Studying microenterprises during a globalized era is relevant because these rms pre-dominate the economic landscape across the world. The share of microenterprises, relative to the total existing rms, is usually above 90 percent in developing countries and may be as high as 98 percent. Furthermore, rm size measured by total work-force is associated with the wealth levels observed across countries. In most developing countries the average rm size is below ve persons5.
Poschke (2014) shows that there are several features of the rm size distribution that are strongly associated with income per capita. For example, there is a negative and signicant correlation between the fraction of microenterprises and income per capita. Contrarily, there is a positive correlation between income per capita and the following labor measures: average rm size, dispersion of employment and skewness of employment. In other words, there are two major empirical observations: the richer countries are, (i) the larger the number of people that their rms usually employ, and (ii) the more common it is that their rms graduate into larger rm categories.
4The term Social Decade was used during the III Conference CAF-OXFORD in November 2016.
Statistics and more details may be traced since the 7th Summit of the Americas in 2015. Current eorts and analyses are being fostered at the ECLAC, CAF and OECD.
5The statistics cited in this paragraph may be graphically observed in Figure 12 of Poschke (2014).
It depicts an international comparison between developed and developing countries. Further data supporting these numbers are: OECD, GEM and Amadeus.
Figure 1: Comparison of indexes: GDP per capita and commodity prices
Notes: The productivity variables refer to labor productivity per hour worked.
Source: Self elaboration based on data from TCB, OECD and IEA.
Another observation is that developed countries exhibit a rm size distribution with lognormal features. Meanwhile, the rm size distribution in developing countries follows a bimodal pattern. These stylized facts have been discussed in the literature as the "Missing Middle". Tybout (2000) and Ayyagari et al. (2007) argued that developing countries appear to have a large share of microenterprises and small rms, a considerable number of large rms, but only few middle sized enterprises. Recently, Hsieh and Olken (2014) further suggested that, in fact, both medium and large enterprises may be missing in developing countries. Overall, Tybout (2014) summarized the debate by highlighting that the preponderance of small scale rms is an empirical observation that deserves being further studied. Specially, because the development of smaller businesses and the emergence of mid-sized rms appear to be discouraged by ongoing policies and market conditions.
As described above, the prevalence of microenterprises is relevant from both static and dynamic perspectives. In LAC, this phenomenon is related to the low growth and the prevalence of inequality throughout the region. Between 2003 and 2012, these coun-tries beneted from the commodity boom because their exports are mainly composed of raw material. Therefore, the higher world commodity prices contributed to an overall increase of their GDP (see Figure 1 ). However, during this period LAC countries did not further diversied their exports and the productivity levels remained low. The eect was milder for countries whose exports are more diversied, such as Mexico. However, now that the commodity boom is over, economic growth is pacing down.
The equity advances made between 2003 and 2012 was the result from a mix be-tween economic growth, improved labor markets and an expansion of public transfers.
Extreme poverty was reduced by half, the middle class grew by more than 50 percent, and inequality dropped by seven percent (OECD et al., 2016). As shown in Appendix 0A, during that period, GDP per capita increased at an average rate of eleven
per-cent every ve years. The regional Gini coecient fell at a pace of 0.1 points a year since 2002 reaching a value of 0.49 in 2010 (Gasparini et al., 2016). Overall, the rates of decrease in poverty and inequality were above the world average. Despite of these improvements, LAC remains the world's most unequal region. Furthermore, all these gains have decimated in recent years because the mixture of conditions that made these improvements possible do not longer exist.
Since economic growth slowed down in 2012, unemployment rates rose, the quality of jobs deteriorated, and both wage growth and formality stalled (OECD et al., 2016).
Furthermore, youth and women were particularly vulnerable to these eects. Between 2014 and 2015, the number of indigent people increased by 5 million such that there was a total of 175 million poor people in the region. These numbers represent the largest increase in poverty rates since the late 1980s (ECLAC, 2016). Furthermore, economic activity contracted throughout 2015 and 2016 and only a modest recovery is expected in 2017 (OECD et al., 2016).
The labor market situation is even more worrisome. As observed in Appendixes 0B and 0C, during the past two decades the total labor force has been steadily expanding at rates well above the world average. There are three main phenomena that explain this:
the young population is entering the working age, more women are joining the labor force and life expectancy keeps rising. During the commodity boom unemployment rates were kept at bay, but the increase in labor productivity per hour worked was very low. The LAC region has historically had low levels of unemployment since workers are mainly absorbed by the informal markets. However, it might currently be trapped in a vicious cycle of poor-quality jobs (Alaimo et al., 2015). At this point, the relevance of microenterprises becomes once again apparent. These rms were, are, and will remain being (at least is the near upcoming years) important employment buers in the labor market.
Microenterprises are also the main income source of the population in the left tail of the income distribution. According to the World Bank (2016), in the LAC region the consolidated middle class dened as the percentage of the population earning between ten and 50 USD a day6 increased from 21 percent in 2001 to 35 percent in 2014. Similarly, the share of the Latin Americans living on four to ten USD a day steadily increased throughout this period, reaching a peak of 39 percent in 2014. These people are denominated the vulnerable middle class because although they escaped poverty, they are at risk of falling back into it.
The gains in the living standards occurred amidst the commodity boom. Therefore, the recent economic slow down will also test the robustness of the middle class that emerged over the past decade. Mazumdar (2001) argues that the existence of robust small scale rms is a factor that contributes to a more equitable distribution of income and to the alleviation of poverty. His study shows that, in Asian economies, there is a relationship between inequality and both (i) the distribution of employment size and (ii) the productivity dierences between small scale rms and larger enterprises. In LAC economies, both the graduation rates of small scale rms and their productivity are lower.
6The World Bank provides this nominal values based on 2005 PPP.
Figure 2: Human Development Index (HDI)
. Source: Self elaboration based on UNDP data.
The advances between 2003 and 2012 were not only material. The LAC region experienced socioeconomic progress as measured by the HDI (see Figure 2). This is why that time period has also been referred to as the social decade. Throughout those years the conditions for women improved and the HDI increased at an average annual rate of three percent, from 0.68 to 0.72. As shown in the Appendixes, there was an improvement in all three main dimensions measured by the HDI: long and healthy life, a decent standard of living, and knowledge. Specically, LAC countries managed to catch up with the world average growth rate of schooling years. In 2014, the average schooling time in LAC was 8.6 years, reducing the gap with North America to 4.5 years7.
The case of schooling is particularly relevant for two reasons. First, the observed increase on the average years of schooling is not completely attributable to the commod-ity boom. Improvements in education have been consistently done throughout the past decades. For instance, between1990 and 2014, the average increase in schooling across all world regions was of 41 percent. In general, people are attending school for longer periods of time. Even if the pace slowed down recently, the positive trend remains. Sec-ond, although the LAC region experienced a further improvement in education levels during the social decade, productivity did not follow. Productivity levels and growth rates remained low.
Although external conditions are not as favorable as they were during the past years, the achievements in various socioeconomic dimensions also mean that LAC is better prepared to deal with both external shocks and internal challenges. Regaining growth momentum is important to maintain those socioeconomic gains, to prevent that the vulnerable population falls back into poverty, and to catch up with other regions in various development goals. The economic growth during the social decade was based on luck. Future well being depends on the ability of the region to make the best out
7In this case, Mexico is included in LAC while North America only refers to the USA and Canada.
These two countries are taken as benchmark because their average years of schooling is the highest relative to other regions.
of the recent gains. It is possible to better shape the performance of these economies, rather than primarily depend on external conditions to determine people's livelihoods.
Following this rationalization, the promotion of productivity is fundamental to achieve sustained growth.
Throughout the commodity boom labor productivity increased in LAC, although mildly. In general, productivity remains low with respect to other regions (see Appendix 0D). For example, the level of productivity per hour worked is three times higher in North America. Also, the productivity growth rate was higher in Asia during that decade, surpassing the productivity level of LAC back in 2010. There are several studies showing that human capital has a key role on income generation and aggregate productivity growth of countries. Recent evidence is linking productivity and equality, based on the common root causes that they share (e.g. Faggio et al., 2010; Galbraith, 2017).
In line with this emerging research, international organizations are suggesting to address low productivity and inequality in LAC via a more integrated approach. Specif-ically, they advocate for policies that promote higher wage equality by fostering a more equal distribution of skills within the population (OECD et al., 2016). The underlying logic is that unequal access to quality education, health technology and formal jobs might be responsible for both inequality and low productivity OECD et al. (2015).
As stated above, microenterprises are the most common production units. Also, it has been estimated that microentrepreneurs and their workers account for approxi-mately 50 percent of the LAC labor force (Fajnzylber et al., 2009). Therefore, improv-ing microenterprises' productivity and overall performance is a central policy concern.
Research shows that the lack of productivity convergence might be the result of a combination of factors such as low savings, low nancial education, weak capital accu-mulation, low eciency in factor utilization and limited labor contribution to growth (Cavallo and Serebrisky, 2016; Pages, 2010; Powell, 2015). All these factors need to be better understood. The purpose of this thesis is to address them and generate micro level insights based on rm level data.