COVID-19 pandemic: Threats to SMEs in poorest countries require swift political action



By Frank Hartwich and Jenny Larsen

Despite the overwhelming predominance of services in the global economy, the manufacturing sector continues to dominate its weight. It remains one of the main engines of the productivity growth needed to stimulate technological change and innovation, essential for both job creation and well-being. This is especially true for developing countries, making industrialization a crucial part of efforts to achieve the Sustainable Development Goals (SDGs).

We must therefore be concerned about the signs that are emerging in the poorest countries of the world. Data sets are scarce, but there is evidence to suggest that the COVID-19 pandemic has had a severe impact on small and medium-sized enterprises (SMEs) and the informal sector in least developed countries (LDCs). Without swift action by governments and the international community to get key industrial sectors back on track, a prolonged downturn could be on the agenda, with spillover effects on development and efforts to reduce poverty.

Factories around the world rallied again in the second half of 2020, following the COVID-19 crisis that crippled much of industrial production in early 2020. The rebound, led by Europe, China and other parts of Asia, was faster than expected, with most of the losses felt in the first half of 2020 having been recovered in early 2021, although there was big differences between regions and sectors.

Using the limited data available, it appears that manufacturing in some LDCs has also experienced a recovery. UNIDO Industrial production index (IIP) – only available for four of the 46 LDCs – showed a dramatic drop in early 2020, followed by a sharp increase in early 2021, although a closer look at the data reveals a nuanced picture. Mozambique and Senegal saw little impact from the pandemic while in Bangladesh and Rwanda the effects were much stronger. In general, within the low-tech industries that predominate in LDCs, the food industry has benefited from the pandemic while other sectors such as textiles, clothing and leather have been particularly affected.

SMEs constitute the majority of industries in LDC economies and it is likely that due to their limited access to financial and government support measures, they have been much less successful in dealing with bottlenecks related to COVID-19 and drop in supply and demand.

This is confirmed by the recent UN report on the impact of COVID-19 on LDCs and by a World Trade Organization (WTO) Study on the Trade Effects of LDC Withdrawal. The results of the two studies follow World Bank research published at the end of 2020, who found that COVID-19 affected SMEs in multiple ways, including small businesses seeing their sales decline more quickly compared to large companies in the same industry and in the same country, which in turn put more pressure on them. cash flow.

Thinking back to the start of the pandemic, the International Trade Center (ITC) reported that in Africa, home to 33 LDCs, two out of three companies had been severely affected by COVID-19, mainly involving a drop in sales (75% of companies) and / or difficulties in accessing inputs (54% of companies).

As you dig deeper, there are winners and losers. Some better prepared businesses, especially larger ones, weathered the storm by managing their inputs and switching suppliers, and are now on the road to recovery. Those backed by international companies also did better because they were able to avoid cash flow problems and maintained easier access to international markets.

But for small, locally run businesses, the overall picture is worrying. Many have filed for bankruptcy or face costly credit bills to stay afloat. Small enterprises and those operating in the informal economy, both of which are important contributors to industrial production in LDCs, have probably been the most affected overall, as reported in numerous press articles in LDCs. the LDCs themselves.[1] In some cases, unable to compete on quality or resources, they may have been squeezed out by large companies. Many may also have missed support measures such as wage subsidies and tax breaks, which rarely find their way into the informal sector. On the other hand, some microenterprises operating in the informal sector may have benefited from continuing to operate under the radar, filling the void left by formalized small businesses that are suffering from supply, sales and credit.

For countries in fragile and conflict situations, according to the World Bank classification, the The International Finance Corporation (IFC) has found that the worsened impact of demand crises, transport and value chain disruptions, and limited availability of credit have forced micro, small and medium enterprises (MSMEs) to go out of business, increasing the number of non-performing bank loans and threatens the stability of the financial systems of these nations.

The precarious situation of many SMEs in the poorest countries was also confirmed by speakers at a UNIDO event at the end of May, organized as part of the preparations for the next United Nations Conference on LDCs in January 2022.

Paul Makanza, president of the Confederation of Tanzanian Industries, said that in Tanzania SMEs “had suffered the brunt of the impact” and called for a dedicated SME policy to help revive the sector, while Union Commissioner Albert Muchanga Africa Trade and Industry Officer, noted that the sharp decline in 2020 had left much of the industrial capacity unused, especially in landlocked African LDCs where production capacity had declined significantly since the crisis.

Widespread indications that the vital SME sector has been hit hardest by the pandemic – and in some cases may be unable to recover from it – will add to the wider impacts of the crisis. A sharp drop in external demand, falling commodity prices, a dramatic drop in tourism, rising debt, a drop in remittances and a drastic reduction in foreign direct investment have caused the worst recession in 30 years. in LDCs, leaving governments more indebted and weaker on the fiscal front. This means that, although they have so far escaped the worst direct effects of the pandemic, LDCs will struggle to recover in the short to medium term.

What should LDCs do?

Governments need to distinguish between taking steps to save existing industrial businesses and putting in place longer-term measures that rebuild better with more resilient industries, more able to withstand shocks such as pandemics.

The key policies that could lead to the inclusive and sustainable industrial development needed to achieve greater resilience are:

  • Use existing registries and platforms to channel aid to businesses on the brink of collapse.
  • Improve access to finance for small businesses and – even more difficult – those in the informal sector to help them sustain their economic activities, retain jobs and maintain links with local and global supply chains.
  • Refocus policies to help companies develop higher value-added and more sustainably produced goods that can be traded with less risk in neighboring less volatile markets. This calls for a new push towards diversification, using relocation and proximity to shorten supply chains and moving towards greater regionalization.
  • Create more structured trade links with national, regional and global suppliers to allow a more reliable supply of products.
  • Invest in digital infrastructure to enable small businesses and informal businesses to access information and services.
  • Increase spending on science, technology and innovation capabilities to boost productivity and competitiveness.
  • Advise industrial policy makers in LDCs on the development of targeted programs to diversify and strengthen the industrial sector.

In short, the private sector must be able to adapt to the new post-COVID reality, find new markets and develop products with higher added value. But this should be backed by strategic government support, directing finances to develop technology and encourage business development.

Given the perilous financial situation of most LDCs, this will require action by national governments and the international community to ensure that industrial policies are part of national and regional stimulus packages, perhaps by devising a common framework for transformation and diversification of the economies of LDCs.

Without it, the vulnerabilities of LDC economies, revealed more clearly by the pandemic and exacerbated by the current lack of access to COVID-19 vaccines, risk taking hold, making development goals even more out of reach.

[1] Fallout from Covid-19: the informal sector hard hit by the second wave , Africa Industrialization Day: How to Support African Manufacturing Industry During Covid-19 Recovery, SMEs affected by Covid are bitter over lack of government support ,Emergency response for artisanal and small-scale mining communities affected by COVID-19

/ Public dissemination by UNIDO. This material is from the original organization and may be ad hoc in nature, edited for clarity, style and length. View full here.

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