SMEs in Asia feeling heat from crisis

Published by rudy Date posted on February 19, 2009

Small and medium enterprises (SMEs) in developing countries like the Philippines have been hit hard by the global financial crisis because of their smaller capitalization and limited access to credit, according to the International Labor Organization (ILO).

In a study titled, “The Fallout in Asia: Assessing Labor Market Impacts and National Policy Responses to the Global Financial Crisis,” ILO said workers in SMEs, which employ the majority of female and male workers throughout developing Asia, have already felt the brunt of the global financial crisis.

“With smaller cash reserves and limited credit support to meet existing debt obligations and sales orders, many SMEs that supply larger firms in national and global production chains have found few alternatives to laying off workers or suspending or closing their operations altogether,” it added.

Sachiko Yamamoto, ILO regional director for Asia and the Pacific, told reporters in a press briefing that factory closures have been reported throughout the region.

“Small- and medium-sized firms, which employ the majority of the workers in Asia, are particularly vulnerable,” Yamamoto said.

She added that when jobs are cut in the formal sector, a majority of workers simply cannot afford to remain unemployed.

“Many have had to turn to the informal economy where jobs are often precarious and offer little social protection,” she added.

Local situation

Sought for comment, Labor Secretary Marianito Roque said SMEs in the Philippines have been hardly hit by the crisis unlike the big export-oriented companies.

“May be it could be one or two [small companies] that are affected. But in as far as SMEs are concern, they are not yet affected because we don’t have a recession,” he said

But Benjamin Diokno, economics professor at the University of the Philippines and the Budget secretary during the Estrada administration, said the present crisis would impact big and small companies.

Boon to informal sector

Diokno also predicted that the number of Filipinos engaged in informal sector would increase, as more workers are laid off because of the crisis.

In the Philippines, the number of people in the informal sector last year reached about 10.5 million, according to the National Statistics Office.

Of that total, the self-employed numbered about 9.1 million, while employers numbered at 1.3 million.

The informal sector includes vendors, household helpers, neighborhood handymen, public transport and tricycle drivers, self-employed entrepreneurs, agricultural and rural area workers, and small traders, among others.

He said the informal sector’s growth would mean lower revenues for the government.

The big problem of the informal sector is it is hard to tax, so government loses revenues, Diokno said in Filipino.

Cost to government

Victor Abola, economist at the University of Asia and the Pacific (UA&P) earlier estimated the informal sector costs the government about P100 billion of forgone revenues annually.

He said the government loses at least P70 billion annually to uncollected from the informal sector.

Abola said another P20 billion to P30 billion in missed revenues from the informal sector are from unpaid value added taxes, business permits, etc.

But he said that the informal sector is important to the economy because it contributes about 20 percent to 30 percent annually to the gross domestic product (GDP).

GDP is the total cost of all goods and services produced in the Philippines for a year.

Helping SMEs

To help SMEs weather the crisis, the ILO recommends the provision of fiscal stimulus packages, such as providing credit guarantees, credit lines and preferential credit, reduction in taxes and wage subsidies.

“The main reason for government-backed credit guarantees is that while cash injections to banks may help alleviate the overall credit crunch, lending to SMEs may not improve unless policies are directed specifically toward their needs,” ILO said.

In Vietnam, some $1 billion in stimulus package would include covering preferential interest rates on bank loans to SMEs in addition to credit guarantees. Other countries like India, Indonesia, Thailand and South Korea also offer assistance to SMEs.

ILO noted that measures aimed at small firms could cushion the social impacts of the crisis on workers and households, and help create consumer demand.

“Targeting small firm could have particularly beneficial multiplier effect,” the labor organization said. –Darwin G. Amojelar, Reporter, Manila Times

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