MSME Responses to the COVID-19 Pandemic and Their Way Forward

Micro, small, and medium-sized enterprises (MSMEs) play an important role in an economy and for the development of a country. They dominate the number of enterprises and provide jobs for a large portion of the labour force, lthough they are not the biggest contributor to output creation in aggregate. MSMEs are spread across all sectors of the economy, with a large number in manufacturing and services. In many developing countries, micro and small enterprises can absorb workers in the informal sector, making them agents for alleviating poverty through economic activities. MSMEs are solid building blocks for industrial development, especially in the formation of industrial agglomerations and international production networks (IPNs). The enterprises, especially medium-sized ones and to some extent small ones, are critical for IPNs as they present themselves to multinational enterprises (MNEs) as arm’s-length suppliers that maximise the combination of business transactions between the local economy and across country borders.1 They are agents of industrial development, as the backward linkages established through their association with MNEs accelerate technology transfer amongst small and medium-sized enterprises (SMEs), especially those participating in IPNs. Deeper and more extensive participation of SMEs in IPNs over time improves competitiveness, which leads to higher participation of SMEs in the international market – expanding the contribution of SMEs in improving a country’s trade balance. The rapid spread of the coronavirus disease (COVID-19) from March 2020 plunged the world into the biggest global crisis since the early 1900s. The pandemic triggered border closings both between and within countries that, while necessary to manage the spread of the virus, halted the world economy. The lockdowns disturbed not only the supply side, through disruptions to production caused by the closing down of factories, but also the demand side. Strict limitations on the movement of people cut demand for various products and services, fuelling the contraction on the production side. As a result of these factors, the world economy saw a deep contraction in the second quarter of 2020 and had not yet fully recovered by the end of that year. The pandemic has put pressure on how business is done and is likely to induce changes in the way of conducting business, including for MSMEs. However, it is not clear what exactly these changes will be, whether they are temporary or could translate to permanent changes in MSME models, and in which direction they will converge (or whether they will converge). This chapter attempts to provide answers to these questions, based on what we know so far and some evidence on the responses of MSMEs to the pandemic. The objective is for the Comprehensive Asia Development Plan 3.0 (CADP 3.0) to devise ideas on how policy could be geared towards assisting MSMEs more effectively in the future. Given the theme of CADP 3.0, special attention is given to elucidate the role of digitalisation in MSME development in the future. The rest of this chapter is organised as follows. Section 2 outlines a general framework for a model of MSME responses to the pandemic crisis. It is important to contemplate potential responses of MSMEs during the crisis because of the pandemic. Section 3 presents key messages from the Association of Southeast Asian Nations (ASEAN) SME Policy Index (ASPI) 2018, which should provide an indication of whether the pre-pandemic policy framework can support possible changes that will take place in the post-pandemic era. This section is limited to the ASEAN Member States (AMS). While this is not ideal – as it does not cover the ASEAN Plus Six countries – it is acceptable as the AMS are the centre of gravity in East Asia economic integration and are the recipient countries of foreign direct investment (FDI) from the Plus Six countries. Section 4 presents policy responses introduced and implemented in selected countries during the pandemic. Section 5 concludes by presenting the lessons learned from the pandemic crisis for policy recommendations.