EMPLOYMENT, GROWTH AND POVERTY REDUCTION IN THE GAMBIA

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1 EMPLOYMENT, GROWTH AND POVERTY REDUCTION IN THE GAMBIA James Heinz, University of Massachusetts Carlos Oya,, University of London Eduardo Zepeda, Carnegie/UNDP

2 Background At the initiative of DOTSIE and UNDP the IPC undertook the task of evaluating the link between growth, employment and poverty in The Gambia The IPC organized a team with Carlos Oya and James Heinz and led by Eduardo Zepeda During the third week of July 2007 Carlos Oya and Eduardo Zepeda visited The Gambia. The team produced a first preliminary draft in August 2007.

3 The recent economic perfomrance of The Gambia looks good Recent growth in The Gambia is good Inflation is down and the exchange rate is stable The private sector has added new jobs

4 Why should the development strategy be re-visited? The underlying long-term growth rate is less than 4 per cent In per capita terms the growth rate is not high enough The economy has a history of instability Unemployment in urban areas is high Despite growth, poverty has not really decreased Some fundamental indicators of long-term growth are still weak (e.g. weak productivity trends and levels, dependence on foreign savings [and FDI], no export diversification, predominance of entrepôt trade)

5 Objectives and inspiration of the report Provide analytical support to the goals and objectives of initiatives such as the GAMJOBS Guiding ideas: Growth must be strong Growth must be employment intensive and productivity enhancing The poor must be prime beneficiaries of expanded employment opportunities

6 Achieving rapid, employment intensive, pro-poor poor growth A careful macroeconomic strategy addressing obstacles to growth, investment and employment creation that i. supports macro stability ii. provides a friendly setting for strong job creation Policies addressing constraints to labour and factor mobility that restrict employment creation by i. developing relevant skills and competencies of the labour force ii. improving the functioning of the labour market

7 The macroeconomics of careful pro- poor growth Three major focus areas Monetary policy Credit allocation Public investment in productive infrastructure Two other important areas Continue increasing the efficient of tax collection Consider a competitive foreign exchange policy

8 Current monetary policy keeps inflation down by restricting liquidity The current macro economic policy has lowered inflation and maintained exchange rate stability Risk: it might fail to control prices and reduce growth even further when confronted with a supply-side side price shock Cost: a tight monetary policy increases the interest rate, which inhibits domestic investment and reduces consumer spending

9 The allocation of credit is not conducive to long-term, sustained, pro-poor poor growth Interest rates are high The difference between borrowing and lending rates is large Only half of bank resources are channeled to investment A large number of firms and activities have limited access, at best, to bank credit

10 Elements for a financial reform in The Gambia Extend public loan guarantees to reduce risk premiums Improve information systems to lower transaction costs Create incentives to encourage banks to shift away from short-term term government securities increase credit to agriculture, informal activities and tourism. Forge links between the commercial banking sector and other financial institutions to service small-scale scale and own-account producers.

11 The labour market: a mixed picture Success stories Productivity in agriculture has recently improved Private registered firms have created jobs Basic education and training have increased Certain sectors provide relatively good jobs Challenges Reduce youth and overall urban unemployment Further increase agriculture s s productivity Decrease the share of informal jobs and increase its productivity Eliminate the skill mismatch Strengthen labour institutions

12 Poverty and employment There is a link: addressing the employment challenges means addressing poverty: Agriculture and construction have the highest incidence of poverty (poverty by occupation sector of the household head is 74% & 64%) The link is far from simple: Yes, low productivity in agriculture explains high poverty But, despite high wages in construction poverty is not low The link is deep: poverty in the three sectors with the lowest incidence is as high as 46% and 49% (social services, and finance & administration, trade & hotels)

13 The skill challenge of low skill level: a mass of workers with Low or no basic education Almost half of the active and employed population has no formal schooling Few skills for employability In 2006, 54 % of the population employed had no training

14 The challenge of getting the right skills: Excess of training There is a dynamic training supply that builds skills for clerical jobs in finance, services and tourism Trainees are secondary school drop-outs outs and graduates of technical schools But these trainees chase few job openings Acute skill scarcities Technical & training schools seldom teach the skills required by occupations in high demand The untapped demand includes: : tailoring, designing & sewing, tie & dye, plumbing, electrician, mechanics, welding and carpentry

15 Expanding labour training Improve basic literacy and numeracy Provide incentives and financing to training institutions and businesses to match the skills that growth and development demand Encourage employers participation in the development and implementation of training (on the job training) Strengthen systems to inform which skills are in high demand Regulate the vocational sector to ensure that the supply of training covers what the market requires

16 Labour institutions: a paradox Labour flexibility in The Gambia is high Weak presence of unions Low firing and hiring costs for firms Non binding minimum wages Yet, employment is not booming

17 Strengthening labour institutions To ensure an efficient matching of the supply and demand for labour in urban and rural markets To provide appropriate training and skill acquisition To monitor the performance of labour markets To regulate labour markets where needed Here the report insists and builds on the findings and recommendations of previous studies

18 Merging macro and labour policies: the demand for labour Promote sectors key to job creation, as indicated in previous studies Cashews, groundnuts and tourism Invest in productive infrastructure to reduce the cost of doing business in The Gambia Particularly, improve the supply of energy Invest in agriculture to increase productivity Ensure the well functioning of the public sector by retaining expertise

19 Recapitulating I This report proposes considering alternative policies to sustain growth, create jobs and reduce poverty in several areas: Monetary policy (targeting pro-investment interest rates) Increase the availability (a financial of credit reform) to the economy (reducing interest rates) Channel credit to priority sectors and activities (a financial reform that looks after priority sectors and activities and reduces the spread in interest rates) Increase investment in infrastructure (based on sound fiscal policies and increased public investment) t)

20 Recapitulating II Continue expanding education (ensuring strong literacy and numeracy skills) Re-organize the vocational system to expand the training that is relevant to markets and development aims (a financial reform) (eliminate the mismatch between the supply and demand for skills) Strengthen labour institutions (to regulate, monitor and ensure the well functioning of labour markets) Direct promotion of priority activities (to balance the pattern of growth and attend lagging sectors)

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