Yes they can have babies. Depending on the parents, they can be a little person, or a 'normal' sized person. If a little person and a 'normal' person have a baby together, they have a 50% chance of it being a little person, and a 50% chance of it being a 'normal' sized person. So to answer your question, yes they can.
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yes, people who are born with different forms of dwarfism are still people and have perfecty working reproductive systems.