Access to Financing for Small and Medium Enterprises

187 I N Latin America and around the world, small and medium enterprises (SMEs) comprise a large share of firms, employment, and gross domestic product (GDP). A new World Bank database on SMEs (defined as firms employing up to 250 workers) suggests that they employ nearly 50 percent of the labor force in the formal economy in Mexico; nearly 60 percent in Ecuador and Brazil; around 70 percent in Argentina, Colombia, Panama, and Peru; and as much as 86 percent in Chile (Ayyagari, Beck, and DemirgüçKunt 2003). Developed countries have a similar pattern: SMEs represent about 60 percent of total employment in Germany and the United Kingdom, about 70 percent in France and Japan, and about 80 percent in Italy and Spain. SME entrepreneurs identify lack of access to credit as the most important obstacle to the development of their businesses. This fact, combined with the sheer size of the SME sector around the world, explains why most countries (developed and developing) have specific programs to address SME problems and why international financial institutions devote considerable resources to address the issue of SME financing. That SMEs comprise an important share of GDP and that they lack access to credit, however, do not necessarily justify the need for the policy remedies targeted to this group. In fact, Hallberg (2000) suggests that social and political considerations that do not have a sound economic rationale are behind many of the programs targeted at SMEs. This chapter examines the economic case for programs to facilitate access to credit for SMEs and the forms those programs should take. Before tackling these issues, the chapter explores some important questions. Do SMEs have inadequate access to credit? How do countries in Latin America compare with other developed and developing countries in this regard? If access to credit is restricted for SMEs, why is this the case? STYLIZED FACTS