: Implications for youth self-employment and conflict mitigation in Sub-Saharan Africa. Industry and Higher Education. 2018. Vol. 33. No. 1. pp. 42-54.

4. Aguilar, R. “Angola’s Incomplete Transition” in Wohlmuth K. et al. (Ed.s). African Development Perspectives Yearbook 2002/2003: African Entrepreneurship and Private Sector Development. 2004. Lit Verlag, Germany.

5. Asian Development Bank. “Projects and Tenders”. URL: https://www.adb.org/projects (accessed 19.06.2020).

6. Ault J.K. and Spicer A. The institutional context of poverty: State fragility as a predictor of cross-national variation in commercial microfinance lending. Strategic Management Journal. 2014. Vol. 35. No. 12. pp. 1818–1838.

7. Ault J.K. and Spicer A. State fragility as a multi-dimensional construct for international entrepreneurship research and practice. Asia Pacific Journal of Management. Vol. 37. No. 4. 2020. P. 981-1011.

8. Baliamoune-Lutz M. and McGillivray M. “State fragility: concept and measurement” in Naudé W. et al. (Ed.s). Fragile states: causes, costs, and responses. Oxford: Oxford University Press, 2011. pp. 33-67.

9. Ballentine K. and Nitzschke H. The Political Economy of Civil War and Conflict Transformation. 2005. URL: https://www.berghof-foundation.org/fileadmin/redaktion/Publications/Handbook/Dialogue_Chapters/dialogue3_ballentine_nitzschke.pdf (accessed 19.06.2020)

10. Baumol W.J. Entrepreneurship in Economic Theory. The American Economic Review. 1968. Vol. 58. No. 2. pp. 64-71.

11. Beath A., Christia F. and Enikolopov R. Empowering Women through Development Aid: Evidence from a Field Experiment in Afghanistan. American Political Science Review. 2013. Vol. 107. No. 3. pp. 540-557.

12. Bennett J. Informal Firms in Developing Countries: Entrepreneurial Stepping Stone or Consolation Prize? Small Business Economics. 2010. Vol. 34. No. 1. pp. 53-63.

13. Brück T., Naudé W. and Verwimp P. Small Business, Entrepreneurship and Violent Conflict in Developing Countries. Journal of Small Business & Entrepreneurship. 2011. Vol. 24. No. 2. pp. 161-178.

14. Brück T., Naudé W. and Verwimp P. Business under Fire: Entrepreneurship and Violent Conflict in Developing Countries. 2013. Journal of Conflict Resolution. Vol. 57. No. 1. pp. 3-19.

15. Ciarli T., Parto S. and Savona M. Conflict and entrepreneurial activity in Afghanistan: Findings from the national risk vulnerability assessment data. UNU WIDER Working Paper No. 2010/08, United Nations University World Institute for Development Economics Research, United Nations University, Helsinki, Finland, February 2010.

16. Ciarli T., Kofol C. and Menon C. Business as Unusual. An Explanation of the Increase of Private Economic Activity in High-Conflict Areas in Afghanistan. SERC Discussion Papers 0182, London School of Economics Spatial Economics Research Centre, London School of Economics, July 2015.

17. Collier P. and Hoeffler A. Greed and grievance in civil war. Oxford Economic Papers. 2004. Vol. 56. No. 4. pp. 563-595.

18. Chaudhuri S. “Afghanistan eases doing business”. 2018. URL: https://blogs.worldbank.org/endpovertyinsouthasia/afghanistan-eases-doing-business (accessed 19.06.2020)

19. Datzberger S. and Denison M. “Private Sector Development in Fragile States”. 2013. URL: https://pure.uva.nl/ws/files/44441223/18054902.pdf (accessed 19.06.2020).

20. Desai S., Acs Z.J., and Weitzel U. A model of destructive entrepreneurship: Insight for conflict and Postconflict recovery. 2013. Journal of Conflict Resolution. Vol. 57. No. 1. pp. 20–40.

21. Development Assistance Initiatives. “Afghanistan—Small and Medium Enterprise Development (ASMED)”. URL: https://www.dai.com/our-work/projects/afghanistan-small-and-medium-enterprise-development-asmed (accessed 19.06.2020)

22. Fund for Peace. Fragile State Index 2019. Washington, DC: The Fund for Peace, 2019.

23. Ghiasy R., Zhou J. and Hallgren H. Afghanistan’s Private Sector: Status and ways forward. Stockholm: SIPRI and NIR, 2015.

24. Goodhand J. From War Economy to Peace Economy? Reconstruction and State Building in Afghanistan. 2004. Journal of International Affairs, Vol. 58. No. 1. pp. 155-174.

25. Gorlorwulu J.D. Job creation in fragile states through SME financing: notes from post-war Liberia. Development in Practice. 2011. Vol. 21. No. 2. pp. 295-299.

26. Hassan M. and Schneider F. Size and Development of the Shadow Economies of 157 Countries Worldwide: Updated and New Measures from 1999 to 2013. IZA Discussion Paper No. 10281, The Institute for the Study of Labor, Bonn, Germany, October 2016.

27. Hiatt S.R. and Sine W.D. Clear and present danger: Planning and new venture survival amid political and civil violence. Strategic Management Journal. 2014. Vol. 35. No. 5, pp. 773–785.

28. Hoffman A. and Lange P. Growing or Coping? Evidence from small and medium sized enterprises in fragile settings. CRU Report, Netherlands Institute of International Relations “Cligendael”, The Hague, The Netherlands, August 2016.

29. House R.J., Hanges P.J., Javidan M., Dorfman P.W. and Gupta V. Culture, leadership, and organizations: the GLOBE study of 62 societies. Thousand Oaks, Califorina: Sage Publications, 2004.

30. IMF. “Government Finance Statistics”. URL: https://data.imf.org/?sk=89418059-d5c0-4330-8c41-dbc2d8f90f46 (accessed 19.06.2020).

31. Livingston S.I. and O’Hanlon M. “Afghanistan Index”. URL: https://www.brookings.edu/wp-content/uploads/2016/07/21csi_20171002_afghanistan_index.pdf (accessed 19.06.2020).

32. Mac Sweeney N. “Private Sector Development in Post-Conflict Countries: A Review of Current Literature and Practice”. 2008. URL: https://www.enterprise-development.org/wp-content/uploads/PostConflict_PSD_EN.pdf (accessed 19.06.2020).

33. Maksimov V., Wang S.L. and Luo Y. Reducing poverty in the least developed countries: The role of small and medium enterprises. Journal of World Business. 2017. Vol. 52. No. 2. pp. 244-257.

34. Mashal M. Small and Medium Enterprises Development and Regional Trade in Afghanistan. Working Paper No. 24, Institute for Public Policy and Administration, University of Central Asia, Bishkek, Kyrgyz Republic, 2014.

35. Miklian J. Contextualising and theorising economic development, local business and ethnic cleansing in Myanmar. Conflict, Security & Development. 2019. Vol. 19. No. 1. pp. 55-78. DOI: 10.1080/14678802.2019.1561624

36. Ministry of Industry and Commerce of Islamic Republic of Afghanistan “MSMEs definition in Afghanistan by World Bank Financial and Private Sector Development”. 2018. URL: http://moci.gov.af/en/page/6024 (accessed 19.06.2020).

37. Muhammad N., Ullah F. and Warren L. An institutional perspective on entrepreneurship in a conflict environment: Evidence from Pakistan. International Journal of Entrepreneurial Behavior and Research. 2019. Vol. 22. No. 5. pp. 698-717.

38. Muhammad N., Warren L. and Binte-Saleem S. Anything Can Happen, Anytime: The Impact of Conflict on Women’s Entrepreneurship in Pakistan. Journal of Developmental Entrepreneurship. 2017. Vol. 22. No. 4.

39. NATO. “NATO Afghan First Policy. Press release (2010) 048”. 2010. URL: https://www.nato.int/cps/en/natohq/official_texts_62851.htm?selectedLocale=en (accessed 19.06.2020).

40. Nasery J.A. The Economic Shock to Afghanistan Caused by Aid Reduction and Troops Withdrawal. IEE Working Papers 202, Institute of Development Research and Development Policy (IEE) Ruhr University Bochum, Bochum, Germany, 2014.

41. Naudé W. Entrepreneurship, Post-Conflict in Addison T. and Brück T. (Ed.s) Making Peace Work: The Challenges of Social and Economic Reconstruction. Basingstoke: Palgrave Macmillan, 2009. pp. 251-263.

42. Naudé W. Entrepreneurship and Economic Development. Basingstoke: Palgrave MacMillan, 2011.

43. OECD. “Small and Medium-sized Enterprises (SMEs). Glossary of Statistical Terms”. 2005. URL: https://stats.oecd.org/glossary/detail.asp?ID=3123 (accessed 19.06.2020).

44. OECD. States of Fragility 2016: Understanding Violence. OECD Publishing, Paris, 2016.

45. OECD. Entrepreneurship at a Glance 2017. Paris: OECD Publishing, 2017 (1).

46. OECD. Small, Medium, Strong. Trends in SME Performance and Business Conditions. Paris: OECD Publishing, 2017 (2).

47. OECD. States of Fragility 2018. Paris: OECD Publishing, 2018.

48. OECD. Boosting Private Sector Development and Entrepreneurship in Afghanistan. Paris: OECD Publishing, 2019.

49. OECD. “States of Fragility”. URL: http://www3.compareyourcountry.org/states-of-fragility/overview/0/ (accessed 19.06.2020).

50. Page J. and Söderbom M. Is Small Beautiful? Small Enterprise, Aid and Employment in Africa. UNU-WIDER Working Paper 2012/94, United Nations University World Institute for Development Economics Research, United Nations University, Helsinki, Finland, November 2012.

51. Rashid L. Entrepreneurship Education and Sustainable Development Goals: A literature Review and a Closer Look at Fragile States and Technology-Enabled Approaches. Sustainability. 2019. Vol. 11. No. 19.

52. Ritchie H.A. Unwrapping Institutional Change in Fragile Settings: Women Entrepreneurs Driving Institutional Pathways in Afghanistan. World Development. 2016. Vol. 83. pp. 39-53.

53. Robson P., Haugh H. and Obeng B. Entrepreneurship and innovation in Ghana: enterprising Africa. Small Business Economics. 2009. Vol. 32 No. 3, pp. 331-350.

54. Schneider F. and Buehn A. Shadow economies and corruption all over the world: revised estimates for 120 countries. Economics - The Open-Access, Open-Assessment E-Journal. 2009. Vol. 2007-9 No. 1.

55. Shahrani N.M. Modern Afghanistan: The Impact of 40 Years of War. Bloomington: Indiana University Press, 2018.

56. Stephan U., Uhlaner L.M. and Stride C. Institutions and social entrepreneurship: The role of institutional voids, institutional support, and institutional configurations. Journal of International Business Studies. 2015. Vol. 46. No. 3, pp. 308–331.

57. Teima G., Berthaud A., Bruhn M., De Castro O., Joshi M., Mirmulstein M. and Onate, A. Scaling-up SME access to financial services in the developing world (English). Washington, DC: World Bank Group, 2010.

58. The Government of Islamic Republic of Afghanistan. Constitution of Islamic Republic Of Afghanistan. 2004. URL: https://www.gmic.gov.af/pdfs/Afghanistan-constitution.pdf (accessed 19.06.2020).

59. The Government of Islamic Republic of Afghanistan. Islamic Republic Of Afghanistan Afghanistan National Development Strategy 1387 – 1391 (2008 – 2013): A Strategy For Security, Governance, Economic Growth & Poverty Reduction. 2008. URL: https://www.wto.org/english/thewto_e/acc_e/afg_e/WTACCAFG18_CD_1.pdf (accessed 19.06.2020).

60. The Government of Islamic Republic of Afghanistan. Afghanistan National Peace And Development Framework (ANPDF) 2017 To 2021. 2017. URL: http://moec.gov.af/en/page/1183/andf (accessed 19.06.2020).

61. The Government of Islamic Republic of Afghanistan. National Priority Program (NPP): Private Sector Development. 2018. URL: http://policymof.gov.af/home/wp-content/uploads/2019/01/Private-Sector-Development-NPP.pdf (accessed 19.06.2020).

62. Tobias J.M., Mair J. and Barbosa-Leiker C. Toward a theory of transformative entrepreneuring: Poverty reduction and conflict resolution in Rwanda's entrepreneurial coffee sector. Journal of Business Venturing. 2013. Vol. 28. No. 6. pp. 728-742.

63. UNAMA “Quarterly Report on the Protection of Civilians in Armed Conflict: 1 January to 30 September 2019”. 2019. URL: https://unama.unmissions.org/sites/default/files/unama_protection_of_civilians_in_armed_conflict_-_3rd_quarter_update_2019.pdf (accessed 19.06.2020).

64. UNCTAD. Achieving the Sustainable Development Goals in the Least Developed Countries: A compendium for policy options, United Nations: Geneva, 2018.

65. United Nations Department of Economic and Social Affairs. “Inclusion in the LDC category”. URL: https://www.un.org/development/desa/dpad/least-developed-country-category/ldc-inclusion.html (accessed 19.06.2020).

66. USAID. “Meta-Analysis of Final Evaluations of USAID/Afghanistan Projects 2010-2015”. 2016 URL: https://pdf.usaid.gov/pdf_docs/PA00M8B2.pdf (accessed 19.06.2020).

67. USAID. “Assistance in Building Afghanistan by Developing Enterprises: Final Performance Report”. 2018(1). URL: https://pdf.usaid.gov/pdf_docs/PA00TCKW.pdf (accessed 19.06.2020).

68. USAID. “Evaluation: Final Performance Evaluation of Assistance in Building Afghanistan by Developing Enterprises”. 2018(2). URL: https://pdf.usaid.gov/pdf_docs/PA00TGD5.pdf (accessed 19.06.2020).

69. USAID. “Afghanistan Foreign Assistance”. URL: https://foreignassistance.gov/explore/country/Afghanistan (accessed 19.06.2020).

70. Webb J.W., Tihanyi L., Ireland D.R. and Sirmon D.G. You say illegal, I say legitimate: Entrepreneurship in the informal economy. Academy of Management Review. 2009. Vol. 34. No. 3. pp. 492–510.

71. Webb J.W., Ireland D.R. and Ketchen D.J. Toward a greater understanding of entrepreneurship and strategy in the informal economy. Strategic Entrepreneurship Journal. 2014. Vol. 8. No. 1. pp. 1–15.

72. World Bank. “Enterprise Surveys: Afghanistan Country Profile”. 2014. URL: http://documents.worldbank.org/curated/en/450721467996743274/pdf/922890WP0Box380IC00Afghanistan02014.pdf (accessed 19.06.2020).

73. World Bank. “The World Bank in Afghanistan: Country Update. Issue 055, October, 2019”. 2019. URL: http://documents.worldbank.org/curated/en/372681570116241368/pdf/The-World-Bank-Group-in-Afghanistan-Country-Update.pdf (accessed 19.06.2020)

74. World Bank. “FY20 List of Fragile and Conflict-affected Situations”. 2020(1). URL: http://pubdocs.worldbank.org/en/179011582771134576/FCS-FY20.pdf (accessed 19.06.2020).

75. World Bank. “The World Bank in Afghanistan: Overview”. 2020(2). URL: https://www.worldbank.org/en/country/afghanistan/overview (accessed 19.06.2020).

76. World Bank. “Doing Business Data”. URL: https://www.doingbusiness.org/en/data/exploretopics/entrepreneurship (accessed 19.06.2020)

77. World Bank. “Ease of Doing Business in Afghanistan”. URL: https://www.doingbusiness.org/en/data/exploreeconomies/afghanistan (accessed 19.06.2020).

78. World Bank. “Projects in Afghanistan”. URL: https://projects.worldbank.org/en/projects-operations/projects-summary?lang=en&searchTerm=&countrycode_exact=AF (accessed 19.06.2020).

79. World Bank. “World Bank Open Data”. URL: https://data.worldbank.org/ (accessed 19.06.2020).

Система Orphus

Loading...
Up