Strait of Hormuz disruptions could hit firms behind 70% of global employment hardest

Disruptions in the strategically vital Strait of Hormuz pose a disproportionate threat to small and medium-sized enterprises (SMEs), which represent 70% of global employment, according to a new analysis by the United Nations Trade and Development (UNCTAD). SMEs constitute nearly all businesses worldwide, holding 70% of jobs and contributing to half of global economic output.

They serve as vital suppliers in supply chains, fostering entrepreneurship, innovation, and economic diversification. The analysis underscores that when SMEs struggle, economic growth becomes less inclusive and more fragile.

While disruptions impact businesses across all sizes, their ability to endure shocks differs significantly. Larger companies generally possess more resources and alternatives to mitigate risks, such as spreading risks across various suppliers, markets, and financing sources. Conversely, smaller firms typically have fewer options when energy, transport, and financing costs surge.

The ramifications can persist even when overall trade volumes rebound, potentially leading to an "exclusion effect." This phenomenon occurs when headline trade recovery masks a more concentrated economy with fewer SMEs engaged in international markets.

The COVID-19 pandemic offers a stark example of how vulnerable SMEs can be to major shocks. Sales declines among these firms, particularly in developing countries, were generally more severe. The experience demonstrates that prolonged trade disruptions could exacerbate existing vulnerabilities, particularly in developing economies where businesses may have limited access to financing, inputs, or alternative markets.

To foster resilience and inclusion, the analysis emphasizes the importance of maintaining not only the flow of trade but also the connection of SMEs to markets. This involves closely monitoring firms' participation in trade, ensuring they can sustain operations and commercial relationships despite changing circumstances. Strengthening access to trade finance, liquidity, and working capital is crucial, especially when production costs rise, delivery times lengthen, and payment cycles extend.

Public support can also play a pivotal role by enhancing access to reliable and affordable logistics, facilitating trade, and expanding access to market information and other essential business services, particularly in developing economies. By bolstering the productivity and competitiveness of SMEs, these measures can help preserve jobs and enhance resilience to future shocks.