Among many of his central bank peers, Bank of England Governor Andrew Bailey has championed the unprecedented balance-sheet expansion by the world’s central banks in their response to the COVID-19 pandemic. In particular, Mr. Bailey argues that the central banks have created the reserves needed to meet the market’s demand for high-quality liquid assets. His argument, however, glosses over an important element for a sustainable long-term recovery.
Reserve expansion has benefited large firms and institutions but left small and medium enterprises (SMEs) behind. This business category comprises micro enterprises (fewer than 10 employees), small enterprises (10 to 49 employees) and medium enterprises (50 to 249 employees). Notwithstanding their relatively small scale, SMEs make an outsized contribution to the economy. In developed economies, the Organisation for Economic Co-operation and Development estimates SMEs on average account for 70% of all jobs and at least half of value creation. Thus, absent reform, the extraordinary measures being pursued by central banks will likely keep unemployment rates higher and productivity levels lower than they otherwise could be.