Importance of SMEs in Central Asian Economy

To tackle the crisis effects on Central Asian SMEs, I first begin with a brief overview of the region's economies. The section then proceeds with the discussion of SMEs' importance in the economy, drawing from various previous studies, and extracts some noteworthy SME characteristics based on firm surveys.

3.1 Brief Overview of Central Asia

Central Asia was among the more underdeveloped regions in the world when the states comprising it became independent in 1991⁶. Per capita incomes ranged from just over 50% of the Soviet Union average (Tajikistan) to about 90% (Kazakhstan). The region is rich with agricultural, mineral, and fuel resources, but because of its landlocked geography, many countries were heavily dependent on the Soviet system of trade routes and energy pipelines to reach world markets. Transport and trade infrastructure were outdated and, except for the Kyrgyz Republic, all countries in the region either have internal and regional conflicts or are near conflict zones. None had tasted modern statehood; rather their political institutions were legacies of the old communist system, with closed, autarkic, and heavily distorted industry and infrastructure serving mostly military purposes.

After the dissolution of the Soviet Union, fast reformers (Kazakhstan and the Kyrgyz Republic) embarked on privatization of many state-owned enterprises (SOE), while gradualists (Uzbekistan and Turkmenistan) moved much more slowly. Tajikistan was in a state of civil war until 1995. SMEs surfaced during the post-break up period amidst a challenging macroeconomic environment marked by hyperinflation, financial system collapse, major structural adjustments, and an institutional vacuum. Some of the privatized SOEs became medium-sized or large enterprises, while all small firms and some medium-sized enterprises were built up from scratch.

Buoyed by a more favorable external environment and the high prices of its main export products (e.g. natural resources), Central Asia recovered from a decade of transition-related problems. Now, the most advanced economy of the group, Kazakhstan, has a gross national income (GNI) per capita of more than US$6,000, which is within the upper middle income bracket globally. The score remains below the average of that income group, but is close to other relatively developed economies like Argentina, Brazil, Chile, South Africa, Mexico, Malaysia, and Poland. The Kyrgyz Republic, Tajikistan, and Uzbekistan remain in the low income group of countries globally, but have GNI per capita figures that are more than 20% higher than the group average. Turkmenistan is in the lower middle income group, like many Southeast Asian economies.⁷

Table 1 [ PDF 50.4KB | 1 page ] summarizes salient economic features of Central Asia. Kazakhstan and the Kyrgyz Republic fully embraced the market economy, evidenced in the large share of the private sector in its economies, starkly contrasting with Turkmenistan where the private sector remains insignificant⁸. Poverty in Kazakhstan is well within advanced economy levels, but Uzbekistan's poverty level is extremely high. Literacy rates, even after the deterioration of education levels due to civil strife, remain high throughout Central Asia, reaching almost the same level as in high-income economies. Mortality rates are worse than the upper middle income group average for Kazakhstan, but the mortality rates for the Kyrgyz Republic and Tajikistan are significantly lower (better) than the low income country group average. Turkmenistan's mortality rate is higher than the lower middle income country group average. As for infrastructure indicators, Kazakhstan is again above the average of the upper middle income group in the number of internet users per 100 people, as is the Kyrgyz Republic with respect to the low-income group. Uzbekistan, though, has an extremely poor internet access figure, with only 1.5 out of every 100 people using the internet. Mobile and fixed telephone subscribers are again high for the three low income Central Asian economies relative to their income group's average, but Kazakhstan is slightly below the upper middle income group average. Although Turkmenistan might have a higher GNI per capita than the three other Central Asian countries, its infrastructure and social indicators are significantly worse than the three low income Central Asian countries.⁹

3.2 SMEs in Central Asia: Definition and Contribution in the Economy

The definition of SMEs varies per country and even per sector but is, generally, based on the number of employees and capital thresholds. According to a United Nations Economic Commission for Europe (UNECE) study¹⁰, Kazakhstan, Kyrgyz Republic, and Turkmenistan base SME definitions on maximum levels of capital, assets or income, and number of employees, while Tajikistan and Uzbekistan base the definition only on the number of employees. The threshold for the number of employees likewise varies per sector. For example, in Uzbekistan, to be considered “small”, the average number of employees should not exceed 40 in industry, 20 in construction, agriculture and other production spheres, 10 in retail trade and other nonproduction spheres. Other Central Asian countries likewise follow different thresholds for the maximum number of employees for different sectors of the economy. Of the five countries, only the Kyrgyz Republic provides a definition for medium-sized enterprises, while the rest leave medium-sized enterprises undefined (see Table 2 [ PDF 45.6KB | 1 page ]).¹¹

Various studies on SMEs compiled by the World Bank/ International Finance Corporation (IFC) from different sources usually define an SME based on the number of employees. On this basis, the collected information shows that Uzbekistan has more than 200,000 micro- and small- and medium-sized enterprises (MSMEs), 86% of which are micro-sized enterprises (see Table 3 [ PDF 48.8KB | 1 page ]). The Kyrgyz Republic has more than 100,000 MSMEs largely comprised of both micro- and small-sized businesses. There are close to 30 MSMEs per 1,000 people in the Kyrgyz Republic while the ratio is 14 and 10 MSMEs per 1,000 people for Tajikistan and Uzbekistan, respectively.

In terms of employment, MSMEs' share of total employment range from 25% (for Tajikistan) to 60% (Turkmenistan). Uzbekistan and Tajikistan's MSME share of employment is below the average of 58% for low income countries¹², while the Kyrgyz Republic and Turkmenistan is slightly over the average. The average SME employment share for upper middle income economies, where Kazakhstan belongs, is 40%— much higher than the 25% employment share in Kazakhstan.

The importance of MSMEs in the economy is shown in the high contribution of MSME to total domestic production. In Uzbekistan, the MSME share of GDP is about one third, while it is more than 40% for Kazakhstan, Turkmenistan, and Kyrgyz Republic. The average GDP share of MSME for transition economies, based on data collected by UNECE¹³, is around 40%, while it is 37% for transition economies considered to be making slow progress on reform.

More than one third of SMEs in Central Asia are engaged in trade. In the Kyrgyz Republic, services and manufacturing likewise constitute a big portion of SME totals, while in Uzbekistan, SMEs in manufacturing constitute the majority. Tajikistan has most of their small enterprises engaged in agriculture, primarily related to cotton farming and related services (Table 4 [ PDF 50.6KB | 1 page ]).

3. 3 SME Characteristics: Ownership, Establishment, and Export Activities

I use the 2005 BEEP Survey by the European Bank for Reconstruction and Development (EBRD) and World Bank to get a better look at SME characteristics in the region.¹⁴ The 2005 sample is comprised of 1,002 respondent firms from Central Asia, of which 690 are micro- and small-sized enterprises, 209 medium-sized firms (micro, small, and medium hereafter), and 103 large firms, using the number of employees as the basis for classification.¹⁵ I find that among small firms, the number of those that are single proprietor (where a shareholder owns 100% of shares) ranges between 54% and 71%, while among large firms, the share of single-owned enterprises is much less.

More than half of the firms in Central Asia have been private firms from the beginning. In Kazakhstan, the number of private start-ups was up to 75% while only 20% were established as privatized SOEs. Across all Central Asian countries, the number of private start ups exceeded the number of privatized SOEs which possibly implies a growing entrepreneurial class of citizens in these former communist countries. Among small firms, the majority were established as private start-ups. In Kazakhstan, for example, more than 80% of small firms started as a private enterprise right at the beginning. In the Kyrgyz Republic, the share is 61% and in Uzbekistan 77%. In contrast, relatively more medium and large firms were established from the privatized state-owned enterprises, rather than as private start-ups (Figure 1 [ PDF 46.9KB | 1 page ]).

How important are exports in SME activities? I grouped the firms in the BEEP Survey into those that export directly as well as those that export indirectly¹⁶. The sample contains few firms, only 14% of the total, that directly or indirectly export (i.e., with positive export sales). But for these few firms, average direct and indirect exports constitute 45% and 28% of their total sale, respectively. Direct exports as a share of total revenue range from an average of 27% for Kazakhstan to 62% for Tajikistan, while indirect export revenue is between 14% (Uzbekistan) and 45% (Kazakhstan). Only 10% of SMEs in the sample directly export,¹⁷ yet in these firms, exports are a significant portion of their income. What is particularly striking is that, in Uzbekistan and Tajikistan, the share of export sales in small firms of 58% far exceeds the Central Asian sample average. In the Kyrgyz Republic, large firms' exports dominate their total sale, while in Kazakhstan and Tajikistan, large firms' exports were roughly a third of sales (Table 5 [ PDF 45.8KB | 1 page ]).

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