(This article was written in June 2009 and published on maldiveseconomicreview.blogspot.com)
“70 percent of all new jobs are created by small businesses.”
President George W. Bush, September 16, 2004
“Small businesses represent the individual economic efforts of our Nation’s citizens. They are the foundation of the Nation’s economic growth: virtually all of the new jobs, 53 percent of employment, 51 percent of private sector output, and a disproportionate share of innovations come from small firms. .”
President Bill Clinton, May 6, 1999
“A vigorous small business sector is essential to a productive and competitive economy. For all of the talk in Washington about government creating new jobs, most of the new jobs actually created are in small private enterprises.”
President Ronald Reagan, February 4, 1982
Economists and Politicians all over the world have now accepted that entrepreneurship is the single most important drive that creates wealth and growth across economies of different countries. A January 2005 UNCTAD report on “Entrepreneurship and Economic Development: The Empretec Showcase” quoting the analyses of the Global Entrepreneurship Monitor (http://www.gemconsortium.org/) reports that ‘the national level of entrepreneurship has a statistically significant association with subsequent levels of economic growth’ and that there are ‘no countries with higher levels of entrepreneurship and low levels of economic growth.’
One can always, of course, expect UN reports to be modest and cautionary in the use of language. However the figures and statistics being reported about the direct and positive relationship between entrepreneurship and economic development are too strong to be seriously challenged today.
While it is almost natural to think that major economic activity, especially in developed countries, occur through large corporations, the trend has been clearly otherwise. Starting from sometime in the mid 1970’s, ‘the empirical evidence clearly shows that firm size distribution in developed countries began to shift away from larger corporations and toward entrepreneurial activity.’ (GEM 2008 Executive Report). In this regard it is noted that since WW II small entrepreneurial firms have been responsible for half of all innovations and 95% of radical innovations have come from small entrepreneurships.
However, and most interestingly in 1960, 25% of the work force worked for big, Fortune 500 companies, yet today that figure has dropped to below 14%. And here, today refers to a world that predates the economic recession and slashing of more than 7 million workers in OECD countries alone, mainly from the registers of major companies while employ numbers have been more resilient in the small firms.
Statistics used by US Presidents and the US Congress show that between 60-80% of the creation of net new jobs in the US results from small business and a June 30th 2005, US Congress Report states that ‘…in 2000-2001, …. small businesses created all of the net new jobs in the US.’ The operative word here is of course the word ’net’. Additionally, small business in the US, are now widely accepted to create some 50% of non-farm GDP.
As stated before the figures above represent pre-recessionary figures. While there are, as of yet, no concrete data regarding the tenacity and doggedness about the ability of small firms to thrive in this economic recession, it is well known that the recession itself creates opportunities to small entrepreneurs. In this regard it is enough to note that some of today’s giants like Microsoft, HP, Polaroid and Revlon, among other, started during recessionary times and a survey among entrepreneurs suggested that they expect that on the average their businesses will grow by about a third and to employ more people in the 2009-2010 period.
Therefore, today there are no longer any further doubt about the importance and indeed about the critical role played by small business and entrepreneurs in the development and growth of economy.
Countries throughout the world, including both developed and developing alike, are hastening to make their economic environment, including the regulatory environment easier and more friendlier, for small businesses to start, for entrepreneurship to emerge and to foster their growth. Universities and Economists alike, are giving up their previous aversion to the more ‘plebeian’ business of entrepreneurism and embracing the concept whole-sale.
Today we are in the midst of a global economic recession. Whilst some us hope that ill winds of the global economic recession will pass us by, this would be just wishful thinking. The reality of the today’s economic context will visit us, even if we do not wish it do so.
Much money has been pumped into national economies as a vitamin injection to national economies. Yet, Paul Krugman, the winner of the 2008 Nobel Prize for Economic, believes that Obama would have to consider an additional stimulus package to help the US economy emerge from the dodldrums, and he re-iterated this belief even last week even while there are signs, faint but nevertheless hopeful signs of economic recovery. Yes, that is in addition to 757 billion economic package signed by Obama on the 17th of February. Meanwhile it is interesting (interesting?) to note that Bloomberg estimates that the full US commitment to the total bailout package today is more than 9.7 trillion US $. (That 12 zeros). At an estimated 13.8 trillion GDP figure the bailout figure is now in excess of 70% of the national GDP and is estimated to take the budget deficit close 2 trillion US $ for the 2009 budget and over 11 trillion US $ total.
The opening paragraph of the April 2009 MMA Economic report reads thus:
… real output is now projected to contract by 1.3 percent in 2009 as tourism is projected to decline significantly during the year owing to the global economic recession. As such, tourism is forecasted to decline by 11 percent in 2009 while the construction sector – which has been a key driver of growth over the last 5 years – is also projected to register a sharp decline (of 24 percent) as major tourism resort development projects and other capital projects of the government are being held up due to financing difficulties.
Maldives Monetary Authority, Monthly Economic Review, April 2009, Volume. III, No. 4
There is little, if any, we as Maldivian can do to reverse the economic plight of the world. Countries and institutions that can, in any marked manner, impact on the economic climate are doing their utmost. IMF is helping small countries survive and larger countries are empowering IMF to do so. Developed countries have injected huge amounts of cash into the economy and brought interest rates close to zero.
The main foundation of the Maldivian Economy is of course tourism; an industry susceptible to perception. The Perception of whether good times are just around the corner or if there are more bad news ahead. As long as there is some uncertainty about the economy and the medium term prospects, and more importantly whether self and immediate family would have a job tomorrow, it can be reasonably expected that the travelling public is going to be coy about their travel plans and holidays.
Meanwhile fisheries, the second most important sector of the economy, and the dominant income earner for the majority of the population who lives in the islands, has been experiencing low landings for three years and continuing. While there are various explanations and theories about why the skipjack schools are charting a course away from the Maldives, the fact remains that landings have been low from the heydays of 2003-2005 period. Meanwhile statistics report a 54% decline in fishery export earnings for the first quarter of 2009 against the first quarter of 2008, while 2008 was not a good year at all.
Seeing the effects of the global economic downturn and anticipating that world economic output will, for the first time since the Great Depression of the 1930’s, decline this year, world leaders have been unanimous in their calls for economic stimulus (both monetary and fiscal) to revive the world economy and to awaken it from its expected slumber.
Indeed in December 2008 IMF; that bastion of economic conservativeness and balanced spending, were among the first to call for a global economic stimulus package and for all economies to follow suit. In December of 2008, IMF Managing Director Dominique Strauss-Kahn said that he is “… specially concerned by the fact that our forecast, already very dark … will be even darker if not enough fiscal stimulus is implemented,” and called for fiscal stimulus worth of — higher government spending and temporary tax cuts — worth $120 trillion, or 2 percent of global annual economic output, to fill the gap caused by slumping private demand following the credit crunch.
IMF is, of course, no friend to budget deficits and can be extremely ‘rude’ to countries that run deficits during normal times. American politicians and economists too, are not overly fond of creating large budget deficits with 1 trillion of the current deficit being created just this year alone. However, desperate times call for desperate measures and there is a reason why this is called a ‘credit crunch.’ All over the world credit has dried up, and in the Maldives, where development credit has always, even in the best of times, been difficult, its almost impossible today.
Credit has almost dried up in the Maldives. Banks are being cautious and over-cautious. Some has firmly closed the loan and OD window in the face of economic hardships. The ‘credit crunch’ that is threatening the world economy has been translated into a ‘credit death’ here in the Maldives and this is paralyzing entrepreneurs and curtailing entrepreneurial activity almost to zero.
Yet, with declining tourism, and fishery and construction industry halted in its tracks, innovative ways to mobilize the economy and to re-start the economic engine has to be sought and implemented.
One of the best and cheapest routes to growth is to motivate and release the energy of small businesses and small businessmen. Loans and OD’s sought by entrepreneurs, specifically because they are small businesses, are small in magnitude.
The advantages accruing to the national economy, in the short, medium and long term, by empowering small businessmen and their inexhaustible drive and energy is evident. It is no longer a matter of conjecture and theory.
As quoted at the beginning, there are ‘no countries with higher levels of entrepreneurship and low levels of economic growth’ and the March 12th Edition of the Economist which included a special report of Entrepreneurship details the direct and positive statistical relationship between ease of business entry and regulatory environment and the economic development of the country.
Victor Hugo the French poet, playwright and novelist famously said that ‘you can resist an invading army; [but] you cannot resist an idea whose time has come’ and the Economist of 12th March adds that ‘…today Entrepreneurship is such an idea.’
As every cloud is supposed to have a silver lining, maybe this is the time, the opportunity to unleash the drive of the Maldivian entrepreneurs by empowering them with small loans and an easier regulatory framework to get him and of course, her to start businesses. To start employing and therefore to start contributing to the national economy.
This is a tested and tried method and the long term benefits unleashing the power of entrepreneurialism on the national economy, can then be a bonus to the act of getting the engine of growth started today.