G-20 Looks to Small and Medium-sized Enterprises for Economic Revival in Developing Countries
By Harold Rosen
The G-20’s 19 member countries, plus the European Union comprise 85 percent of the world’s gross domestic product and roughly two-thirds of the global population. Decisions made by this powerful body can help restore global economic growth and steer the future course for economic development worldwide.
During this week’s G-20 Summit in Seoul, South Korea, leaders are turning their attention to small and medium-sized enterprises (SMEs) as the economic vehicle of choice. Long shown to be engines for economic development, SMEs have the potential going forward to serve as catalysts for countries at various stages of development. Why then, have SMEs been largely underserved by traditional financial institutions?
SMEs typically fall through the cracks because they require longer-term, quasi-equity financing that is too risky for commercial banks and beyond the capacity of traditional microfinance institutions. Many also require technical assistance which cannot be financed and delivered by existing sources.
When supported, SMEs can produce considerable social and economic impact. For example, socially responsible agricultural suppliers are crucial to providing economic opportunities for the millions of small farmers living in poverty. In addition to sourcing sesame, a crop that requires less labor and has a higher yield than crops typically grown in Bolivia, LATCO International for instance, provides capacity building training to as many as 1,200 farmers to help them improve their basic administrative, business, and agricultural skills. LATCO’s scale, efficiency and business prospects have been dramatically improved by a relatively modest amount of investment and business assistance by the Grassroots Business Fund.
Why should the rest of the world care about supporting the growth of SMEs in emerging markets? In many developing countries, and perhaps in wealthy countries too, the economic gap between the upper and lower income populations is so large that this disparity sets up the kind of unrest that the world has witnessed recently in many nations. Apart from questions of basic social equity, when low-income people are left behind, a country’s political system and democratic values can be at risk.
The world cannot count on large companies to come into emerging markets and set up jobs for everyone. Big, global corporations cannot do this. Instead, the world’s attention should also focus on creating SMEs to provide jobs and economic growth from the bottom up in developing countries. The G-20 has recognized this need to build a middle class in developing countries to create political stability and to grow markets which in turn can help large corporations to expand their businesses.
When G-20 leaders met at the Pittsburgh Summit last September, they announced a competition to find the best models worldwide for public and private partnerships to catalyze finance for SMEs. Successful applicants had to demonstrate innovation, leverage, scalability, social and economic impact, and sustainability. The winning applicants will be introduced at the Seoul Summit November 11-12, with their innovations receiving financial support and valuable recognition.
Given that SMEs are in most economies the single largest contributor to employment and job creation, the world should applaud the G-20 for positioning SMEs as the primary vehicle for catalyzing the global economic recovery, and creating sustainable economic opportunities for millions of people at the base of the economic pyramid. It is high time that SMEs get the world’s attention.
Harold Rosen founded the World Bank group’s SME department and led much of the early work in SMEs and microfinance by the International Finance Corporation, the World Group’s private sector arm. In 2008, he established the Grassroots Business Fund, an independent organization, with support for International Finance Corporation, FMO and the Dutch Ministry of Foreign Affairs, OeEB: the Development Bank of Austria for the Austrian government, Omidyar Network, Luxembourg and Netherlands governments and philanthropists worldwide. GBF was one of the winners of the G-20 SME Finance Challenge.