Rising inequality among businesses during pandemic
“NOT only are profits rising, but in some industries, the leading firms are winning bigger than ever before,” wrote the authors of a McKinsey (MGI) study featured in the October 2015 issue of the Harvard Business Review.
The May 2020 study of the Asian Development Bank’s (ADB) financial sector specialist Shigehiro Shinizaki says that 70.6 percent of micro, small and medium enterprises (MSMEs) were forced to temporarily close owing to the pandemic. In the study, almost 6 out of 10 (58.8 percent) MSMEs reported zero income while 28 percent said that revenues fell over 30 percent. Moreover, 78.8 percent of the MSMEs have either no cash or savings or only have a month worth of working capital. A recent February 2021 ADB working paper on the impact of Covid-19 on MSMEs, because of the sharp drop in revenue, says “MSMEs began laying off employees at an early stage (March 2020 ECQ) to survive (68.0 percent of micro, 59.5 percent of small, and 78.6 percent of medium-sized firms).”
With the persisting bleak environment, 99,800 to149,700 of the 998,342 MSMEs are expected to permanently close, according to a March 2021 IBON foundation study.
As MSMEs bear the brunt of the crisis, there are certain large businesses that have emerged not only as survivors but also as stunning winners from certain industries — from food manufacturing, supermarket, telecom, and tobacco and spirits. These companies have made a remarkable year-over-year (Q3 2019 and Q3 2020) growth in net profit from 7.2 percent to a whopping 57.6 percent.
The closure and downsizing of MSMEs have left a massive untapped market, which could easily be exploited by deeper-pocketed large companies that have better weathered the current crisis. The growth of market shares by the better-endowed companies from the closed and downsized MSMEs widens the inequality between the large companies and MSMEs.
And it would no longer be healthy in the economy once the large companies try to protect their market shares using their market power, setting barriers to entry to deter emerging competitors. There was a recent International Monetary Fund research posted in the IMF blog in March 2021on the striking increase of the market power in the hands of large companies, which is a threat to economic recovery.
One of the ramifications of the 2020 pandemic, which are not easily noticed, is the rising inequality among business enterprises. Excessive market power held by a few players is counter to inclusive growth because it limits the expansion of the MSMEs and dissuades entrepreneurial growth. In the Philippines, 99.56 percent of businesses are MSMEs. The Department of Trade and Industry says nearly 7 out of every 10 Filipino labor force work in the MSME sector. The accelerated increase in inequality among businesses caused by the pandemic has a considerable effect in the economy.
Governments have to create a more level playing field to promote competition in order to address this.
In the local level, inequality among local businesses can be addressed by promoting entrepreneurship and focused interventions especially on the micro and small enterprises (MSEs) — the more affected sector — to weather the crisis and avoid closure.
My article in the Feb. 27, 2020 issue of the “Harvard Veritas” column featured the supply chain integration program (SCIP) for Muntinlupa MSEs. SCIP is a trickle-down mechanism that I conceived in 2018. It is an offshoot of the 2016 two-year study of the five-year data to identify the best performing industries in Muntinlupa (called Group of 19 industries).
Under this program city government of Muntinlupa will incentivize and recognize the businesses under the G19 industries that have tapped local micro and small enterprises (MSEs) as suppliers. SCIP is designed to enable the local MSEs to piggyback on the stellar growth of the G19 industries by shifting their business model from B2C to B2B. It ensures them of the guaranteed sales from the top performing businesses of the G19 industries. SCIP is also designed to promote entrepreneurship with the demand from G19. It enhances competitiveness of the MSEs by enabling them to meet the standards for supplying for the best performing businesses.
In April 2020, the president of the local Philippine Chamber of Commerce told me that their supply chains, particularly on their needed essentials, were disrupted. We referred to them a directory of essential industries of the city’s MSEs. A number of MSEs that are in the brick and mortar businesses, which some have temporarily closed, started to supply for the needs of some PCCI members (mostly belonging to the G19).
SCIP may be an alternative to address the rising inequality caused by the widereaching closure and downsizing of MSMEs. It enables the MSMEs to avoid closure, and to those that have closed, re-enter the market later as more competitive players.