The impact of disasters on MSMEs

Natural disasters are often unanticipated costly events for MSMEs. MSMEs are affected differently by disasters. These differences are determined by the type of hazard, risk exposure or context-specific vulnerabilities (exogenous variables), as well as from the characteristics of MSMEs, which increase or decrease vulnerability to natural hazards (endogenous variables). Where data is available on the topic, the number reveal that in Japan, for example, when an earthquake hit in March 2011, 656 MSMEs employing a total of more than 10,000 workers, went bankrupt within a year.³⁰¹ In the Bangkok flood of 2011, at least 550,000 MSMEs were disrupted, and more than 2 million jobs affected. The flood also reduced Thailand’s national GDP by 37 per cent.³⁰² Similarly, in Malaysia, the great flood in Kelantan in December 2014 affected 13,337 MSMEs; this figure represented 37.7 per cent of all MSMEs in the state. ³⁰³ Most of the affected MSMEs, especially in developing economies, are unable to recover after their businesses were hit by natural hazards because of low disaster resilience. In rural areas, MSMEs that are environment-dependent can be considered one of the worse off sectors, given the severe disruption disasters pose to the availability of natural resources and the time it takes for ecosystems to recover.³⁰⁴ 

To repair or reinstall what disasters destroy, businesses that survive are often saddled with debt. Because it is difficult for many local firms to either cover the total cost by themselves or prepare for such rare unpredictable events in advance to reduce the cost, the government often intervenes after disasters. The direct and indirect impacts of natural disasters and other calamities such as pandemics are devastating to business activities and their continuity. These catastrophic events have created a significant impact on MSMEs.

Infrastructure damage has been identified as an important source of financial stress for businesses after disasters. It can cause temporary business closure while structural repairs needed to restore operations usually require large amounts of resources. If businesses are uninsured or lack resources for these repairs, business survival is put at risk. Even if operations resume, physical damage has been found to make a difference in business performance of surviving firms as severe damage implies longer closure periods and more resources allotted for repairs, particularly in the case of uninsured firms.³⁰⁵ In addition, disruptions after disasters regarding the provision of public services such as electricity, water supply and sewage, fuel, transportation and telecommunications, can be responsible for businesses closing down and can cause population dislocation. Many businesses do not reach post- disaster stage. Further, in 2015, the Philippine Institute for Development Studies placed disaster impacts on enterprises into four categories, namely: capital, labour, logistic and market (see box 19 below).

MSMEs, however, have an inherent flexibility due to the lower levels of capital needed to operate (especially in the case of informal MSMEs), which could be exploited after disasters to support a faster and more equitable recovery of the local community.³⁰⁶ The role of MSMEs in disaster recovery thus depends on their own ability to withstand disasters and having the right incentives in place for them to participate in livelihood recovery. Pathways toward more resilient MSMES should consider tackling the socio-economic drivers of risk in the pre-disaster stage and should be further built by the provision of swift and adequate support to MSMEs shortly after disasters. MSMEs support the creation of social capital in communities, which is a crucial element in restoring the social fabric ruptured by disasters. With local businesses reopening and providing spaces for social bonding, MSMEs can contribute to motivating a relocated population to return home, as well as helping to attract new investment in recovering areas. A strong MSME sector also promotes a country's resilience to shocks by broadening and diversifying the domestic economy. By reducing the dependency on few large firms or specific sectors, MSMEs protect a broad base of the labour force from sector-specific shocks and fluctuations in international markets.³⁰⁷ Through better understanding of the impact of disasters on MSMEs, vulnerability to natural hazards can be reversed by promoting enabling pre- and post- disaster environments for MSMEs to use entrepreneurship as a driver of local economic and social recovery. MSME resilience requires partnerships and cooperation among firms, government and other private organizations.