3 large to smaller scale enterprises, with small enterprise shares rising steadily to over 50% of employment since 1992 in countries such as the Czech Republic, Hungary and Lithuania, whereas in the late-recovery CIS economies (Russia, Ukraine, Kazakhstan) recorded small enterprise shares of sector employment remain below 25%.

1.7 While the relative efficiency of small scale versus large scale production is not clear in all conditions<sup>9</sup> , it is however likely that in appropriate factor price/ endowment conditions small scale production can be economic in many product areas, and in some sub-sectors small firms have been the most innovative, and dynamic. But leaving aside the efficiency arguments the existence of large proportions of the labor force in this sector in market economies means that the sector's development has to be a central focus of economic policy for the transition economies and the current relative stagnation is a major problem.

# **II.** ALTERNATIVE **ENTERPRISE SUPPORT MECHANISMS AND THEIR DEVELOPMENTAL RATIONALE**

# **Evolution of Support Instruments**

2.1 SME assistance has been at three main levels - the macroeconomic, the 'meso-economic' (market institutional, regulatory), and the micro (firm) level. As stated at the start of this paper, our concem is with trying to identify cost-effective interventions at the level of inputs to firms.

2.2 Development policy in general until the 1970s tended to assume that Governments generally acted in the public interest, to enhance welfare through eliminating market failures and through redistribution of resources. Accordingly, the design of technical support for enterprise in general and SMEs in particular, in the Bank and outside, tended to be located centrally within the Government bureaucracy. Increasingly however, it was found that Government failure may be as or more important than market failure. For example, whether in the area of exports assistance through official trade promotion agencies, or in the area of small business support through centralized Government enterprise departments, the experience of support to business was unsatisfactory **10** In the case of enterprise export support, the use of public sector service suppliers is considered to have failed" in all but a few cases (e.g. in East Asia'<sup>2</sup> ). Even given an appropriate policy environment, experience suggests that State institutions are only likely to be effective as long as they enjoy the support and participation of the business community, are well funded, have staff experienced in relevant technical areas, and have a significant degree of autonomy from bureaucracy and political interference. These conditions have generally not been met. 13 The conclusions of one Bank study of the issues were that interventions should (a) support,

- 9 See Kristin Hallberg IFC Discussion Paper No 40, 1999; op cit.

- '° e.g. see "World Bank Lending for Small Enterprises 1989-93" L. Webster, R. Riopelle, and A. Chidzero World Bank Technical Paper no. 311(1996).

- l l Keesing and Singer for example reviewed 27 Bank enterprise development and export support projects approved between 1980 and 1990. With few exceptions (eg the Philippines Design Center) they found that staff themselves considered the results unsatisfactory both in terms of export achievement and institution building. See "Expanding manufactured exports through support services" Don B. Keesing and Andrew Singer, World Bank 1990.

- 12 E.g. in Hong Kong, Taiwan and Singapore. However in these cases State agencies were also helped by exceptionally strong export environments and a dynamnic private sector, and attributability of State support is difficult to assess.

- 1 Keesing and Singer strongly advocated a change in approach. See e.g. "Development assistance gone wrong. failures in services to promote and support manufactured Exports" World Bank, 1990.