The 6th CEU Conference in Social sciences is entitled “Social Science Perspectives on Global Transformations and Social Change”. The conference will take place at Central European University in Budapest, during April 16-18, 2010. I’ll be presenting the paper “Entrepreneurship in times of economic and financial crises. Methods of adaptation and survival” which is based on research conducted over 117 small and medium-sized enterprises from the South-East region of Romania. The official schedule can be found on the Conference’s website.
Here are some of the conclusions from my paper:
The problems that small and medium-sized enterprises face during economic and financial crises have direct and strong implications on the local communities. These are affected by increased social problems generated by the measures that the companies are taking. The research has shown that the adaptation and survival methods of SMEs during crises is a function of layoffs, reduced activity and reduced to none investment.
Layoffs determine greater pressure on the social protection policies and diminish the local expenditure on goods and services. The diminished expenditures on goods and services determine a chain effect that spreads to other consumer-goods businesses, credit reimbursements, and various services. This situation requires governmental intervention to protect the increasing number of poor. The measures that were successful in Thailand’s response to the 1997 economic crisis and that seem to work in the Romanian environment include “an improvement to the strategic design and coordination of social policy, protection measures to the poor and to the elderly, strengthened social protection of workers, and improved monitoring of living standards.” These measures require intervention at the macroeconomic level, with results to be seen on a short to medium period of time. From this regard, managers that were interviewed seem to have been objective when stating that recovery is to be seen within the next two years.
Thailand instituted a comprehensive social protection program for workers, aimed to strengthen labor demand, reverse the unemployment trend, and halt the decline in wages. “A variety of market labor policies were implemented to promote re-employment of laid-off workers through training and job placement services. The government established a task force, with representation from workers, employers, and government, to design, target and rigorously evaluate the cost-effectiveness of training programs for unemployed workers.” Also, a reform of the social security policy needs to be revisited and adjusted to cope with the new social problems in a more effective manner.
Companies are diminishing their activity because they cannot sell as much as they used to, due to the lower purchasing power of the population. Those companies that made prior investment plans and relied on cash flow projections made before the crisis, found themselves in the situation to even close the business. Investment is slowed down or even reduced to zero because there are no liquidities. The jobs that were initially supposed to be created or kept with the initial development needs have halted, adding up to the pressure on the social protection system. Under these circumstances, the business environment needs to receive government support and to restructure. One major goal is to provide businesses with liquidities, to start to invest. But do accomplish this, the financial institutions need to be reformed first. Important lessons may be learnt from Thailand’s financial sector reform following the 1997 economic crisis. The objectives of such a reform would be to make troubled institutions leave the market in an orderly way, impose tighter supervision on the remaining players, and provide sufficient information to companies to analyze the risks of the available options. Macroeconomic steps have been taken at a European level in this regard, improving the rules of the activity of the credit rating agencies.
The Thai government first ensured that assets controlled by the affected financial institutions were not impaired and owners were held accountable for their mistakes. At the same time, the fiscal costs were kept so that to avoid the burden on the taxpayer, in an orderly and transparent manner. In the next step, the government reestablished the financial institutions on sound footing. This was done by identifying and addressing the problems like lack of power for the central bank, fraud, poor management of certain financial institutions, and action on non-compliance. Also, the Bank of Thailand established a principle that when it intervened, it would change the management of a financial institution or reduce its capital so that shareholders are the first to take losses. Trust for the financial sector was increased with two other important measures related to strengthening prudential regulations and strengthening supervision. The new regulations “obliged finance companies, like banks, to submit semi-annual credit plans to the Bank of Thailand that reflected portfolio diversification, risk profile, and growth planning and to issue loan-to-deposit, or promissory note, ratio guidelines.” Also, the government established an interagency task force to review and recommend changes in the legal and regulatory framework for supervision. These kinds of measures could be taken and adjusted to the Romanian macroeconomic environment in order to regain confidence in the financial sector and boost investment. The results though are to be seen on a longer period of time, but they form a solid foundation to tackle the chronic social problems.