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The effects of the Covid-19 pandemic on small businesses and global value chains

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The effects of the Covid-19 pandemic on small businesses and global value chains

The Covid-19 pandemic has had a heavy impact on Africa’s micro, small and medium-sized enterprises. Dorothy Tembo, Executive Director ad interim of the International Trade Centre, analyses the effects on these vital businesses and the measures taken to support them

The Covid-19 pandemic has caused an unparalleled health crisis with often tragic consequences and disrupted every aspect of social and business activity across the globe, putting about half of the world’s economic activity under stress. Micro, small and medium-sized enterprises (MSMEs) provide 70% of all jobs, but had fewer resources to ride out the storm, making them particularly vulnerable to the crisis, with the severity increased for those in the least developed countries and small island states.

Afreximbank has teamed up with the International Trade Centre (ITC) to launch the training programme ‘How to Export within the AfCFTA.’ It is designed to give small-business owners and young entrepreneurs the knowledge and skills they need to take advantage of the trading opportunities soon to be unleashed by the African continent’s free-trade area and to fully engage with the developing regional value chains.

The ITC is a joint agency of the World Trade Organisation and the United Nations and is the only international organisation fully dedicated to supporting the competitiveness of MSMEs. The 2020 edition of its flagship publication SME Competitiveness Outlook, entitled ‘COVID-19: The Great Lockdown and its Impact on Small Business’, gives real insight into the realities and business impact that the pandemic is causing based on analysis of survey responses from almost 4, 500 businesses in 132 countries.

Heavy impact on MSMEs

The lasting effects of the pandemic are as yet unknown, but it has disrupted supply chains, reduced international travel by about 70%, crashed commodity prices – particularly of oil and metals – and reduced exports of skins and leather products, footwear, vehicles and clothing by over 20%. China, the European Union and the United States account for over 63% of supply chain imports and 64% of supply chain exports and are major importers of raw materials, parts and components, meaning that their lockdowns had global ramifications.

The strengthening of the US dollar, which rose by 9.5% against emerging-economy currencies in the three months to April 2020, has further affected developing economies by increasing the costs of trade priced in dollars.

At the same time, surging domestic demand for medical and personal protection equipment, sanitisers, sanitary products and food resulted in 93 countries applying export bans or restrictions on certain products, severely limiting access for the most vulnerable. Governments have been encouraging MSMEs to manufacture sanitisers and masks, although there is a need to ensure conformity of these products to prevailing standards, particularly in developing economies.

The ITC survey revealed that the pandemic has strongly affected nearly two-thirds of micro and small businesses – compared with about 40% of large companies – with 20% of MSMEs fearing that they would shut down permanently within three months. Two-thirds of African businesses reported being strongly affected, of these, 75% had reduced sales and 54% had difficulty accessing inputs. Service companies – particularly those in food and accommodation – have been particularly hard hit and it is notable that many women-led firms operate in this sector, as well as in retail and wholesale.

Still, even when the distribution of gender across sectors is taken into account, women-led businesses have been disproportionately impacted, with 64% of them declaring that their business has been strongly affected by the pandemic, compared to 52% of male-led businesses. Youth-led and informal enterprises were also found to be more at risk of closure.

Support measures

Recognising that MSMEs are vital to the health of national economies, many governments around the world have been implementing support measures for small businesses. The extent of support varies considerably and unsurprisingly MSMEs in richer countries typically get more support than those in poor countries. Respondents reported tax waivers, temporary tax relief and financial programmes to be the most beneficial forms of government support. Smaller companies had a preference for cash transfers to ensure survival, whereas larger companies favoured employment programmes to support their employees’ incomes.

When the pandemic struck, most MSMEs implemented actions to protect employees and customers against infection and communicated with clients about temporary closures. Some also sought support from government, industry groups and business support networks. Following the initial responses, strategies differed with about 60% adopting a strategy of resilience by scaling down or temporarily adjusting their business, for instance by focusing on online sales, source new suppliers or teleworking. 20% followed a retreating strategy by laying off employees, selling assets or taking on debt, all of which could affect their long-term viability.

Finally, the remaining 20% demonstrated their agility to cater for the new situation, for example by making new products such as masks, sanitisers or rapid testing technologies, or, when lockdown struck, sought to lend their workers to active businesses in essential industries.

Smaller firms were more likely to adopt the agile or retreating approach than larger companies, which typically followed a resilience strategy as they could better afford it. The take-away from the analysis is that smaller companies require agility to survive crises and it is apparent that many assistance programmes seek to nudge at-risk MSMEs away from retreat towards resilience or agility. Alarmingly however, over half of survey respondents reported that they found it hard to access information and benefits from their government’s Covid-19 related assistance packages, calling into question the effectiveness of communication.

Adapting to post Covid-19 realities

As the lockdowns have lifted globally, attentions have shifted to how businesses, support organisations and governments need to adapt to the post Covid-19 realities. The ITC report believes that SMEs should increase their resilience by diversifying, connecting with business support organisations and increasing their financial reserves during the good times. For those that have not already done so it is essential to fully embrace digital technologies with technical support, skill building and infrastructure support. Inclusiveness also needs to be broadened to cater for those often omitted from it, such as informal or microenterprise workers and migrants. Also, environmental sustainability will continue to rise up the agenda so improving sanitation and including environmental impact in decision making must be encouraged.

The Covid-19 pandemic has revealed the frailties of many SMEs and from a trade perspective there are now many additional issues to address. The disruption of supply chains saw ‘lead’ firms passing many of the risks to SMEs in developing countries, resulting in widespread job losses and bankruptcies. There is a need for lead firms to redesign their approach to increase collaboration, splitting costs with smaller suppliers to share value and encouraging the sharing of information and collective action to withstand challenges and respond to crises.

Certification standards and regulations are exerting an increasing influence on cross-border trade. International organisations, business support organisations and regulatory bodies must collaborate to harmonise their efforts in assisting SMEs and ensuring a fair business environment. ITC is also calling for national standards bodies to increase their engagements with the private sector by providing advice, support and solutions on the relevant standards to SMEs. International organisations should be partnering with business support entities to provide the technical assistance, training and advisory services that will help SMEs implement the necessary standards.

It is not just the pandemic that is creating change, the advance of the fourth industrial revolution, financial disruptions, shifting trade relationships and tensions and the rise of the environmental conscious are rapidly altering traditional beliefs and accepted ways of operating. Now could be the ideal time for the multilateral trading system to embrace proposals that would link it to supply chain actors through the creation of supply chain councils, which could deliver resilience, share knowledge, generate agility and provide stability.

Discussions at the multilateral level should also focus on the operations of logistics networks, trade facilitation and customs, in addition to addressing the severe stress on government finances in developing and emerging economies. All of these require international collaboration and coordination if we are to achieve an open and predictable world trading system, together with the reforms necessary to enable the World Trade Organisation to address the current realities post Covid-19.

What is clear is that SMEs continue to face many challenges, but ITC has produced a roadmap of possible solutions, many of which require widespread commitment and collaboration.

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