Metaphor Sky Diving Risk

summary

  • Small Businesses Cast A Large Shadowargumen
  • Oil’s Not Well
  • Reopening? Haste Makes Waste

We love tales of successful entrepreneurship. We admire tech titans who start by cobbling together computers in a parent’s garage, researchers who spend years perfecting and then producing revolutionary medical therapies, and small people with big ideas who overcome serial failure to produce an overriding success. Their creativity, drive and dedication serve as an example for others to follow.

But small businesses are not only a source of inspiration. Small businesses are the growth drivers of modern economies. They are a vital source of innovation and employment, and they are fixtures within their communities. Unfortunately, small businesses have been placed at significant risk by the coronavirus. Governments around the world are racing to support them before they fail.

The definition of small-and-medium-sized enterprise (SME) has some local variation. The European Union (EU) defines a medium-size company as one with up to 250 workers, while the U.S. Small Business Administration (SBA) typically supports businesses of up to 500. According to the World Bank, SMEs account for the majority of businesses globally, representing over 90% of all firms and over 50% of employment worldwide.

In high income, Organization for Economic Cooperation and Development (OECD) countries, SMEs account for the vast majority of companies (99% of all firms), about 70% of employment and more than half of value added. SMEs in emerging markets (EMs) represent a little less than half of total employment and about one-third of gross domestic product (GDP). If one accounts for the large informal sector in countries like India, their importance is likely to be even greater than is reflected in formal statistics.

Weekly Economic Commentary - 04/24/20 - Chart 1

Entrepreneurship has long been vital to global economic policy. It represents a path to prosperity for those willing to work hard and serves as a source of constant economic renewal. An OECD survey shows that SMEs participate significantly in a range of innovative work: For example, SMEs account for about 20% of patents in biotechnology-related fields in Europe.

Recognizing the importance of the small business sector, countries around the world have established agencies to aid them. The U.S. SBA was created in 1953 to guarantee loans to SMEs. SMEs have been a focal point in shaping the EU’s enterprise policy. And China has worked hard over the past few years to diversify away from large state-owned enterprises and encourage the formation of more fledgling firms.

“COVID-19 has dealt a severe blow to SMEs, the backbone of the world economy.”

But with over half of the world population now under some form of lockdown, smaller businesses are bearing the brunt of reductions in global demand. According to a survey of over 1,500 small firms in the United States, 51% of owners said they will be able to continue operations for less than three months in the current economic environment. A February survey of China’s SMEs revealed that only one-third had enough cash to cover fixed expenses for a month. At a European level, about 90% of SMEs have experienced business losses of at least 50%.

Policymakers across the world are making unprecedented efforts to help SMEs stay in business and sustain their employment. Those measures include temporary tax relief, direct financial support, loan subsidies and moratoriums on debt repayments. Some prominent examples are:

  • The U.S. SBA’s new Paycheck Protection Program will forgive loans if they are used to maintain payrolls. Its initial $349 billion of funding was consumed within two weeks, and this week’s fresh tranche of $310 billion will meet high demand when it is released.

Weekly Economic Commentary - 04/24/20 - Chart 2

  • Among European nations, France took the lead on SME funding, with French banks offering more state-backed loans than other countries in Europe. The Italian Banking Association agreed to a large-scale moratorium on debt repayments, including mortgages and repayments of small loans and revolving credit lines for businesses. The U.K. announced cash grants of £10,000 for eligible small businesses and up to £25,000 for SMEs in retail, hospitality and leisure; a 100% business tax holiday has been established for the next 12 months.
  • The Reserve Bank of Australia has established a term funding facility of at least $50 billion for the banking system, including credit support to small- and medium-sized businesses.
  • Asian economies including South Korea and Singapore are offering flexibility for repayments of existing loans. India increased the threshold for starting insolvency proceedings against SMEs in default by a factor of 100.

“Governments must do “whatever it takes” to maintain a vibrant small business community.”