COVID-19 Still Poses a Threat to Minority Firms – What can be Done?

The Coronavirus Disease 2019 (COVID-19) pandemic has led to widespread economic and social disruption since its inception in March of 2020. According to the Johns Hopkins Coronavirus Resource Center, the United States has reported over 34 million confirmed cases and over 600,000 fatalities as of July 2021 (Mortality Analyses, 2021). A Washington Post article published in February of this year starkly illustrates the grim impact of the outbreak: if 600,000 people were to travel by bus, it would take a caravan of nearly 12,000 buses stretching over 100 miles.

The devastation wrought by the pandemic reaches beyond the scope of public health. In the spring of 2020, nationwide lockdowns led to immediate supply chain disruptions that have been exacerbated over time by supply shortages, food shortages, and panic buying. In April of 2020, the International Monetary Fund described the resulting global recession as “the worst economic downturn since The Great Depression”, surpassing even the 2008 Subprime Crisis. The effects of COVID-19 on small businesses and Minority Business Enterprises (MBEs) in particular have been stark, and demand a careful consideration of strategies for immediate relief and long-term recovery.

The Effect of COVID-19 on MBEs

                As was the case with the 2009 recession, small businesses endured the greatest losses during the pandemic. A study published by the Small Business Administration (SBA) in May of 2020 found that 90% of small business owners reported that COVID-19 had negatively affected their operations.  Minority-owned firms in particular bore a disproportionate brunt of the damage. The National Bureau of Economic Research conducted a survey of business closures between February and June of 2020 (Figure 1). The survey found greater disparities in losses by businesses owned by women, ethnic and racial minorities, and immigrants. African American firms experienced a catastrophic 41 percent drop in the number of active business owners. Latinx business owners also experienced a major loss of 32 percent. Moreover, minority business ownership and employee share are highest in industries most directly affected by COVID-19, with Food Service and Retail showing severe job losses (Figure 2).

Figure 1 – Number of Active Business Owners by Ethnicity before and during COVID-10

Figure 2 – Industry Vulnerability by Market Share During COVID-19

The effects of the pandemic on MBEs were compounded by pre-existing institutional barriers. According to a study published by McKinsey, MBE firms are more likely to be declared “at risk” or “distressed” compared to non-MBE firms. In addition, the a survey conducted by the Brookings Institution found that large banks approve around 60 percent of loans sought by white small-business owners, 50 percent of those sought by Hispanic or Latinx small-business owners, and just 29 percent of those sought by black small-business owners.

Policy Prescriptions – What can be done?

Several policy options can provide MBE firms with assistance in navigating a post-COVID onset marketplace two years on. The first is immediate relief – funding provided by the CARES Act, the Paycheck Protection Program, and the SBA Economic Injury and Disaster Recovery Loan (EIDL) program has been successful in assisting thousands of small businesses throughout pandemic. The United States Government would do well to continue rollout and implementation of these and similar programs, especially considering that funding was not dispersed equitably. Frank Fossen and Robert Fairlie of the NBER found evidence that the first round of funding “was disproportionately disbursed to nonminority communities, and that the second was disproportionately disbursed to minority communities”.

In addition, several tools are available at the executive level to alleviate burdens on households throughout the country, including deferring or cancelling student loan debt payments, continuation of child tax credits, eviction moratoriums, and additional stimulus payments.

However, continuous institutional barriers continue to impede the health, longevity, and success of MBE firms. The benefits of short-term relief payments will be limited so long as these barriers continue to affect diverse suppliers. Actors in both the public and private sector need to advocate strongly for reduced barrriers to entry, such as:

  1. Reducing and eradicating barriers to lending and credit,
  2. Establishing Federal Supplier Diversity Programs and requirements for MBE participation in Federal contracts,
  3. Utilizing tools such as Community Development Funds and Community Development Block Grants.