Private Enterprise and Financial Markets > Micro, Small and Medium Enterprise
From Intervention to Empowerment: A New Approach to Assisting SMEs in Latin America
By SDS/MSM (10/98, En, Es)
Executive Summary
The Inter-American Development Bank (IDB) group has a long and important tradition of support to the small and medium enterprise (SME) sector. Since 1990, for example, Multi sectoral Global Credits channeled $2.5 billion of IDB resources that were leveraged with local capital to reach almost $4.8 billion in total lending capacity. Over the same period, nonfinancial services loans were approved for a total amount of $1.3 billion. In a parallel effort, the Inter-American Investment Corporation (IIC) was created in 1989 to attend to the financial needs of SMEs in the region. As of 1997, the IIC had participated in 180 transactions totaling $450 million in commitments. The Multilateral Investment Fund has also participated in this area creating, for example, eight venture capital funds amounting to $35 million targeting general and industry-specific small enterprises.
The work presented in this paper is part of the Bank's most recent efforts to develop new approaches and instruments to strengthen its role as a major development partner of this important engine of growth in the Latin American and Caribbean region. It focuses on nonfinancial issues which have seldom been addressed systematically in the debate on the constraints hindering SMEs.
As we review loans presented to the Board, it is clear that many of them deal with themes that potentially affect SMEs. There is consequently the potential to incorporate small business issues in many projects that do not explicitly target this sector. Exploiting these opportunities would allow us to increase our interventions in this area considerably. To explore this idea, we have selected three themes that a priori hold promise as candidates to be dealt with in numerous projects in fields such as modernization and reform of the State, decentralization, and labor market reform. These themes are regulations, procurement and dispute resolution. Each of the themes are analyzed in terms of their impact on SME development. At the end of each section, we provide a checklist of issues which operational staff interested in including SME issues in their operation could use as a starting point for project design.
Section I analyzes the effect of regulations on SMEs within a transaction-cost framework considering such issues as taxes, labor, trade, and corruption. It shows that by reforming the regulatory environment business, SMEs can be empowered, thereby spurring economic growth in Latin America. Additionally, it advocates the development of private and independent SME associations in each country. Their participation in regulatory reform efforts is crucial to the development of a framework that takes SME issues into account. Such associations can best monitor bills, law enforcement, and judicial decisions, and advocate on behalf of SMEs in these processes.
The second section considers the possibility of using procurement as an aid to SME development. It determines that the IDB should not use procurement as an instrument of SME promotion but where possible, the Bank should make the processes transparent and remove barriers to SME participation. Although rigid rules for procurement are undesirable, standardized guidelines regarding issues that could encourage SME participation might be beneficial. These issues include prequalification, performance guarantees and information dissemination. Furthermore, there is the potential for coordination between program aimed at assisting SMEs through technical services and training and procurement arising from IDB loans. A pilot or experimental program in this area could reveal important lessons for future promotion of SMEs in the area of procurement.
The final section looks at the effect on SMEs of inadequate dispute resolution procedures. The IDB has already made substantial inroads in this area with many Judicial Reform projects either in execution, preparation, or in the pipeline. However, there are some specific issues that could be considered in future efforts. These include improving the framework and institutions surrounding summary judgement proceedings, introducing competition to notaries in those countries where there appears to be cartelization, and streamlining legal processes in general because the lengthy delays in decision making are an issue for businesses of all sizes.
This working paper is being published with the sole objective of contributing to the debate on a topic of importance to the region, and to elicit comments and suggestions from interested parties. This paper has not gone through the Department?s peer review process or undergone consideration by the SDS Management Team. As such, it does not reflect the official position of the Inter-American Development Bank.
Last updated: 06/13/07
