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Competitiveness and Private Sector Development: Eastern Europe and South Caucasus 2011

Competitiveness Outlook

image of Competitiveness and Private Sector Development: Eastern Europe and South Caucasus 2011

With a total population of over 75 million people and a strategic location between wealthy trading partners, with Russia to the east and a vast market of EU citizens to the west, the Eastern Europe and South Caucasus (EESC) region is attractive as a destination for investment and trade. It is endowed with significant human and resources ranging from the black soil in Ukraine that produces some of the best wheat in the world, to energy reserves in Azerbaijan and unexplored water resources in several countries. However, in spite of recent growth – an average of almost 8% of GDP during 1998-2008 – the region’s productivity levels remain 77% below the world average. The OECD Eastern Europe and South Caucasus Competitiveness Outlook examines the key policies that would increase competitiveness in the countries of the region through developing human capital, improving access to finance for SMEs and creating more and better investment opportunities.

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Improving Access to Finance for Smaller Enterprises

Access to finance is critical for small and medium-sized enterprises (SME), as it allows small enterprises to leverage their limited internal funds and provides additional resources to expand their turnover and their investment. However, due to the high administrative costs associated with small-scale lending, the high risk attributed to small enterprises, asymmetric information and the lack of collateral provided by SMEs, banks and financial institutions have lower incentives to provide credit to SMEs. In the Eastern Europe and South Caucasus region in particular, SMEs face constraints in the form of high real interest rates and collateral requirements as well as reduced possibilities of external financing outside the banking sector. This chapter discusses the challenges facing SMEs in accessing finance and the measure to be taken by policy makers. In the long run, the sustainability of a viable SME sector will depend on such factors as the creation of an efficient regulatory framework, and a sound and competitive financial sector. However, in the near term, a number of options are available to policy makers: A system based on multiple licences should be introduced to allow microfinancing institutions to gradually become self-sustainable. The quality of credit demand should be improved through financial education and entrepreneurial skills training. In the short term, SMEs can also be financially supported through credit guarantee schemes.

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