Synthesis documents

World Bank Viewpoint Note on SMEs, Growth, and Poverty, February 2004

    Description
    Although associated with the World Bank, Viewpoint is an open forum to encourage dissemination of public policy innovations for private sector-led and market-based solutions for development. It does not necessarily represent the official policy position of the World Bank Group.

    This issue of Viewpoint was written by Thorsten Beck and Asli Demirgüç-Kunt, both of the Development Research Group of the World Bank. The Note, entitled SMEs, Growth, and Poverty, explores the relationship between the size of the SME sector and economic growth and poverty reduction. It begins by reviewing the core arguments in support of a pro-SME policy, namely that SMEs enhance competition, are more productive than large firms (when not impeded by financial markets and other institutions), and are more labor intensive and thus better at creating jobs.

    The Note continues by outlining the arguments against a pro-SME policy, including the view that large firms offer several advantages related to production and wages, are no less labor intensive, and may better reflect the optimal firm size in a country.

    The authors look to a new study that provides the first cross-country evidence on the links between SMEs and economic growth and poverty reduction. Data collected for the study do not support the view that SMEs cause economic growth or reduce poverty. They do provide qualified evidence that an effective business environment causes growth, although the results do not show that a good business environment has an effect on poverty reduction beyond its positive effect on GDP per capita growth.

    Summary of results
    Rather than directly subsidizing SMEs, the authors conclude that policymakers should focus on creating a business environment that allows easy entry and exit for firms and assures entrepreneurs and financiers that property rights and contracts will be enforced.

    However, the debate continues more generally; for example, one of the articles in the March issue of Development Outreach points out that the largest enterprises in some developing countries already enjoy very strong policy influence within government. By implication, therefore, development agencies have a responsibility to contribute to a levelling of the playing field, so that the voice of those in the smallest enterprises (where many of the poor currently work) is also heard in policy-making processes.