The green and digital path for Latin American SMEs

Micro, small, and medium enterprises (MSMEs) are the essence of the socioeconomic fabric of Latin America and the Caribbean. True to their Latin American roots, they are full of nuances, contrasts, and paradoxes. On one hand, they employ over half of Latin Americans and represent 90% of existing businesses. On the other hand, they only contribute 25% to the regional GDP (in contrast to the 50% contribution of MSMEs in OECD countries).

Nearly all of the region's problems flow through the veins of these businesses (from informality and low productivity to the scant creation of quality jobs), but also many of our future hopes (like creativity, resilience, entrepreneurship, and the potential for sustainability).

As we work to solve the issues affecting the region's MSMEs and boost their strengths, we can't lose sight of the major business trends of the coming decades: sustainability and digitalization. It's essential to stay ahead in the new way of doing business, marked by new reporting standards with sustainability criteria, for example. This is an irreversible global trend, and Latin America and the Caribbean cannot afford to fall behind."

Latin American MSMEs need to join the value chains of climate change mitigation and adaptation, enhancing the environmental richness and biodiversity of the region, while also accelerating their digitalization to compete better, internationalize their products, and increase their productivity levels.

The first obstacle to achieving greener and more digital MSMEs has to do with a historical conditioning: they don't grow enough nor generate sufficient quality employment, and therefore, don't add enough value to the socioeconomic fabric. Latin America and the Caribbean create more companies compared to Asia, for example, but has many very small firms, generally informal, and few medium and large enterprises. Moreover, those that do sustain over time often grow more slowly than their counterparts in more advanced economies.

Similarly, the value of exports reported by MSMEs in the region is relatively low (around 5% of total exports, while in Europe it reaches 40%). Additionally, our MSMEs show high levels of business closure due to non-viability, as well as difficulties in growing in markets and generating higher levels of quality employment.

Developing productivity, sustainability, and digitalization of MSMEs is critical for economic growth and stability in the region. Improving productivity not only increases competitiveness at national and international levels but also helps reduce labor informality, another major historical burden in the region.

Having appropriate financial instruments is crucial for boosting the development of MSMEs. These instruments, which can include loans, credit lines, venture capital, and specific financing programs, provide necessary access to capital for investing in growth, innovation, and expansion.

Furthermore, they enable funding for projects, acquiring assets, hiring qualified personnel, and ultimately, improving market competitiveness. By facilitating access to credit and investment, financial instruments contribute to job creation and promote entrepreneurial spirit, thus driving economic development and stability in the region.

In summary, creating and making available appropriate financial instruments is an essential catalyst for the growth and success of MSMEs, triggering a positive effect on the entire economy.

That's why, at CAF - Development Bank of Latin America and the Caribbean, we see MSMEs as a strategic segment for the region's development. Our credit lines have benefited more than 320,000 microenterprises and over 110,000 SMEs in the region between 2020 and the end of 2022. On the non-financial products side, we work on institutional strengthening programs to provide better services aimed at MSMEs, and we also offer training programs on topics related to innovation, digital transformation, internationalization, and productive integration through collaborative models such as productive linkages and clusters.

With these actions, we are helping to position a comprehensive vision of business development that combines macroeconomic elements with access to adequate financing, strengthening of innovation capacities and technological adoption, as well as facilitating trade to link productive units with global value chains, aiming to have more resilient, productive, competitive, and sustainable MSMEs.

Governments in the region are also doing their part. Among the most effective measures that have been implemented are fiscal, financial, and regulatory incentives to encourage the creation, formalization, and expansion of businesses; improving connectivity and public services to facilitate market access; promoting internationalization; supporting the transition to a green and circular economy; and strengthening human and social capital.

Within the major trends shaping modern economies, in Latin America and the Caribbean, MSMEs continue to be a light that too often gets distorted and dimmed. In the coming years, we must ensure that this faint light becomes a beacon. And this will only be achieved with more sustainability and more digitalization.