Can productivity in SMEs be increased by investing in workers’ health? 11
Chapter 4, their impact on working conditions in Chapter 5 and the effect on productivity in Chapter 6. Chapter 7 will provide an overview of current legislation concerning social
protection and SMEs in selected countries, as well as a case study on India.
3.5. Economic impact of pro-SME policies
In many developing countries, SMEs are generally seen as vital sources of economic growth and employment, and a wide array of interventions and programmes have been
implemented in order to promote them Tai and Quynh, 2007. Only one study found no support for the theory that SMEs are a significant source of growth or poverty alleviation
Beck and Demirgüç-Kunt, 2004 and argues that larger companies may be able to provide employment that is more secure, better salaried and includes more benefits.
While strong economic growth corresponds with a strong SME sector, this relationship is not causal. Rather, both seem to depend on the general business
environment Ayyagari et al., 2007; Beck and Demirgüç-Kunt, 2004. An analysis of SMEs in Japan found that the entry of new SMEs to the market forces those already
existing to become more efficient; also, that an important determinant for the creation of an SME is the associated cost of entry Kawai and Urata, 2001. Multiple studies have found
that low barriers to entry and exit of enterprises are important for economic growth and development Carre et al., 2002.
It seems therefore that a strong SME sector is a symptom, rather than a cause, of economic growth. While policies aimed specifically at promoting these enterprises might
not significantly increase a country’s economic output, policies that encourage the business environment in general are likely to benefit the entire economy, including SMEs. This does
not refer to more informal employment, but rather to a large formal economy that is only lightly influenced by labour legislation. Indeed, a study of several countries found that the
informal economy was lowest in countries which combine a low regulatory burden with an effective regulation enforcement system Kus, 2006.
To some extent these views are implemented in policy decisions. Increasing the managerial flexibility of entrepreneurs and the ease of doing business are widely held to be
measures that will result in growth of the SME sector World Bank and IFC, 2013. In contrast, high taxes, labour regulations and contributions to health insurance schemes are
viewed as constraints on medium-sized businesses by driving up their costs and lowering their margins South African Chamber of Business, 1999.
It has however been shown that the focus on reducing administrative burdens might result from an over-reliance on business costs as an indicator Kitching, 2006. The effects
and consequences of labour regulation extend beyond financial considerations on the part of employers; they influence many individuals and mechanisms. Thus, statements such as
“labour regulation impairs small enterprises” are ignoring the many dimensions in which small enterprises are likely to benefit or suffer from regulation.
As for the effect of social protection, it is worthwhile to bear in mind the mutual interdependence of pro-poor growth and social protection:
A successful package of economic and social policies must produce i a good rate and pattern of economic growth to reduce poverty directly; ii a well-designed system of social protection
to defend those still left in poverty despite the growth achieved; and iii internal consistency between the two broad categories of policy involved, such that neither cancels out the positive
effects of the other. It is particularly crucial that social protection policy be as consistent as possible with the creation of good jobs, since it is mainly through job creation that growth
contributes to poverty reduction. … Although economic growth is almost always a key factor in poverty reduction, this is especially true for low-income, often mainly agricultural
12 Can productivity in SMEs be increased by investing in workers’ health?
countries. Such countries are generally characterized by a low public spending capacity due to low taxing capacity, a low implementation capacity and a higher presence of community
mechanisms that can protect vulnerable people from certain types of economic crisis. Berry, 2013, pp. 1−2
This viewpoint might lead to a tendency to see the implementation of social security as a factor that hinders the economy and SMEs in their development. However, such fears
are exaggerated, given the fact that in industrialized nations a significant increase in health insurance contributions results in only a marginal increase in the cost of production Weber
et al., 2005 whereas the productivity gains have not been evaluated.
A study of 16,779 small businesses in the United Kingdom Carter et al., 2009 evaluated in depth how far labour regulation might hurt the small business sector. It was
found that although many employers were dissatisfied with regulation, few were able to recount specific instances in which they had been actually impaired by it. Also, the
downsides of regulation are mitigated by the competitive market situation in which every business has to comply and thus every business will be impaired equally. Furthermore,
studies that evaluated specific economic sectors or labour legislation found little or no evidence of impairment of SME growth by labour market regulation Leach, 2006;
Ayyagari et al., 2007.
An ILO discussion paper Joshi, 2005 on the relationship between the micro- enterprise business environment and the provision of labour regulation in different
countries found that, unless labour legislation is very inefficient and complicated, it does not cause limits to growth or avoidance. Furthermore, micro-enterprises that were freed
from labour obligations for various reasons did not view this as a competitive advantage. The paper also advanced the position that while labour regulation should be simple and
comprehensive to enable easy access, a strong and efficient administration is required for proper enforcement.
