Small business in Belarus - a dilemma between economics and politics

Small and medium business in Belarus is experiencing constant pressure from the authorities, so it is not waning attention of analysts, both domestically and abroad. For some, this is a purely economic interest, for others the development of small and medium-sized businesses is an indicator of general policy. Although the legislative and economic changes are being tracked regularly and assessed on a good professional level, the overall picture looks quite contradictory. On the one hand, decrees, regulations, programs and developments in this area create a sense of revitalizing and dynamic changes in the overall business landscape in the country. On the other hand, it is more difficult to apprehend what this recovery means and in what direction the development will continue.

What do small and medium businesses signify for the leadership and for the organizations of entrepreneurs that could be regarded as agents of influence in this area?

Small and medium business is better understood via the prism of the appropriate economic categories. That is often precisely how an analysis of unfolding developments in this area is being made. That is also how the leadership of the country looks at this issue. At least in the elaborated programmes and projects all actions with regard to SME are justified via understanding the basic functions of small businesses in the economy:

* Provide jobs, above all, to businessmen and entrepreneurs themselves, as well as to employees;

* Fill in economic niches that are unprofitable for large producers;

* Contribute to pioneer, venture development related to high risk.

Economic analysts believe that tax revenues from small and medium businesses have become an important component while doing budget calculations. The SME stimulate small and medium real estate market. This is one of the most profitable segments of the Belarusian market. A very large amount of unused space and production space is in the property of the State. Sale or rental of the premises and spaces is a significant portion of the state revenue. However in the absence of buyers this market is unable to function. The government had once promoted the expansion of small and medium businesses, which generated income from the sale and lease of the real estate objects. However the government has not yet developed a clear strategy with regard to SME even talking from a purely economic point of view. It can not determine the manner in which it would like to receive income from the sphere of small and medium business: either through taxes or through goods turnover.

The actions of the leadership are inconsistent and insecure: one step forward, two back. The mere shift in the economic plane of discourse and action is forced. To effectively promote the development of small and medium-sized businesses there is a need for favourable complex environment.

All over the world small business take risks, the average ‘age’ of such enterprises in the majority of the countries does not exceed two years. Only a small part of small businesses become medium by size. Successful existence of small businesses requires a favourable tax regime, allowing for capital accumulation and development. The Belarusian small business is virtually deprived of the opportunity to grow from small to medium-sized enterprises. The implemented tax policy prevents from the accumulation of capital in small business therefore the transition of small businesses into medium-sized businesses happens rarely.

The second important condition regarding the expansion of the scope of small business relates to creation of a business environment. In Belarus, the support to infrastructure and to the development of small and medium business is proceeding slowly. At the time, there were support programmes for small and medium-sized businesses financed by international institutions, such as IFC and EBRD. In the 90s these programs were widely implemented in several areas and cities of Belarus. Today there are virtually no such programmes under implementation. There are no effectively operating incubators for small and medium-sized businesses, tax incentives are ineffective and it is complicated to obtain them. Mostly large businesses founded before 2000 enjoy services for the business environment.

Education and training courses for entrepreneurs and employees of small and medium business are virtually non-existent. Public universities do not have the relevant training programmes. The non-state system of business education is obviously underdeveloped. Business education and business consulting almost entirely focus on Russia, since programs, teachers and coaches are Russian or, in rare cases, European. As a result, the knowledge gained through "Belarusian" business schools allows operating effectively in Russia or in the West, rather than in the home country.

The lack of favourable environment shows that the basic understanding of the role and place of small businesses by the State lies in the non-economic field. Lukashenko is known for an eloquent statement that the ‘collective farms’ is not an economic but political category. This can fully be attributed to entrepreneurship and business. The most articulated understanding of "business" in terms of non-economic categories can be found in agriculture.

The main characteristic of small business is the independence and autonomy of businessmen and employees of small businesses compared with large firms. There, the size of an enterprise matters, which is linked to type of administration and ownership.

Any farmer, no matter how much he depends on bank loans and the purchase prices set by the state or even state subsidies, is an independent figure that makes decisions independently in business as well as with regard to social and political issues. While the employees of collective farms completely dependent in their life and public activities on kolkhoz leadership. Non-conformism and independence in the behaviour puts a worker under the treat of dismissal. The employees of large agricultural enterprises would not be worried about the dismissal if the labour market at small and medium-sized enterprises existed. However there is no such market in rural areas. Therefore while searching for a new job they are limited to other collective farms, which are geographically removed. Consequently, the search for new job opportunities is coupled with the relocation, which in turn is complicated by the lack of real-estate market. As a result, the slowdown of the development of small and medium businesses becomes a condition for the implementation of social and political control.

There are fewer difficulties connected with relocation within a city, however the labour market in small and medium business is so insignificant that a person quitting a large state enterprise would face a serious problem of searching for a job. For the highly skilled professionals seeking for employment the problem is compounded by the fact that enterprises operating in the public sector have coordinated personnel policy. And experts can fall into so-called "black lists".

Why would the state complicate the situation on the labour market to this extent? From the economic point of view it is ineffective and meaningless. However the need to tie a hard worker tying to enterprises of a particular type is dictated by social and political policy. All public sector enterprises implement well-elaborated forms of control over the behavior of employees, including the non-working hours. It concerns administrative pressure, control over trade unions and other social pro-governmental organizations. Until recently, the state controlled administration of large enterprises with joint stock ownership, using "golden shares". Even in enterprises with domination of private property a Director form the ‘government’ is appointed.

The main problem of medium-sized businesses is the threat of nationalization and dependence on government officials and preferences. Companies of medium-size are getting involved into the  corruption process from the moment of their inception. The leadership of these enterprises is forced to share profits with the officials who control the accreditation, licensing, certification, customs preferences. Thus, the entire range of medium businesses is put in a full dependence on the state.

Another consequence of splicing of medium-sized businesses and the state officials is the suppression of competition and micro-monopolization. By issuing a license and permission to work or simply to build, officials dictate to entrepreneurs, where and who from they should buy, where to sell their products.

In fact, only small businesses remain outside the direct control. But here the Belarusian state has ingenuity and it regulates the size of the most of small businesses, and therefore the number of people employed in this area. An obvious example is enactment last year of a decree prohibiting individual entrepreneurs to hire employees. This caused a massive shift from "individual entrepreneurs" to "private unitary enterprises", though the conditions are different and the tax burden is tighter. The majority of the individual entrepreneurs were not able to survive in the transition to the new taxation system. But the main thing here is that, as individual entrepreneurs, they could create up to 10-15 jobs, however while becoming private unitary enterprises with a new tax burden, they were not able to afford it. The enforcement of the decree has led to the passing away of a large part of individual entrepreneurs. The employees, more than businessmen, were the most painfully affected by this.

Bankruptcy of individual entrepreneurs and the release of employees exacerbated the problem of unemployment. Creating new businesses is a subject to myriad complications, the procedure of registration might take up to several months. In the meantime the creation of small businesses immediately becomes “cluttered” with stringent conditions: on purchases of certain enterprises, on construction from only certain materials and from certain manufacturers, etc.

The attitude of the government to small businesses as a matter of ideological and political policy has led to a complete decline of several industries. In the 90s taxation policies have led to the destruction of rapidly developing small and medium businesses in the area of food production. As a result, the most businesses ransacked in the consumer market and Belarusians became dependant on Russian producers. The same happened with the market of European cars and car service. The Belarusian government, under the pressure from Russia, imposed a very unfavorable tax and customs regime on imports of European cars, allowing the whole market to shift to the neighbouring Lithuania. As a result, the Belarusian cargo carriers have lost the leading position in transport industry between Europe and Russia.

Forcing out small and medium businesses from the country contributes to the loss of financial and material resources and revenues by the country. These losses though considerable are relatively simple (well-known and used in economic policy) to recover.

Schumpeter, who introduced the figure of an entrepreneur in the economic theory, viewing it as a source of development, aiming at overcoming inertia of economic and social processes. Public policy prevents from emerging of people of such mentality.

Now the state is prepared to accept any "foreign" business, however it is not prepared to develop similar its own. However this substitution is not possible. It becomes a pertinent question as to how businessmen themselves understand small and medium business. It is worth mentioning that this aspect of the issue is perhaps the least explored and debated. Unfortunately, the Belarusian businessmen, being member of unions and associations do not understand the difference between their pragmatic, economic interests as businessmen (taxes, preferences, guarantees, etc.) and political interests that can and should be defended by their unions and associations. These interests may lie in different sectors of the society: the first (economy) and the third (public). The public sector in Belarus is very small, unions and business associations are weak and not influential, their position and voice is practically not taken into account while making decisions at the state and regional level. In the similar situation find themselves trade unions and the Union of Consumer Protection.

The government regards easing control in business control, development of self-initiative and activity as a threat and fighting against it with all available means. Until the remaining in Belarus representatives of small and medium-sized businesses are not concerned about the development of entrepreneurship as a source of risk, innovation, initiative, economic and social innovation, the economic opportunities of business will be severely limited. It is ironic that in order to develop normal scope of small and medium business, the mentality of businessmen should be shifted from economic and pragmatic thinking to political and conceptual consideration.

Vladimir Matskevich,

Tatiana Vodolazhskaya

[email protected]