THE IMPORTANCE OF SMALL AND MEDIUM ENTERPRISE:

LESSONS FROM ITALY?^*

Andrzej Brzeski

Professor Emeritus, Department of Economics, University of California at Davis

The years of post-communist reforms have yet to result in a sound private market economy. Neither the sundry privatisation schemes nor the foreign capital inflow have apparently been enough. Russia, where the failure has been egregious, is a case in point. “Progress in institutional reforms has been remarkable, but not sufficient to create a business friendly environment,” the OECD’s Silvana Malle concluded soberly. Conditions are better in other parts of Eastern and Central Europe, but, with few exceptions (e.g., Estonia) hardly satisfactory. The dead weight of communism can still be felt. Yukos, Sibneft and their lesser counterparts elsewhere are unlikely to provide a remedy because they are altogether too close to—and dependent on—governments suspicious of, if not outright hostile to, capitalism. As leftovers of the central planning system they themselves lack the grounding, and experience, in genuine private enterprise. Russia’s “oligarchs” and their like, successful as they may be in exploiting the opportunities to get rich quickly, are hardly representative of capitalist spirit at its best.

What is needed at this stage to breathe life into the historic transformation project is a massive build up of private enterprise from below. A proliferation and success of small and medium enterprises (SMEs)—almost completely annihilated by the communists and still underrepresented in the countries of the former Soviet bloc—is essential to success.

As Western European and American experience clearly demonstrates, the SMEs constitute a vital component of the economy. They account for a large share of output and employment and, often, are on the cutting edge of progress. Hewlett-Packard, Intel, Microsoft and, in the more remote past, also Ford and many other pioneering enterprises began small. Most famously perhaps, the two Steves—Jobs and Wozniak—started their revolutionary Apple computer venture in a . . . garage. The economic potential of the SME’s—which are the true fruit of freedom—is undeniable. So is their social and political significance. It is difficult to conceive of a vibrant civil society and a well-functioning democratic polity without a class of independent owners. They seem a necessary condition of a civilised order; there is no historic counter-example so far.

With several post-communist states having joined the E.U. there should be both opportunities and pressures to reduce the economic gap and institutional differences between the two parts of Europe. Growth of the SME’s is an important part of the convergence process. It will require a variety of legislative, fiscal and financial measures. Although the guiding principle is the Hippocratic primum non nocere, there is room for positive action facilitating progress. National, provincial and local governments must necessarily be involved, as well as banks, including the international ones, especially the EBRD.

Obviously, neither the availability of finance, nor government policies, however business friendly, guarantee a favourable outcome. Many variables, some economic and rather obvious, others more vague, usually subsumed under such categories as “culture,” “tradition,” “national characteristics,” are involved. Their interplay determines the outcome.

For a better understanding of the role of SMEs in economic development as well as of conditions propitiating their success, the relevant experience of the West must be studied. Italy (and possibly Spain) are instructive cases. In both of these countries—latecomers to modern industrialisation—the role of SMEs was of great importance. It was especially striking in Italy. Forni and Paba, in an illuminating study, conclude that in “the Italian provinces during the period 1971-1991 . . . local growth is strongly affected by the diffusion of specialised industrial districts made up of small and medium-sized firms.” Relevant discussion can also be found in other works, including those of Beratini, Becattini, Brusco, and Fenoaltea. Only a part of this literature is available in English.

The story of the Italian SME’s is best learned at the source. And so is, for that matter, the story of the more recent setback dealt by relentless competitors from less-developed countries, especially China, to what has been labelled Terza Italia. To this effect, a few of us have thought about organising in loco a conference on the Italian experience. In dealing with the subject both analytically and historically, we would hope to illuminate those aspects of the Italian situation likely to have bearing on Eastern and Central Europe. In some measure, the lessons might be helpful in advancing the post-communist transformation.