Disruptive, digital, and local: the new reality for Latin American MSMEs

By Alejandra Tapia Cruickshank, Outreach Manager at FUNDES

So far, Latin American MSME sector recovery forecasts remain pessimistic, mostly since they have yet to face structural barriers such as informality, lack of access to markets and inclusive value chains, as well as low financial and digital inclusion rates. Consequently, some international projections remain that more than 25 million people will enter poverty levels after the crisis. Do we know what that means economically and ethically for humanity? FUNDES identifies three specific gaps that affect the development of Latin American MSMEs in the traditional economy:

The economic impact caused by the lack of access to physical markets during the COVID-19 crisis -also known as “The Big Confinement” – is unique and it is the last consequence of a big chain of structural commercial breakdowns; such as the contraction of global demand and a reduction in global trade.

In Latin America, almost 99% of companies are micro, small or medium enterprises (MSMEs), representing 61% of jobs and contributing to almost 30% of the region’s GDP (ECLAC). The impact of the pandemic in this sector may end up increasing poverty rates, inequalities, and tearing the economic and social fabric even further, all of this while deteriorating productive capabilities and human capital; problems that even before 2020 were already alarming enough.

So far, Latin American MSME sector recovery forecasts remain pessimistic, mostly since they have yet to face structural barriers such as informality, lack of access to markets and inclusive value chains, as well as low financial and digital inclusion rates. Consequently, some international projections remain that more than 25 million people will enter poverty levels after the crisis. Do we know what that means economically and ethically for humanity?

Even though current levels of uncertainty are affecting everything, from the most remote community to the most advanced city, there are some lights that allow us to see a few “undeniable” facts: that the future of the economy is to travel towards a digital world, and that globalization took an unexpected turn, giving back the pulse to local markets, which until now had been easy prey for the dominant economies. Could it be possible that Capitalism and the global division of labor (so often argued in favor of by Ricardo) are suffering an unexpected low blow?

Even though local trade has become even more relevant, products and services of the typical Latin American economy are amongst the most affected sectors today. Traditional businesses like small producers and distributors, hardware stores and neighborhood stores, trades such as construction and carpentry, service enterprises such as restaurants and beauty salons, among others, lack certain basic skills to help them move towards recovery.

In this sense, FUNDES has identified three specific gaps that affect the development of Latin American MSMEs in the traditional economy:

1) Creative Gap – The biggest difference between a Start-up and an MSME from the traditional economy is its capacity to be creative, innovative, and to adapt to the changing and uncertain environment of the globalized world.

2) Digital Gap – While most micro and small entrepreneurs in Latin America have a smartphone, less than 20% have an online sales platform. Most of them suffer from a lack of basic digital skills to properly take advantage of the benefits of the internet.

3) Market Access Gap – The COVID-19 pandemic, border closures and social distancing are weakening global value chains and strengthening the already existing trend towards local consumption. The lack of circuits among MSMEs prevents them from fully taking advantage of this opportunity

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