How the World Sought to Protect Small Businesses during the COVID-19 Crisis
Policymakers typically respond to labor market shocks—such as the one caused by the COVID-19 pandemic—through two types of policy approaches: protect the economy to preserve employment or provide direct supports for families and individuals affected by the crisis.
These approaches are not mutually exclusive. However, in a world of scarce resources, policymakers tend to choose one or the other. Economists and other labor market researchers have tried to understand how and when these two policy types are most efficient. For example, recent evidence (PDF) suggests it made sense for European countries to focus resources on insuring jobs, rather than workers, because they already have strong welfare policies relative to the US.
To illustrate the types of policy actions governments took in response to the COVID-19 pandemic, I identified and categorized an inexhaustive list of policies implemented by several countries (mostly European) to help businesses, particularly small ones, survive and retain workers during the pandemic. These policies could inform US decisionmakers during future crises.
- Government-backed business financing. Denmark implemented a loan program for businesses of all sizes similar to the Paycheck Protection Program in the United States, except borrowers needed to prove a revenue drop of at least 30 percent. Spain offered to open government-sponsored business loans for refinancing and payments to be deferred. The City of Barcelona offered a spectrum of financing initiatives for emerging businesses, from investment in venture funds to direct grants and loans. Italy also offered loans to small businesses without repayment obligations during the first 18 months.
- Business costs compensation. To avoid layoffs, the Danish government offered to cover 75 to 90 percent of workers’ wages for employers while pandemic restrictions impeded normal operations. The Danish government also offered to cover up to a quarter of the business’ fixed costs in these cases. Similarly, the Lithuanian government offered to cover up to 70 percent of rent and facility operation costs for self-employed people if they engaged in “limited and indirectly limited economic activities during quarantine.”
- Flexible grants. Luxembourg provided more flexible assistance to businesses with a lump sum capital grant of up to 500 euros (US $582) per employee, focusing on firms in the most affected sectors, such as entertainment, leisure, food, accommodation, and the arts.
- Boost on infrastructure investments. Outside Europe, some countries and localities accelerated infrastructure investment plans to stimulate the local economy. Mexico City launched a US$3.6 billion Economic Reactivation Plan made up of public and private investments in housing, transportation, and water infrastructure, among others. According to the city’s government, the plan is expected to create close to 1 million jobs. Similarly, South Korea is planning to spend US$62 billion in a “Korean New Deal” to tackle climate change and develop the country’s 5G infrastructure. Though both plans were already in progress before the pandemic, the COVID-19 crisis prompted government to speed them up and increase funding in some areas.
- Insolvency reform. Australia enhanced support for small businesses facing bankruptcy. Instead of the owner losing control of the business, as was required under past norms, the country now offers a restructuring practitioner that supports business owners as they prepare their restructuring plan, certifies this plan to creditors, and oversees disbursements.
- Consumption vouchers. Some policies seek to help businesses indirectly through stimulating demand. Malta implemented a voucher program in which every resident received about US$100 in vouchers to spend at businesses in selected industries, such as retail, food, accommodation, and entertainment. Similarly, Northern Ireland offered up to US$136 to all residents to be spent in town and city centers.
More recently, demand has reached prepandemic levels in many countries, and labor markets have tightened considerably. In response, some countries have instituted policies to help businesses fill open positions. For example, Israel is incentivizing returning to work by offering unemployed people a grant worth 40 percent of their unemployment benefits during the first four months of work, plus an additional amount.
Crises often push the imagination and willingness of community members, leaders, and policymakers to try bolder initiatives. The COVID-19 pandemic has been a stress test for an array of policies to support small businesses.
As researchers embark in evaluating how these policies played out and their impact, we in the US have a chance to draw lessons from global experiences. These lessons could inform the development of a new system of support for small businesses that not only addresses the challenges of a crisis like the pandemic but also tackles preexisting issues, such as startup failure, lack of access to capital, and inequity, so businesses can survive and thrive.
The Urban Institute has the evidence to show what it will take to create a society where everyone has a fair shot at achieving their vision of success.
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