IFC Jobs Study: Findings , implications and next steps Thanks to the donors supporting the jobs study: Roland Michelitsch Development Impact Department, IFC More information: www.ifc.org/jobcreation 1
Why jobs matter…(1) Current dual jobs challenge: o Quantity: 200 million unemployed . Additional 600 million jobs are needed by 2020 . o Quality: About 50% of jobs are informal and 30% of workers are poor worldwide Only the private sector can bring an answer, as it provides ~90% of jobs worldwide – but the public sector needs to help. IFC Jobs Study: o Assesses the effects of private sector activity on job creation o Elicits practical lessons for policy makers, IFC and other finance institutions focused on private sector – and private companies. 2
Why jobs matter…(2) 3
Why jobs matter … (3) “If you were to ask me, from all the world polling Gallup has done for more than 75 years, what would fix the world — what would suddenly create worldwide peace, global well-being, and the next extraordinary advancements in human development, I would say the immediate appearance of 1.8 billion jobs — formal jobs … This raises an important distinction — not only do we need to create more jobs, we need to increase the number of good jobs .” Jim Clifton, Chairman and CEO of Gallup 4
IFC Job Study: Components Website ifc.org/ Financial Funds Literature jobcreation Data from Markets analysis review IFC’s DOTS case study Macro-case WEF-IFC Advisory Youth essay studies MSMEs FI panel IFC’s Smart Enterprise competition study Lessons Survey competition Analysis Meta Micro- evaluation Collaboration IFC case Infrastructure with WDR Operational Blog studies case study experience 5
Three distinct layers of policies are needed Source: WDR 6
Jobs challenges vary by country Source: WDR 7
Constraints vary by countries and firms Four findings stand out: Finance (A2F): A problem particularly for SMEs Infrastructure (A2I): A reliable power supply is the most important issue for companies in low- income countries Investment climate (IC): Informality is a key issue in middle-income countries and for SMEs; taxation is also important Training/skills (T&S): A key challenge for larger businesses and businesses in high-income countries * For this analysis: Small = 5-20 employees, medium= 21-99 employees, and large >= 100 employees. Source: World Bank Group’s Enterprise Surveys covering 46,566 enterprises in 106 countries. 8
Selected findings: Removing constraints creates jobs IC: Business entry reforms can have large positive effects, particularly when combined with other reforms. o Mexican one-stop shops : Firm entry + 5%, jobs + 2.8% . A2I: Most studies focus on immediate direct job creation, but effects through enabling economic growth are even larger. o A reliable power supply could increase job growth in low income countries, by at least 4-5% … and probably much more. Powerlinks : Effects from having power far outweigh direct + indirect + induced effects of power transmission. A2F: Improvement can create significant number of jobs. o Significant extra job growth from bank loans (>3%) or external financing (>4%). o “Footprint” : Jobs provided - in 2011 IFC clients “reached” 23M MSMEs … which employed an estimated 100M+ people huge potential. o Job created: Sri Lanka case study – SMEs financed grew twice as fast (12%) as jobs in economy … but attribution is difficult, and more studies needed. T&S: Programs show mixed results, but involving private sector and combining education with on-the-job training works best. o Programs that included both had 20% increase in probability of success 9
Investment Climate Cumbersome and costly regulations prevent companies from entering, operating and growing . Investment climate adds up to the most pressing issue for firms Top IC constraints : (1) Informal competition (2) Tax rate (3) Corruption Source: Enterprise Surveys 10
Investment Climate Informal firms provide a large portion of jobs in developing countries. Informality is closely linked to poverty 36 countries High poverty high Low poverty informality (% of total non-agricultural high Informal employment informality employment) High poverty low Low poverty informality low informality Population living below the national poverty line (% of total population) Source: ILO, Department of Statistics, and IMF , World Economic Outlook. 11
Selected Findings: Investment Climate (IC) Business entry reforms: Evidence of job creation, particularly when combined with other reforms. Mexico one-stop shop reform increased jobs (including self-employed) by 2.8% in eligible industries in one year Business entry reform alone may not be not enough to formalize : Business owners “Out of aspiration” 14.3% more likely to register. Business owners “ Out of desperation” less likely to register, but 20.4% more likely to become wage workers Some evidence of benefits from IC reforms (e.g. competition reform); but more data and impact evaluation needed. Special economic zones (SEZs/EPZs), industry specific reforms : Potential … and challenges 12
Infrastructure: Increasing private investment Infrastructure investment by sector using PPP arrangements (US$ billions) 80 Energy 70 Telecommunications Need to 60 Transport improve urban Water and sewerage 50 infrastructure , 40 as more people 30 move to cities. 20 10 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: Private Participation in Infrastructure Database. 13
Access to Infrastructure: Power Reliable power supply could increase job growth in low income countries by at least 4-5% Current focus on direct jobs, but larger job effects through enabling economic growth Second- order (“growth”) Improved/more firm services and inputs (e.g. reliable power) more output/jobs effects Indirect and Indirect/induced jobs often larger than direct jobs Important, but often ignored induced jobs Direct New power transmission lines in India, jobs created: Construction and maintenance ~2K direct , and ~ 8K direct/induced in 25 yrs Improved power supply: ~75K jobs from 2006-12 14
Powerlinks Case Study IFC invested in a power company that set up power transmission lines that helped bring power from a hydropower project in Bhutan to India. Case study tried to estimate (1) direct, indirect & induced employment effects (construction & maintenance); and (2) effects of improved power supply (which are much larger and potentially much more transformative for an economy). 15
Selected findings: Infrastructure – other sectors Telecoms/IT : Significant employment effects – especially for young people – and use of technology can help spur job growth. Strong job effects also from other infrastructure services (e.g. water – irrigation ), and huge needs from urbanization . In LAC: water/sewer (100K), rural electrification (23K): Strong direct job effects per $ billion invested – but regional/sectoral variation. Direct job creation is the focus of most studies, but “growth effects” can be much larger – and women often benefit disproportionately more. Summary : Infrastructure – a big contributor to jobs, and the biggest effects often come from improved infrastructure. 16
Finance: Smaller firms have less access to financing Source of financing for working capital and fixed Use of bank financing: Small firms: 14% Medium firms: 18% investment needs (%) Large firms: 25% Source: IFC (2010). Scaling-up SME Access to Financial Services in the Developing World. 17
… and firms in poorer countries too Ratio of domestic private sector credit to GDP 18
Selected Findings: Access to Finance (A2F) • Firms in developing countries: Less access to finance. Financial markets are less developed. • 45-55% of formal SMEs unserved, over 20% underserved, 70% don’t use external finance. Gap: $2.5 trillion SMEs that have access to finance show significant job growth mainly as a result of expansion of operations and technology investments o 3.1% - 4.2% higher job growth with loans/overdraft, external financing o “Footprint” : In 2011 IFC’s client FIs “ reached ” 23M MSMEs … which in turn employed an estimated 100M+ people huge potential. Growth : Sri Lanka case study – SMEs financed grew twice as fast (12%) as jobs in economy … but attribution is difficult. o Macro case studies: High job creation through FIs: Per $ million invested : Estimated 228 jobs in Ghana , 107 jobs in Jordan o From 2000 to 2010 , 494 Firms financed by IFC’s private equity funds created, net of job loss, ~300K jobs Strong growth compared to small portfolio. 19
How to improve access to finance? Improve financial sector regulation : Liberalize to encourage entry and lending … but enforce prudential regulations and protect property rights (which helps lenders … and enterprises). Improve financial infrastructure to improve information (e.g. collateral registries ). Example: 28%-40% higher likelihood for SMEs to get a loan in countries with credit bureaus . Step up competition – increases the incentive to reach out to SMEs. Increase funding to FIs : Particularly for under-served groups, such as MSMEs and women entrepreneurs. 20
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