Barriers to Entrepreneurship Development in Tajikistan

Barriers to Entrepreneurship Development in TajikistanIntroductionThe cultivation of the entrepreneurship as an essential comp starnt of the parsimony of Tajikistan is taking place for the sensation while(prenominal) 19 age, in spite of its certain d profess go game during the civil fight in the expanse in 1991-1997. Within the condition period, the legal poser for the regulation of lineage activities was developed and amendments to the secernateicular conditions of the political policy link up to the entrepreneurship support were made.The stage of the entrepreneurship governing form required the improvement of its domainal structure and enhancement of the frugal efficiency. It is obvious that the prospects of its study atomic proceeds 18 directly cerebrate to the fill-in of particular barriers which business people authoritatively encounter. At the same eon the inception of efficient air should initiate the imperative influence on the entrepreneurship pro motion.The try come on will exclusively focus on the analysis of entrepreneurship establishment and outgrowth in Tajikistan with the reference to SME sphere of influence including the importance of entrepreneurship for the socio-economic instruction. In addition, the essay will describe main barriers to entrepreneurship development and practical ways to salve the difficulties related to its promotion.The rationale for the decision to write slightlywhat this specific affair is based on following particular reasons there be rattling few re take c ar intact works describing problems of entrepreneurship development in Tajikistan. Although, some scholars describe these issues in the former Soviet Union countries, in roughly of their works Tajikistan is only slightly mentioned among the other countries.The verifiable of this stipulation paper is to congeal the entrepreneurship slip in Tajikistan, the importance of its development as fountainhead as to find out the di fficulties for entrepreneurship development and to provide recommendation for the solution of the existing problems.In severalize to reach the stated objective, the following research questions were raised. showtime of whole it is central to understand, what atomic number 18 the main barriers to entrepreneurship development in Tajikistan? Secondly, what are the manageable ways to promote entrepreneurship development?The theoretical and empirical grounds for the extendn paper are the analytical works of Tajik and foreign scholars, statistical data, as sanitary as surveys and reports of various international intromissions. Due to the analysis of both(prenominal) foreign and Tajik experts assessments the reader will be enabled to find the dual judgement on the described issue.Chapter OneThe office staff and importance of entrepreneurship in Tajikistan1.1 Tajikistan at a glance puntground informationIn order to condone the entrepreneurship situation in Tajikistan, it is w orth to describe the background information about the coarse.Being a landlocked countrified, Tajikistan is located far from the main Eurasian elevatedways. Infrastructure is poorly developed ascribable to the situation that 93% of the any territory is mountains. In concomitant there are a flesh of scientific works describing the linkages amid the infrastructure and the country development, including development of the entrepreneurship. However, in the framework of limn essay the impact of poor infrastructure to the entrepreneurship development will non be discussed.During 1929 1991 Tajikistan was a member of the Soviet Union. later the breakdown of the Soviet Union in 1991, the country gained independence and started the musical passage to the commercialize prudence. After gaining its independence, the country was immediately faced with the economic problems ca utilise by the cut off of the centr totallyy-planned Soviet economy much(prenominal) as, disruption of gu aranteed markets, withdrawal of subsidies and asymmetry of exchange (Middleton, 2007). Due to these facts, economical as s salubrious up as political transformations of Tajikistan were difficult, primarily due to the holdover of various centrally planned omit and control approaches to the national development (Suhir, 2003). agree to Johnes, Tajikistan tolerate be considered as the poorest of the countries of the former Soviet Union. At the beginning of its independence the position of the country was undermined by a civil warfare which locomoteed from 1991 until 1997. During that time the economy suffered significantly. In addition, the war has seriously disrupted the entire infrastructure of the country and contributed to the expatriation of al virtually one million people, this number was equaled to a sixth of the fit population. After the end of the civil war, the political science undertook an aggressive design of reforms. As a consequence, by the beginning of 2000, the majority of elegant sized enterprises had been privatized, and most of the large enterprises were transformed into joint stock companies. Moreover, almost half of all cropland belonged to offstage people. In addition, existence a neighbor of Afghanistan, the country has go victim of the drug trade and has been directly affected by drug-related illegal infiltration (Johnes, 2002).Despite its growth, Tajik economy is non still fully recover from the effects of the collapse of the Soviet Union and the civil war. The gross municipal product in 2007 was still only 72% of the 1991 take in real footing, which is visually represented in the Chart 1.Chart 1 Real GDP continues to recover but has not reached the direct of 1991 solution Business Environment in Tajikistan as seen by minor and long suit Enterprises, IFC, 20091.2 Definition and types of entrepreneurship in TajikistanThe surgical process of society democratization and the carrying into action of market relations whic h are taking places in Tajikistan nowadays cause a manikin of positive effects. Entrepreneurship which influences all economical spheres can be considered as much(prenominal) effect. In developed countries the role and the importance of entrepreneurship are being evaluated sooner spirited. Our country, which has chosen the path of market economy, is considering the issues of entrepreneurship and strengthening of its role as a matter of par measuring importance (Rahmon, 2001, own translation).According to the raise program of Protection and support of entrepreneurship in the Republic of Tajikistan for the years 2002-2005, entrepreneurship is described as an practise which independently carried out by the persons registered in an order realized by the law this activity is directed to the earning of profit from use of property, exchange of goods, manufacture, performance of works and rendering of run. Entrepreneurship development is one of the priority directions of pecuniar y and economic policy in the conditions of market economy and it is directed on increase in drudgery and rendering of services as well as provision of newfound workplaces (Soliev, 2004). It is quite possible that the reason of such simplified definition of entrepreneurship was to motivate as much as possible people to become entrepreneurs.Tajik scholar Juraboev described entrepreneurship as a search for new spheres of rationalization and a profitable gracement of recourses, performance of new combinations in manufacture, movement to the new markets, and base of new products. It is aimed at making a profit above the come level (Juraboev, 2003, own translation).The aim of entrepreneurship development in Tajikistan started from the period of 1993 1994. At that time the quantity of enterprises which performed entrepreneurial activity and had a status of legal entity was equaled to 3304 enterprises for the year of 1993 and 3988 enterprises in 1994 (Statistical yearly , 2006). The entrepreneurship area was dominated by the cooperatives, farmers, private and somebody enterprises.However, the crisis in the economy ca employ by the severance of economic relations amidst the former Soviet Union countries which had common free market zone before, and the post-war elements with corresponding shine of nation welfare became the reasons of reduction in the quantity of private enterprises, particularly SMEs.Nevertheless, in later years the entrepreneurship in Tajikistan, which for the purposes of this essay is described by the SME heavens, started to recover from the consequences of Soviet Union breakup The obvious development of SME sector can be proved by the available data that shows that in October 2006 the come up of small and medium enterprises in Tajikistan was equaled to 12167, including 7578 active enterprises. The structure of the SME sector can be described as follows the full(prenominal)est amount of 38.4 % is commercial enterprises, the character o f trade and catering 17.2%, construction 13.3 %, industry 12.3%. The part of other economic activities is equals to 20% (Nazarov, 2006).In addition to the information provided above it is important to identify the SME sector in Tajikistan. In compliance with the Law of the Republic of Tajikistan On State Protection and Support of Entrepreneurship in the Republic of Tajikistan passed in 2005, the SME sector is composed of three typologies of businesses. The first group is singular entrepreneurs, who is involved in a business activity without forming a legal entity and operate it at their own risk. The second group is dehkah farms enterprises involved in the production and exchange of agricultural products. Dehkan farmers operate as individual entrepreneurs according to the State adaption Certificate. Third group includes small and medium sized companies (Law On State Protection and Support of Entrepreneurship, 2005, own translation).Moreover, the special SMEs criteria are also being significant. As consistent with the levy Code of Tajikistan, small enterprises are individual entrepreneurs and legal entities which perform business activity and their gross r compensateue (before assesses) is not exceed 150 000 USD. The intermediate quantity of employees should not exceed 50 for agricultural sector and 30 for other sectors. Respectively, medium enterprises are individual entrepreneurs and legal entities whose gross r make upue is more than than 150 000 USD but does not exceed 3.7 million USD. The average quantity of employees can vary from 50 to 200 for agricultural sector and from 30 to 100 for other sectors ( appraise Code, 2009, own translation). In fact the Micro-enterprises are not defined in the Tax Code.1.3 The importance of the entrepreneurship in the socio-economic development of the countryNowadays private enterprises are functioning almost in all fields and spheres of the economy of Tajikistan. With the strawman of prerequisite support, th e entrepreneurship plays an important role it contributes to the state budget, constructs new employment and causes the friendly and economic development of the regions. Furthermore, entrepreneurs play a significant role in the social and political life of society.According to the statistics, in the year of 2007 approximately 1.7% or 19 thousand people of all population workings in the private sector belonged to the SMEs. Over the last years, the quantity of employees of small and medium enterprises has increased by 14.5%, while the amount of enterprises has risen by 35%. However, the most interesting fact is that the total quantity of employees in the SME sector in 2007 was lower equality to the 1998 (Statistical Yearbook, 2008). Visually this information is presented in the Chart 2.Chart 2 Dynamics of the quantity of employees in SMEs (in thousands) writer Tajikistan 15 Years of Independence. Statistical yearbook, Dushanbe, 2006It can be assumed that the comparatively low qua ntity of employees in the SME sector is resulted from the r correctue enhancement perfume of the employers. In fact, the amount of social tax which the employers substantiate to pay equals to 25% out of the total payroll fund. Moreover, in contrast to the other countries, the existing receipts system in Tajikistan does not have the tax remissions in connecter with the increase of the quantity of workers (Nazarov, 2006).Furthermore, the role of entrepreneurship in the market economy is precise significant in harm of solving a number of socio-economic problems as well as in the poverty alleviation. Small and medium enterprises create the most favorable opportunities for the entrepreneurship especially at its initial stage. The presence of the material amount of SMEs on the market promotes the competition. And by promoting the competition, small and medium enterprises stimulate the increase of production efficiency as well as production growth which in its crimp may cause the real growth of the economy.As a short summary of the given share about the importance of entrepreneurship in ecumenical and SMEs in particular, it can be stated that it is both the aim and the tool for the development of market economy. The dual role of entrepreneurship is confirmed by the analysis of the functions of SMEs which were classified into two groups. These groups are objective functions and tool functions. The objective functions promote the development of small and medium entrepreneurship and being considered as one of the governmental tasks. These functions include the impact on the unemployment reduction, the acceleration of the technological progress by means of innovations and ensuring the social and political perceptual constancy in the society. According to the tool functions, small and medium entrepreneurship is being used in order to limit the tendencies of monopolized economy, to support formation of a middle class and to fill the particular market niches w hich are not enthralling for the large enterprises (Chapek, 2004. own translation).1.4 Characteristics of entrepreneurship development in TajikistanThe establishment of entrepreneurship in Tajikistan started at the time when the legislative foundations were absent. The Law On entrepreneurship activity was passed only in December 1991 and up to day it has completely changed. This law had a percentage of disadvantages which negatively affected the process of entrepreneurship establishment in the country. Other economic laws which could support and secure the entrepreneurial activity in Tajikistan were passed later. For instance, The law on property (1996), The law on privatization of state property (1997) as well as laws related to taxation, customs and currency circulation (Nazarov, 2006).The formation of the entrepreneurship took place at the period of destabilization of finances and significant level of unemployment, which were caused by the collapse of the centralized control sy stem. Another unique feature of entrepreneurship formation and development in Tajikistan is the limitation of strategic behavior. There are two reasons explaining it. First of all, during the first years of the market economy establishment, the formation of entrepreneurship was influenced by the certain advantages of short-term transactions in the sphere of circulation and in the financial market. This stage setting created an appropriate attitude, stereotypes of thinking and behaving. Secondly, there is a significant gap betwixt the profitability of long-term investments in manufacture and short-term financial transactions. The conditions for the implementation of long-term investments projects in the production sphere are such that invested pecuniary resource will be paid off only in 3-5 years however, in conditions of the transition economy this process may take even longer. Therefore such areas of entrepreneurship as trade and catering remain the most attractive for the entr epreneurs (Soliev, 2004).According to the statistics, at the beginning of 2008 there were 55,8 thousands of enterprises registered in Tajikistan in fact, 60% of them are private enterprises including both SMEs and large enterprises (Statistical Yearbook, 2008). There is a trend toward positive increase of total amount of enterprises in general as well as private enterprises in particular, as it is exhibit in the Chart 3.Chart 3 Dynamics of total amount of enterprises, including private enterprises (in thousands)Source Statistical Yearbook of the Republic of Tajikistan, Dushanbe, 2008The dynamic development of SME sector is caused by several specific advantages of the latter. According to the Kamarov, the most important fact is that SMEs are able to get their own market share, although they have much less property for implementation of important strategic researches compare to large enterprises. In addition, small and medium businesses are quite conciliative and mobile, which allo w them to react fast for the market demand as well as to adapt for the changing conditions. Small entrepreneurship can be characterized as an originative type of economic behavior which at the same time being described as special entrepreneurial spirit and fanciful action (Kamarov, 2009).Another important fact is that on every k of economically active population in Tajikistan there is in average only one SME in contrast, in Russia there are 3 enterprises on every 1000 of economically active population (Davgyalo, 2007).Chapter dickensBarriers to entrepreneurship development2.1 General overview of difficulties related to the entrepreneurship development in TajikistanAs it is demo by the world experience, the more opportunities for the widening of the activity by the entrepreneurs, the higher(prenominal) growth rate can be seen for the country. Under the given circumstances, the creation of the favorable conditions for the entrepreneurship development is a crucial factor.The entrep reneurship of Tajikistan faces particular barriers, among the others they are unbalance and imperfection of the legislative system related to entrepreneurship, high level of taxes, complexity of tax collection, insufficiency of the start-up capital and current capital, difficulties with the access to bank gives, corruptness, shortage of the qualified staff, difficulties with the rent of the production space as and others. In most cases there is no proper social and personal security for owners and employees of the private enterprises (Soliev, 2004).The current institutional mechanism of entrepreneurship promotion demonstrates that although the entrepreneur is secured by the laws and governmental instruments, the level of entrepreneurship development is not correspond to the high taxation level and denotationing rates. (Asrorov et al., 2004). Therefore the entrepreneurs are acting in the environment of legal and economical limitation.The barriers faced by entrepreneurs impede th e inflow of billions of dollars of potential profit for the country each year and threaten to derail the political and economic transition. These losings take place due to the ill-designed, complicated laws and regulations that unnecessarily raise the follow of doing business in the formal sector. As a result of high costs of doing business, entrepreneurs are using in their appendages limit funds in order to survive with presence of low income and consequently they are losing the economic potential. In addition, the costly business regulations encourage potential investors to invest in the more favorable business environments and therefore country faces the overlook of the needed investments (Suhir, 2003).The experience of entrepreneurship establishment and development in Tajikistan demonstrates that the majority of business owners are not aimed at the further growth. Their main goal is to assure the stable existence, to preserve their capital and market position (Urdashev, 200 5). The given situation can be explained by two reasons. First of all, there is no effective system for the stimulation of entrepreneurial activity. Secondly, entrepreneurs are experiencing the certain insistence from the tax, custom and law-enforcement authorities.2.2 Main barriers faced by entrepreneurship in TajikistanIn this section of the paper the main barriers to the entrepreneurship development will be described in details. These barriers are difficulties related to licensing, access to finance, imperfection of taxation system, poor infrastructure, degeneration and overleap of sufficient knowledge by entrepreneurs.LicensingIFC defined license as a special permit issued by a state body authorizing a business to carry out a certain activity under specific terms and conditions. When a business is subject to licensing requirements, it moldinessiness obtain the specific license before starting its activities. Thus licensing happens later business registration, but before a c ompany is allowed to start operations in the activity to be licensed (IFC, 2009).The barriers related to the licensing can be classified as the continuation of the Soviet system of permissions whereby one must obtain approval from the authorities in order to perform even the smallest tasks. The present permissive entrepreneurial climate which characterized by abundant regulation, continues to trim down losses on entrepreneurial activity in all sectors of the economy (Suhir, 2003).According to the world manage, the low-risk activities and those which do not involve any limited resources should not be subject to licensing. In fact, Tajikistan licenses some activities that are not licensed in many other countries for instance, real estate rating and tourism (IFC, 2009). The Chart 4 illustrates that in spite of the recent reforms, the number of activities licensed in Tajikistan is still relatively high compare to some other countries.Chart 4 Number of economic activities subject to l icensing in selected countriesSource Business Environment in Tajikistan as seen by Small and Medium Enterprises, IFC, 2009For instance, IFC reports that eight of the 65 licensed economic activities are related to the transport. However, the implementing regulations of the Licensing Laws divide these eight economic activities into 22 sub-activities, each of that in its turn requires a separate license.In addition, the period of validity of licenses as well as their cost still remains a problem. The law foresees that the borderline period of validity for the license is 3 years however, on practice the licenses are being issued for the period which in average is less than one year (IFC, 2009). The short periods of licenses validity impede the investments and long-term development as well as create the grounds for the extortion by the officials.Access to financeOne of the main conditions of the entrepreneurship development is the existence of proper financial infrastructure. In general the Tajik financial system was growing rapidly over the by years, although it still remains small. Recent data shows, that there are xii commercial banks (including one state-owned bank), seven credit societies, one non-bank financial institution and eighty eight microfinance institutions operating in Tajikistan (IFC, 2009).The banking systems in Central Asia in general and in Tajikistan in particular can be considered as insufficient since they impose impossible demands on entrepreneurs due to the unreasonable time-frames and terms of credit repayments, it is difficult to provide collateral and to find a surety for securing a loan (Suhir, 2003). Thus in order to get a loan from some commercial banks the entrepreneur should provide the collateral which set up to 3 times more compare to the actual amount of requested loan. The survey performed by the IFC demonstrates that more than half of rejected loan applications in 2007 were due to the insufficient loan collateral (IFC, 2009 ). In addition, the process to formalization and registration of the collateral is complicated and expensive at the present time.Besides that, the loans themselves became not very attractive because of the interest rate. Additional factor of distrust to the banking area is the wish of reliable mechanism for the protection of the borrowers interests. In this respect the majority of entrepreneurs actually not able to use services of commercial banks.The Chart 5 demonstrates what kind of problems entrepreneurs encounter in terms of access to the finance. And it is quite clear that the most important issue is high interest rates.Chart 5 Main obstacles as identified by the potential borrowers (in %)Source Business Environment in Tajikistan as seen by Small and Medium Enterprises, IFC, 2009In general, in compliance with the Doing business report, Tajikistan is be as 167th overall in terms of easiness to getting credit (World blaspheme, 2010). And firms consistently rate access to cred it as among the greatest barriers to their operation and growth.Taxation systemThe modern tendency for the entrepreneurship development can be described as the one with the lack of unity of economic aims between entrepreneurship and government. On the one hand, the governmental regulations related to the entrepreneurial activity are grounded on the creation of the favorable conditions for the entrepreneurship development however, on the other hand, they are directed on provision the maximum tax revenues to the state budget. At present there are 18 different taxes in Tajikistan. According to the statistics, forty-eight percent of countrys tax revenues in 2008 came from the value-added tax. Tax code states that the value-added tax is equal to 18%, income tax 30% and social tax 25% (Tax Code, 2009). Such level of taxation does not correspond with the taxation systems used in developed countries. As a rule, developed countries increase tax rates in order to restrain the overproduction (Davgyalo, 2007). In fact there is no problem of overproduction in Tajikistan.On the whole the tax regime in Tajikistan is characterized by high complexity and instability. The Tajik Tax Code, which went into effect in 2004, has been amended 9 times since that time. Unfortunately given amendments n all caused the simplification of tax obligations nor improved tax administration. The World Bank Groups Doing Business 2009 report demonstrates evidence that taxes impose a heavy burden on business taxpayers in the country. This report ranks Tajikistan as 159th out of 181 countries in terms of ease of complying with the tax obligations (World Bank, 2009).Besides, the procedure of preparation the tax forms is complicated, the average Dehkan farmer or individual entrepreneur has washed-out almost 5 working days on the filing and on payment of taxes in 2007. While the average SME spent more than three weeks on this process. Moreover, there is a lack of effective communication infrastructur e for the acceptance of the tax reports by mail. Although the Tax Code states that it is possible for taxpayers to submit their tax declarations in three ways by certified mail, in person, or electronically in practice, entrepreneurs submit tax reports in person. In addition, the survey performed by IFC shows that that submission of tax declarations involves a significant period of time spent waiting in lines at the tax office in order to get the appropriate signatures (IFC, 2009).CorruptionThe harmful nature of corruption between government and business enterprises is a classic conflict of the political economy, which goes back to Adam Smiths The Wealth of Nations. In the socialist period, bribery was widely nice as a sort of necessary annoyance among citizens in Soviet Union Countries. It operated as a special social mechanism used to overcome obstacles established by bureaucratic systems as well as chronic shortages of supply which could affect business operations and everyday activities. In contrast, in the transition period, the corruption between entrepreneurs and bureaucrats started to take place more for self-interest rather than as a socially necessary evil like it was in Soviet Union time (Ichiro Iwasaki, 2007).Interesting business relationship of the existence of corruption was provided by Clark and Naito in their article. According to them, corruption is indigenous in all countries of Central Asia. However, the additional factor which contributes to the level of corruption results from the existing barriers with respect to the cooperation between various Ministries. In fact, nowadays the level of cooperation is relatively small and as a consequence there is a shortage of transparency in the system. The lack of transparency in its turn allows corruption to flourish as there are no checks and move on the system (Clark, Naito, 1998).The number of surveys performed by the World Bank confirms the fact that corruption remains a main constraint for e ntrepreneurship in Tajikistan. This exhibit by the high frequency of informal gifts requested from enterprises by the government officials, so called Graft Index. The Graft Index shows the proportion of instances in which enterprises were either requested or expected to pay an informal payment for licenses, permits or public services (IFC, 2009). Visually the situation with corruption in Tajikistan in comparison with some other countries of Eastern europium and Central Asia is presented at the Chart 6.Chart 6 Tajikistan has the highest graft index in Europe and Central Asia (ECA)ECA Regional AverageSource Business Environment in Tajikistan as seen by Small and Medium Enterprises, IFC, 2009However, the survey performed by IFC in 2007 demonstrates that the situation related to the informal payments in Tajikistan has improved over the last years. According to the survey responses, entrepreneurs were asked for or expected to pay bribes or give informal gifts in 2007 fewer compare to p revious years. Although this is a positive development, it is too early to conclude that corruption is no longer a problem. Data demonstrate that 21% of enterprises have defined the informal payments as a main obstacle for their business activity. In fact, only high tax rates were defined as a major obstacle more often than corruption (IFC, 2009).Lack of the sufficient knowledge by entrepreneursJohnes stated that the main resource which is available to Tajikistan is its people. Generally the level of upbringing in the country is high, with a literacy rate about 98% (Johnes, 2002). However, one of the obstacles which may be additionally observed in Tajikistan nowadays is the lack of the sufficient knowledge in the area of entrepreneurship.This fact can be explained by taking a look at the history. In the Soviet era entrepreneurship was considered as a surmise. The Great Soviet Encyclopedia defines speculation as a process of buying up the goods on unappealing markets and resale th ose goods on open and deficiency markets in conditions of constraining the freedom of trade, for example, during the war (Great Soviet Encyclopedia, 1978, own translation). This activity was punishable either by high fines or imprisonment and due to this reason was considered as a part of the shadow economy. Based on the above mentioned information, the following conclusion can be drawn the entrepreneurship as an activity as well as entrepreneurs are still being considered as unacceptable or even discreditable activity by the people of older generation.It is obvious that problems related to managerial issues are really crucial for the private entrepreneur due to the reason that the manager should be a specialist with a abundant knowledge in the area of management, finance, accounting and marketing. In fact, nowadays the universities of the country are not preparing such versatile managers for the private sector (Urdashev, 2005).The current situation in Tajikistan is such that the majority of entrepreneurs have problems due to the lack of proper knowledge. Thus according to the IFC survey, more than one-third of individual entrepreneurs did not keep any financial or tax records in 2007 (IFC, 2009), notwithstanding the existing requirements. The responses presented in the Chart 7 demonstrate the reasons for the absence of necessary records. It is clear that the lack of knowledge is a very significant issue in this respect.Chart 7 Reasons f