The Populist Case for Favoring Small and Medium Enterprises

Forty-odd years ago, a kindly German economist living in Britain named E.F. Schumacher delivered a sanguine argument in his telling book, Small is Beautiful.

The book’s equally weighty subtitle was: “Economics as if People Mattered.” It was ranked as among the 100 most influential books written since World War II by the Times Literary Supplement.

The point of that gem of a book was to assault what is meant by “progress.” It asked what had gone wrong when a few live in almost obscene wealth while large parts of the world and portions of our own nations barely get by. The book was a call to arms, to understand things we all seemed to have forgotten: what is value? What actually matters in life? Should the means always justify the ends? What is work for?

The major question, which remains the most relevant, is: Who put all these elites and economists in charge?

This was the original tract of “populist economics.” These are questions that reverberate back to us even more demonstrably today as we witness a near-total frustration with globalization and the uneven economics and havoc it has wrought. The globalist Davos crowd has delivered wealth and livelihood for themselves but what about the rest of us? What about American workers and the vast middle class?

That message should not be lost on leaders around the world, captains of industry, nor governments these days. It could be rephrased as “Small- and medium-sized enterprises (SMEs) are the lifeblood of our economies.” Listen up President Trump, prime ministers, and presidents . . .

Where the Jobs Are

Trump instinctively grasps this, and his policies have worked to undo many of the decisions of the past, of globalists, transnationals, and even corporatist Republicans, who have sold out America to China or the highest bidder.

SMEs are the places where jobs are created; the location where economies truly prosper, and where innovations take place. In our current age, we should come to the realization that SMEs are beautiful—as the place of real economic action. We need to cultivate them—as good places and places for good.

Look at some very telling statistics: Small- and medium-sized businesses accounted for 99 percent of all private sector businesses at the start of last year. Total employment in SMEs was 15.7 million, 60 percent of all private-sector employment in the UK and more than that in the U.S. economy. One in three new jobs were created by SMEs in 2015 alone. This is where the current economy is centered—where people live and work.

SMEs are important in terms of employment and gross value added (GVA), especially in smaller countries. They are also significant, however, in places like Germany, where they account for a high percentage of GVA created. The German Mittelstand is well known for its characteristics and world-class companies. This is also true in the United States, where 30 million SMEs accounted for two-thirds of net new private-sector jobs in the last few decades. SMEs, according to international statistics, provide more than two-thirds of all jobs in Africa, Asia, and Latin America, and 80 percent in low-income countries.

We should celebrate these engines of growth and ask how can they do even more? What we need is a new way to foster SMEs—and that revolves around capital itself. Trump needs to make this case loudly in his reelection campaign.

Giving Credit

One way to do that is to favor flat-tax regimes that put money back into the hands of the populace. Tied to that is what’s called “purchase order financing.”

That is a new and novel way of getting funding to these suppliers when they most need it. It has the potential to attract and boost smaller suppliers, enabling them to handle bigger contracts more reliably, creating a more resilient supply chain, lowering input costs, while helping contractors to deliver on time and on budget.

What exactly is SME capital? Is it possibly the very core of an emergent populist economics?

It is a completely new way of financing small and medium-sized businesses that are supplying into large supply chains, based on the buyer’s creditworthiness but without any advanced payment by the buyer or impact on the buyer’s balance sheet. And it can be insured for risks.

Cash is advanced to suppliers at the point when it’s most needed—when the purchase order is issued—up to 50 percent of the value of the purchase order.

This process involves the buyer as a critical participant, but at zero cost to the buyer and with no impact on the buyer’s balance sheet. The supplier pays a finance charge with no need for security or any director’s guarantee.

For the supplier, this amounts to unsecured borrowing, available earlier and more flexibly than other forms of funding. It is cheaper than invoice-based finance and certainly than debt on the balance sheet.

Such a form of capital could be made available to construction and other industry suppliers providing access to funds that traditional providers of finance, such as large banks, struggle to provide, especially given the lack of need for security or collateral.

Such supplier resilience reduces the risk of supplier failure, and enables smaller suppliers to take on bigger contracts than otherwise might be possible. This grows small, local companies into medium-sized ones and in the process adds many jobs and fosters economic growth.

Supply-chain resilience means that not only do suppliers and buyers benefit, but also suppliers are attracted to work with buyers who take seriously the needs of their suppliers.

There is also a significant cost saving as more viable suppliers means keener competition, lower prices (potentially with big savings for buyers), and provides more incentives for suppliers to innovate.

Toward a Market-Oriented Populist Economics

The social benefits of this kind of collaborative approach provide a unique selling position for contractors tendering for public sector construction projects and for companies looking for new suppliers anywhere. It would provide spending procurement budgets locally and allow for a Brexit-driven infrastructure push in the UK. In the United States and across deindustrialized Europe, it would put jobs back in those down and out places that badly need them. In the developing world, it would encourage market-based development and take businesses from start-up phases into the next rung on the ladder.

This kind of financing favors smaller, more local suppliers, who are often more cost-efficient but otherwise have been unable to access finance. It strengthens local communities with social and economic benefits of multiplier effect by keeping spending and employment local, efficient, and more sustainable.

This new and better scheme of financing would complement prompt payment codes and transparency and fits around stage payments and approvals processes, helping to reduce cash flow volatility. Time is money and this fixes that problem. We need a market-oriented populist economics that benefits real people and the firms they create.

SMEs often struggle simply because they can’t fund growth and don’t have the financial ability to face off against giant companies. This process of greater flexibility to fund anything, including additional equipment, software, materials, manpower, or services such as training, puts them back in the game and makes them truly competitive. It is a lifeline.

SMEs need a sustainable way to do business collaboratively. By helping smaller and medium-sized suppliers to compete and grow, all Americans benefit. This makes economic as well as political sense.

We achieve what we all want: economic growth at a more robust and sustainable rate of development while creating more well-paying jobs for hardworking, talented, everyday people.

About Theodore Roosevelt Malloch

Theodore Roosevelt Malloch is a scholar, diplomat, and strategist who was active in the Trump campaign in 2016.

Photo: Thomas Barwick/Getty Images

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