SMEs, Growth, and Poverty:

This paper explores the relationship between the relative size of the Small and Medium Enterprise (SME) sector, economic growth, and poverty using a new database on the share of SME labor in the total manufacturing labor force. Using a sample of 76 countries, we find a strong association between the importance of SMEs and GDP per capita growth. This relationship, however, is not robust to controlling for simultaneity bias. Thus, while a large SME sector is a characteristic of successful economies, the data fail to support the hypothesis that SMEs exert a causal impact on growth. Furthermore, we find no evidence that SMEs reduce poverty. Finally, we find qualified evidence that the overall business environment facing both large and small firms-- as measured by the ease of firm entry and exit, sound property rights, and contract enforcement -- influences economic growth. Keywords: Firm Size; Market Structure; Economic Development JEL Classification: O1, O2, L11, L25 Beck and Demirg-Kunt: World Bank; Levine: University of Minnesota and the NBER. We would like to thank Gerard Caprio, Maria Carkovic, Mary Hallward-Driemeier, Patrick Honohan, Phil Keefer, Aart Kraay, Norman Loayza, Richard Messick, Brad Roberts, Nick Stern, Chris Woodruff, and seminar participants at the World Bank for very helpful comments. We greatly appreciate the outstanding research assistance we received from Meghana Ayyagari. This paper's findings, interpretations, and conclusions are entirely those of the authors and do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. I