The Hindu : Business : Small firm clusters: some neglected real issues

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Monday, Jul 05, 2004

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Small firm clusters: some neglected real issues

Clustering can strengthen pro-poor impacts by enhancing the well-being of small producers and workers, reducing their vulnerability to external shocks.

WHEN MAHATMA Gandhi talked about breaking free from the colonial yoke, with Khadi as a crucial weapon, it enthused the millions of India and swung them into action. That was the economics and politics of the Freedom Movement. In 1955, the followers of the Mahatma required a Ford Foundation team to suggest a small industry policy for the country. The report of the Ford Foundation was implemented in letter and spirit, and thus India got the various SSI policies and promotional institutions of today.

Providing employment and, through that, reduction of poverty were crucial elements of India's SSI policy until 1991, when a reform programme was announced by the then Minister for Industry, P. J. Kurian. In the so-called globalisation era, the country has been told of a policy framework and strategies that focussed on the `collective efficiency' of small firms. Trying to groom the individual entrepreneur through pro-active support measures, as per the latest thinking, is `expensive;' the subsidy element, if any, is against the stipulations of the new trade regime as well.

UNIDO study as base

Thus a formal programme of industrial cluster development was inaugurated in the mid-1990s. A study was initiated by the UNIDO on Indian clusters, the report of which came out in 1996. This formed the basis of the Programme of Cluster Development, which began to be implemented by the Office of the DC (SSI). It is estimated that there are 400 modern clusters of SSIs, and another 2000, which are of rural producers and artisans. These are estimated to contribute up to 60 per cent of India's manufactured exports.

The goal of cluster development is to increase the competitiveness of small and medium scale enterprises through organised agglomeration initiatives. This would imply that inputs and support services become increasingly space-bound and more closely targeted in such a way that enterprises in an agglomeration are able to tap both internal and external economies. They provide not only an incubator for competitiveness, but also a platform for business alliances. They help enterprises to specialise, attract suppliers and buyers, spread ideas and the capacity to innovate, and most importantly, engender co-operative action.

But the mere concentration of enterprises operating in a particular sector is no guarantee for the evolution of competitiveness-enhancement partnerships. Such partnerships do not emerge automatically. That is where strategy comes in. It is in this area that the role and relevance of various actors become crucial.

Italian model

The cluster experiments in most other parts of the world are based on the Italian experience. The success of Italy in the area of industrial organisation and initiatives for local economic development under the aegis of local governments has been well documented. The unusual correspondence of the same political party having its presence both in the local government and industry in that area (for example, Third Italy) provided a conducive environment of cooperation, the political economy implications of which are debatable. However, experience shows that it contributed significantly to local economic development. It is this experience that led to the export of `industrial clusters' as an innovative model in social and business organisation.

The effective functioning of a cluster and its ability to provide significant positive benefits to its participants depend on its economic relationship with the rest of the world. In a globalised economy, this needs to be explained in terms of global value chains, which bring together dispersed actors into networks of production, trade, finance and other activities that turn raw materials into furnished goods and services for end-markets. Such networks are organised by `lead firms,' including global buyers and retailers, who exercise power over the chain, coordinating activities, and directly influencing the potential for local upgrading. In such an environment, an exercise of mapping local and external ties alone will provide a picture of the net distributional effects. This can be extended to show how such ties affect the workers, their families and the wider community.

In India, the cluster development strategy has come up in a big way, cutting across the ministries and economic activities. The SGSY programme of the Ministry of Rural Development, the Ambedkar Hasthakala Vikas Yojana of the Ministry of Textiles and the National Programme on Rural Industrialisation by the Ministry of ARI are examples. One needs to look at such initiatives along with the downsizing of the government and the incompetence of the bureaucracy to cope with the fast developments in the economy.

There is a lot of recent literature on the cluster strategy around the world. This has undoubtedly helped in better understanding of the latest developments in economic theory such as `flexible specialisation', new competition, and the transitional phase between conventional `Fordism' and new forms of industrial organisation.

While the literature on `flexible specialisation' concentrated on what could be done locally in the area of industrial organisation, writers on `value chains' paid little attention to local networks, interfirm co-operation, business associations or `real services,' since the fate of local clusters was thought to depend on decisions taken elsewhere. While early research in this area, especially in the context of Italy and Germany, focussed on looking into innovative roles of the local government, several of the subsequent studies have almost totally neglected this aspect of governance and capacity building at the local level. It is a variant of such apolitical approach which led to the eulogising of Self Help Group (SHG) models. An altogether new stream of theory has developed: social capital. While the latest developments in the theory of industrial organisation underscores the role of local governments and business associations in industrial development, there is not even a mention of such vital actors in the Indian policy and practice of clusters.

What is being overlooked in the theoretical and strategy perversions as outlined above is the rich history of countries like India that can point out significant innovations in social organisation which are, in fact, inalienable from the history of political and social mobilisation; the early history of women's movement in India, that of Panchayati Raj during its early days, and of co-operatives during the early 1950s, are examples. Unfortunately, the country has not paid adequate attention to examine the reasons for their degeneration, and to adapt and reform them to the new environment. On the contrary, the talk on reforms is largely geared to undoing such strong foundations.

At the international level, there has been an enhanced realisation that the Millennium Development Goals (MDGs) are difficult to achieve given the present state of globalisation. A `pro-poor' trade policy has been argued without actually looking into some of the major partisan behaviour patterns built-in, in an apparently `fair' trade system. The latest thinking on industrial clusters (as in May 2004) focusses its attention on the poverty implications of cluster policy and strategy. For example, a recent study conducted in Pakistan demonstrates that there is a clear link between clusters and poverty reduction that is evident in incipient rural and urban clusters that directly generate income for the poor, especially unskilled women and migrants. This study also shows that through agglomeration benefits and joint action, clustering can strengthen pro-poor impacts by enhancing the well-being of small producers and workers, reducing their vulnerability to external shocks. Social capital can further promote this and provide a basis for local social protection, especially for the most vulnerable households.

While such conclusions remain largely at the abstract level, the Indian experience of development of enterprise clusters raises a few relevant questions: Why is local economic development not in the agenda of Panchayati Raj institutions, even in States like Kerala and Karnataka, which have experimented significantly on decentralised governance and planning?

While social capital and Self Help Groups have been painted as emancipators of women, why is it that enterprises truly initiated by women do not come up in large numbers, and that they do not get truly integrated with the rest of the economy?

Why is it that governments are not able to evolve meaningful regional industrialisation programmes, even when the banking system is flush with funds?

The poverty implications of cluster development are going to be the pre-occupation of governments hereafter, and one can presume a variety of studies, training programmes and seminars on these lines in the coming years. But the pertinent question remains: Are these not, in fact, attempts at re-inventing the wheel?

P. M. Mathew

(Director, Institute of Small Enterprises and Development, Kochi. The author can be contacted at: ised@md2.vsnl.net.in)

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