Assessing Private Sector Contributions To Job Creation and Poverty Reduction An IFC Open Source Study

Transcription

1 Assessing Private Sector Contributions To Job Creation and Poverty Reduction An IFC Open Source Study More and better jobs offer the best (often the only) opportunity for upward mobility in the lifetimes of poor people and their children. Upward mobility is key to securing the ultimate objects of development: freedom from hunger, long life, health, greater choice, and generally more human fulfillment (IFC, Paths out of Poverty, 2000). I ve worked for 23 years, and I ve never touched somebody else s property. But just look at my leg now it was broken when I was stealing manganese from the railway station; the train pulled off just as I was trying to climb on board. Do you think that I would risk my life for nothing if I had a job? Do you know what it s like to have your children crying because they are hungry (World Bank, Voices of the Poor, 2000) There is consensus among policy makers, donors, World Bank Group shareholders, private sector companies and the poor themselves that creating jobs is a key contribution of the private sector to poverty reduction. However, there is limited knowledge about which interventions in what country conditions are most likely to catalyze job creation. There is also a lack of clear knowledge about which activities are likely to provide most benefit to the poor. To enhance understanding of employment creation based on IFC s past results and clients and partners experiences, IFC s Development Impact Department (CDI) is launching a study and open source process to elicit lessons that can be applied to strategy making and operations. IFC, as the largest global development institution focused on the private sector in developing countries, with its strong network of partners in development, is well placed to lead this study that is focused on the practical lessons we can learn for job creation through private sector development. Policy makers, private sector oriented development finance institutions, private companies and and we ourselves at IFC will be able to apply it to our work. Context Job creation is critical to transition out of the vicious cycle of poverty. Job creation is often the result of a robust private sector and a key ingredient for economic growth and poverty reduction. As the landmark World Bank publication Voices of the Poor (2000) documented, the most important path out of poverty came in the form of jobs, either through self-employment starting a business or through paid employment. A vibrant private sector can boost economic activity, enhance productivity, foster competitiveness, facilitate entrepreneurship and ultimately provide a chance for upward mobility. Private sector development also creates more and better employment opportunities that enable people to invest in upgrading their education and skills, and attain upward mobility. Competitive, profitable and growing SMEs, including those in the informal sector, can also pay better wages and invest more in training. While there is broad agreement that creating jobs is a key contribution of the private sector to poverty reduction, there is lack of systematic knowledge of which activities are most likely to have the largest returns in terms of job creation. Not all private enterprises in all environments generate jobs, investment, and human capital, and thus contribute to poverty reduction. Some enterprises have more of an impact than others in certain country or sector contexts. For example, employment effects in certain sectors are more sustainable than others and can impact women and youth differently. Further, specific interventions have different impacts depending on country context (eg. the impacts in fragile states will vary with those of a middle income country). Greater clarity on which activities really matter and when and how they benefit the poor and marginalized most is critical to reevaluate and reshape our strategies to

2 boost employment going forward. At this juncture, to better understand the current situation and propose solutions that will have a tangible impact on job creation, the urgent first step of better understanding the job creation effects direct and indirect of private sector interventions is necessary. Why IFC? IFC has consistently aimed to foster new opportunities for people in developing countries to escape poverty and attain higher standards of living through financing to help businesses employ more people and supply essential services, by mobilizing capital from others, and by delivering advisory services to ensure sustainable development. IFC and the World Bank Group have helped foster a competitive private sector with the aim of creating new investment and employment opportunities. Through investments and advice, IFC supports private companies, resulting not only in direct job creation but also indirect job creation through demonstration effect and upstream and downstream linkages. The following conceptual framework explains the link between IFC s activities and broader development outcomes (Figure 1). Advisory services and investments aim at contributing to sustainable private investment directly and through demonstration effects, and improving the business climate that fosters economic growth and ultimately reduces poverty and improves standards of living. Many projects also have direct effects, for example providing jobs or cheaper goods and services sometimes directly to the poor. IFC s advisory services can foster investment climate reforms and contribute to creating sustainable private investments. Business enabling environment operations for example that target simplification of the registration process and tax payment procedures for SMEs, have helped strengthen the formal sector and contributed to private sector development. IFC investment operations also contribute to sustainable private investment and can have demonstration effects. For example, if IFC s operations help establish a profitable, first of a kind company in country, others may follow (which, for example, has frequently happened where IFC invested in the first mobile phone operator in a country). The improved business environment, coupled with the demonstration effect lay a foundation for a creating a sustainable domestic private sector in developing countries. Sustained private investment and a well developed private sector in developing countries can result in increased employment, lower costs and provide access to higher quality goods and services. A robust domestic private sector is critical to increased growth, which can be linked to poverty reduction and improved standards of living in developing countries.

3 Figure 1: How IFC and the World Bank Group help to improve the investment climate and to reduce poverty and improve lives In 2010, IFC s clients had almost 10 million outstanding micro, small and medium enterprise loans valued at over $140 billion, generated power for over 40 million customers, and provided 2.4 million direct jobs. While IFC tracks these development results indicators, we still do not know enough. For example, how many of these jobs were additional because of the projects IFC financed? While we have some understanding of direct jobs IFC s clients provided, we know that indirect job creation effects through the economy are often much larger, as confirmed in a recent study by Dalberg Consulting (2010). How do these direct and indirect job creation effects relate to jobs created by improving investment climates, providing better access to finance or infrastructure, or providing jobs training for young people? Surely the answers will differ depending on a country s circumstances, but we do not know enough about what works best where. In fragile states, or when facing the risk of conflict and violence, citizen security, justice and jobs are the key elements of protection to achieve human security. The private sector is crucial for countries coping with or emerging from violence. While in the short run recovery from violence can be supported by external assistance or natural resource revenues, the path to longer-term development is critically dependent on a healthy private sector. Outreach to the private sector can help build a sense of the long term, which is critical for planning, investment in the future, and sustainable growth (World Bank 2011). There is a need to unbundle the transmission chain between IFC s investments and advisory services that strive to enhance private sector development and foster job creation on the ground, and consequently support poverty reduction. CDI is thus launching a study and open source process that will be undertaken with a combination of internal expertise and expert consultants, linked across the World Bank Group. The effort will systematically access the experience of IFC s partners and clients. The main objective is to use past experiences to learn about job creation in our client countries. The project will be guided by a panel of experts, reinforced by inputs through the project's open source process. Knowledge by experts and development partners will significantly complement IFC s own experience. The focus will remain on the practical conclusions that can be drawn from a better understanding of these results to inform strategy going forward and operational decision-making, and will thus be relevant not only for IFC, but for all development practitioners focusing on private sector development. IFC can build on its strong development results measurement culture, and will consider adding a specific Development Goal 1 on job creation. IFC s evaluation system has consistently been benchmarked as the best among the multilateral 1 The IFC Development Goals or IDGs are a new set of reach or access targets, or targets for other tangible development outcomes, designed to measure our clients increased outreach in priority areas as a result of IFC support

4 development banks and its Development Outcome Tracking System DOTS has been considered as leading in the industry, with parts of it emulated by other DFIs. Two additional benefits can be envisioned. First, there is an active portfolio of clients across industries and business lines whose experiences will be invaluable in this learning process, and in turn benefits other clients and private sector companies. Second, there is an enormous public good benefit, in that, the study can help more deeply understand how private sector operations more broadly are boosting job creation in developing countries. The Study Through a study and open source process, IFC will aim to better understand the job creation impact it has been able to achieve and based on that understanding what can be expected ex-ante from various types of private sector interventions under different circumstances. A key focus will be on gathering the lessons on employment effects that can be applied directly to IFC s work and that of other development finance institutions focused on the private sector. Based on the findings, key lessons for future operations will be gathered. Key and (non-exhaustive) questions that need to be considered include: 1. How do IFC s investments help private sector companies create jobs, including secondary and tertiary effects, but net of job destruction? How do these effects differ between sectors and country contexts? 2. How do the legal and regulatory changes IFC supports translate into job creation? 3. How can the likely effects of IFC s activities investments and advice on job creation be estimated, and then the extent of their achievement be tracked? 4. Can job quality in relation to contributions to growth (e.g. 1 unit of skilled worker will add more to GDP than one unit of unskilled worker) be analyzed as distinct from job quality as a pathway out of poverty (e.g. Is a salaried cleaner s job is superior to a subsistence farming existence)? For example, creating unskilled jobs may be more significant in terms of growth contribution in environments with constraints on the availability of skilled workers and skilled positions. 5. IFC investments will typically result in formal jobs being created, sometimes at the expense of informal jobs. What are the consequences? 6. Is the location of job creation important? The literature (with dissenters) indicates that agriculture-related job creation has a higher poverty reduction effect than jobs in the urban space. 7. What can be learnt from IFC s partnership with the ILO on Better Work? 8. Which IFC interventions may be most relevant for job creation for young people and for women? 9. In a specific country context, which activities are likely to have the highest sustainable job creation effects, and which of them are most likely to benefit the poor? An important caveat is that IFC s activities are expected to induce other labor-related impacts such as changes in wages or income. While the study will document some evidence of other labor impacts, through the analytical and field efforts initiated to track employment creation, the central focus will be on employment-related effects. To answer these questions, the methodology proposed will draw on the combination of internal expertise and additional external expert consultants as well as accessing the experience of IFC s partners and clients. A panel of experts will be drawn upon to guide the study and the open source process, including a webpage on IFC s external website. The panel, expected to be composed of six people to help oversee the project, will do three things: review the proposed approach and offer guidance; review progress at a midpoint and offer guidance; meet towards the end and comment on emerging findings.

5 Further, the following steps are planned: A literature review and meta-analysis of existing evaluations to examine what is known about the job creation effects of different activities that contribute to private sector development in different country contexts, measurement methodologies, and the other questions listed above. Analysis of existing data (e.g. monitoring and evaluation data from IFC s systems, WBG data such as enterprise surveys, Doing Business reforms, macro-economic data, household level data, labor statistics), focusing on job creation and addressing the questions above. Draw upon the ongoing efforts in the MENA region to assess and estimate the job creation effects of IFC s activities and undertake additional interviews with IFC s advisory and investment clients in other regions to assess job creation impacts. Scoping study to develop and define the methodology that can be used to track the employment creation impacts of IFC s investment activities. The methods developed will be tested in pilot countries (location and number to be determined) to attempt to quantify the direct, indirect and induced employment effects of IFC s activities. Based on initial results of the study, rolling out the model to other countries to determine the broader impact of IFC s activities will be considered Develop a synthesis report with broader consultations with bilateral and multilaterals. An open source process will also be used to inform the findings of the study. The methodology, data and findings will be made freely and widely available, to be added to/interpreted by anybody who has the necessary expertise and knowledge. The process will ensure collaboration with IFC s partners and clients and other experts to draw upon their own knowledge and experience with job creation. Additionally, the process will ensure joint ownership of findings and the end product. To facilitate an open source process, IFC will aim to identify opportunities for interactive engagement with our partners, experts and others interested in the work. The primary platform for engagement will be a website created to post background information, links to additional resources and preliminary data and findings. Feedback will be solicited from interested parties. The feasibility of other on-line interactive tools such as external blogs (linked to the study website); a job creation forum; targeted blasts/listservs etc and a database of knowledge that explores best practices, information sources and data to which others can add will also be explored. The initial analysis will be followed by a public event in Washington DC, perhaps supported by smaller public events in interested regions, the outcomes of which will be made available on the website, inviting feedback. Applying the lessons learned from this first phase, IFC will then undertake: In-depth evaluations of activities in areas of IFC s business that are considered to be most likely to contribute to job creation (e.g. investment climate work, access to finance and infrastructure, funds, manufacturing and services, agribusiness) to assess job creation effects. Such evaluations would be focused on practical questions trying to answer (i) What were the job creation effects? (ii) What were the main factors affecting job creation positively and negatively? (iii) What can we learn for future interventions targeted at job creation and poverty reduction? As the results of the analysis emerge, a specialist event will be held in DC, again possibly supported by smaller events in interested regions, the outcomes of which will also be made available on the website. The final publication will pull together lessons learned and recommendations for IFC and other DFIs on how to better assess the potential job creation effects of our interventions, and how to apply this

6 understanding in strategy formulation and operational decision-making. It will be the subject of a conference for interested Donors, Development Finance Institutions, private sector companies, policy makers, academics and think-tanks, and civil society organizations to disseminate the findings and discuss the policy conclusions. The findings of this study will feed directly into the World Development Report 2013 that will be on Employment.

7 Annex 1: Preliminary Literature Review Recent literature provides substantial evidence of how private sector activity powers growth and catalyzes job creation. The ILO found that SMEs create and retain most jobs, between 60 percent-70 percent in rich economies, and even more in emerging economies (ILO). Haltiwanger, Jarmin, and Miranda (2010a, 2010b), based on US census data for , found that the large and mature firms (over 500 employees and 10+ years) account for around 45 percent of employment and greatest job creation and destruction. While small firms seem to have large shares of employment and job creation and grow faster, it is the small-young firms, especially startups, that disproportionately create and destroy jobs. Ayyagari, Demirguc-Kunt and Maksimovic (2011) found that in developing economies small firms, especially small mature firms, are significant contributors to employment and job creation. The youngest firms (two years old or less) have higher employment, sales, and productivity growth. Beck, Demirguc-Kunt, and Levine (2005) found that small and medium enterprises contributed significantly to employment across 54 (mostly developed) countries and that there was a strong association between the SME sector and GDP per capita growth. Inadequate investment climate or infrastructure has constrained economic activity and hindered employment growth. Aterido, Hallward-Driemeier and Pages (2007) found based on firm level data - that a weak business environment shifts downward the size distribution of firms. In the case of finance and business regulations, this occurs by reducing the employment growth of all firms, particularly micro and small firms. On the other hand, corruption and poor access to infrastructure reduce employment growth by affecting the growth of medium size and large firms. Escribano and Guasch (2005, 2008) and Escribano and others (2008) have found empirical evidence in Brazil, Chile, Costa Rica, Mexico, Turkey, and several southeast Asian countries - that improvements in investment climate conditions in general, and in infrastructure quality in particular, may lead to important gains in productivity and in other economic performance measures: employment, real wages, exporting activities, and foreign direct investment (FDI) inflows. The recent financial crisis, which has been the most severe since the Great Depression, has caused global turmoil. It had serious repercussions on firms and workers throughout the world. Global unemployment soared to historic heights and was particularly acute in developed economies. Other labor market indicators revealed additional forms of severe labor market distress: falling employment-to population ratios, increases in vulnerable forms of employment, stagnant labor productivity growth, and rising discontent particularly among youth (ILO 2011). Developing countries today continue to rebound from aftermath of economic crisis. The global economic that contracted severely in 2008 and 2009 was on a path to recovery in early Asia s growth was the most robust with notable acceleration in growth in other developing parts of the world as well. Recent estimates based on the UN s World Economic Situation and Prospects for 2011 suggest that global growth was around 3.6 percent in 2010, compared to 2 percent in (ILO 2011). 2 The estimates are based on market exchange rates rather than the purchasing power parity weights used in IMF

8 While there is reason to be optimistic with the recent turnaround in growth, global employment trends offer reason for concern. Global unemployment began to grow in 2008 as the crisis increased uncertainty and led to reduced hiring. There was a massive increase of over 22 million in global unemployment in ushered in little change to these high rates of unemployment. In all, there were 27.6 million more unemployed people in the world in 2010 as compared with 2007, with little hope for these aggregates to revert to pre-crisis levels in the near future. The current projections for these indicators for 2011 show a further widening of the gap between the macroeconomic recovery and a recovery to precrisis unemployment levels (ILO 2011). While over half of the increase in unemployment was in developed countries, unemployment that was already high in developing countries stubbornly persists. Unemployment in Central and South-Eastern Europe (non-eu) and CIS region peaked at the highest regional rate in the world in 2009, having risen 1.7 percentage points to 10.4 percent. As of 2010, youth unemployment was the worst in the world one in five economically active youth in the region was unemployed. The South Asia region has the highest rate of vulnerable employment in the world, at 78.5 per cent of total employment in Gender-based inequities in the labor market remain a primary concern with a disproportionate share of women working in the agricultural sector, many in subsistencelevel activities. In Sub-Saharan Africa, three quarters of the workers are in vulnerable employment and four out of five workers live on less than $2 a day. Unemployment levels were already high prior to the financial crisis, and very little improvement is predicted in the immediate future. Job creation is now a critical priority for most governments, donors and companies in developed and developing countries. Recent events in the Middle East have reinforced how the lack of employment opportunities is perceived by citizens as one of the highest priorities, particularly for youth and women

9 Selected Sources Carmen Pagés-Serra & Reyes Aterido & Mary Hallward-Driemeier, "Investment Climate and Employment Growth: The Impact of Access to Finance, Corruption and Regulations Across Firms," RES Working Papers 4559, Inter- American Development Bank, Research Department Ayyagari Meghana, Asli Demirguc-Kunt and Vojislav MAksimovic Small vs. Young Firms across the World - Contribution to Employment, Job Creation, and Growth. World Bank Policy Working Paper Washington DC Beck, T., A. Demirguc-Kunt, and R. Levine SMEs, Growth, and Poverty: Cross-Country Evidence. Journal of Economic Growth 10(3), Dalberg Global Development Advisors, SME Reach Framework and Methodology. Washington DC Escribano, A., and J. L. Guasch Robust Methodology for Investment Climate Assessment on Productivity: Application to Investment Climate Surveys From Central America. Working Paper (11), Universidad Carlos III de Madrid Assessing the Impact of Investment Climate on Productivity Using Firm Level Data: Methodology and the Cases of Guatemala, Honduras and Nicaragua. Policy Research Working Paper 3621, World Bank, Washington, DC. Escribano, A., M. de Orte, and J. Pena Empirical Econometric Evaluation of Alternative Methods of Dealing with Missing values in Investment Climate Surveys. Unpublished manuscript, Universidad Carlos III de Madrid. Escribano, A., J. L. Guasch, M. de Orte, and J. Pena Investment Climate Assessment Based on Demeaned Olley and Pakes Decompositions: Methodology and Application to Turkey s Investment Climate Survey. Working Paper (12), Universidad Carlos III de Madrid. Escribano, A., M. de Orte, J. Pena, and J. L. Guasch Investment Climate Assessment on Economic Performance Using Firm Level Data: Pooling Manufacturing Firms from Indonesia, Malaysia, Philippines and Thailand from 2001 to Working Paper (13), Universidad Carlos III de Madrid. Escribano, A., N. Peltier, L. Garrido, and H. Sing The Impact of Infrastructure on Competitiveness in Latin America: A Firm Level Analysis Based on Investment Climate Assessments. Paper presented at the Joint Conference of the Inter-American Development Bank and the World Bank, June 6 7. Escribano Alvaro, J. Luis Guasch, and Jorge Pena Assessing the Impact of Infrastructure Quality on Firm Productivity in Africa: Cross Country Comparisons based on Investment Climate Surveys from 1999 to Africa Infrastructure Country Diagnostic Working Paper Series. World Bank. Washington DC Haltiwanger John, Ron S. Jarmim and Javier Miranda Who Creates Jobs? Small vs. Large vs Young. National Bureau of Economic Research. Workding Paper Number Cambridge International Finance Corporation Paths out of Poverty: The Role of Private Enterprise in Developing Countries. Washington DC International Labor Organization Global Employment Trends 2011: The challenge of a jobs recovery. International Labor Office: Geneva Narayan, Deepa, Robert Chambers, Meera Kaul Shah, and Patti Petesch Voices of the Poor: Crying Out for Change. New York, N.Y: Published for the World Bank, Oxford University Press World Bank Conflict, Security and Development: World Development Report Washington DC