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

Publication type Article
Status Published
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

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
Publication date11.12.2020
Number of characters32468
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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).

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