YOUTH ENTREPRENEURSHIP IN SWAZILAND Mthuli Ncube, Zuzana Brixiova, Thierry Kangoye UNU-WIDER, Helsinki September 20, 2013
Outline of the Presentation • Youth unemployment, obstacles to entrepreneurship in Africa • Analytical framework • Comparing the results with data from Swaziland • Experiences of other countries with interventions
Youth and Adult Unemployment in Selected African Countries Source: African Economic Outlook 2012
Share of Youth in Working Age Unemployment by area (% of LF) Population (%)
Constraints to Entrepreneurship in SSA • After the global financial crisis, productive entrepreneurship is high on policy agenda as a potential driver of inclusive growth; • Key questions: (i) what are some of the impediments to productive entrepreneurship and (ii) how can policies help overcome them?; • According to the WB Enterprise Surveys, constraints on the side of firms -- infrastructure and the limited access to credit -- impede firms at the earlier (e.g., factor driven) stage of development; • Constraints on the side of workers -- the lack of skilled labor, labor regulations -- are more binding in the later stages (e.g., at the efficiency-driven and the innovation- driven stage of development);
Factors impacting rate of start ups: Regulations, Start-up Cost, Education/Innovation, 2004 - 2011 10 10 9 data data 9 fitted curve fitted curve (% of 1,000 working age people) 8 8 (per 1,000 working age people) 7 7 New firm entry New firm entry 6 6 5 5 4 4 3 3 2 2 1 1 0 0 0 20 40 60 80 100 120 140 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 Cost of start-up Quality of regulations (in % of income per capita) (Index, -2.5 to 2.5) 9 data 8 fitted curve 7 Innovation index 6 (0 - 10) 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 Education index ((0 - 10)
Relative Constraints on Firm Activities and the Level of Development, 2005-08 2 3 4 2 3 4 2 3 4 Elect ricit y Finance access Tax rat es 3 3 3 AFR non-AFR 2 2 2 Distance from the mean, % 1 1 1 0 0 0 0 0 0 -1 -1 -1 Skills Labor regulat ions License 1 1 1 0 0 0 0 0 0 -1 -1 -1 2 3 4 2 3 4 2 3 4 Log of G DP per capita
Constraints to youth entepreneurship The lack of involvement of youth in the economic activities; The need for changed societal attitudes to young people who are often underestimated; The lack of start-up capital ; the limited access to finance; The lack of skills in identifying business opportunities and turning them into firms; Entrepreneurship training programsnot geared towards youth; Limited supportive infrastructure such as incubators for youth business ideas.
The Model – Set Up a one-period economy with the population size normalized to one. two types of agents, entrepreneurs and workers, with population shares µ and − µ , respectively 1 a portion 1-p of both entrepreneurs and workers are adults and portion p are young people All agents receive w amount of consumption good, c, from their domestic or informal sector production. isk neutral preferences in consumption where E denotes the ( c ) E expectations agents form at the beginning of the period about the income they will receive from their activities.
The Model – Set Up At the beginning of the period, entrepreneurs search for opportunities to open firms and incur cost equal to , = γ 2 d ( x ) x / 2 i i i where for adults and youth, respectively = i A , Y γ is a search efficiency parameter that takes on two values: γ Y for the young entrepreneurs (that is with probability p ) and γ A with probability 1-p, where γ > γ > 0 A Y The search results in probability x , of opening a business = i A , Y i which then produces output y using n amount of labor as follows: 1 = α − α 1 y z n − α 1
With entrepreneurs paying workers a market-determined (competitive) wage w , each entrepreneur running a firm earns profit amounting to 1 π = α − α − 1 . z n wn − α 1 The market clearing condition for entrepreneurs is µ = m + where m m u denotes aggregate number entrepreneurs who run a business and m are u entrepreneurs self-employed in the informal sector. Entrepreneurs who do not find a business opportunity to open a business become self-employed in the informal sector and earn income b . At the beginning of the period, workers acquire skills for the private while θ again takes on two sector at a cost of = θ , where = 2 k ( q ) q / 2 i A , Y i i i θ for youth and θ with probability 1-p, with θ > θ > values: . 0 Y A A Y Workers’ learning efforts result in probability q , = of obtaining i A , Y i skills and job in the private sector at wage w , which reflects their marginal product of labor. Denoting N as the total labor working in the private sector n (e.g., N = − µ = N + ), the market clearing condition is , where N are the nm 1 N u u unemployed
= The entrepreneur of type , where Y denotes young and A i Y , A denotes adult, solves: max E ( i c ) 2 x ≤ + π + − − s.t. i c w x ( 1 x ) b γ i i i 2 i Similarly, the worker of type = solves: i Y , A max ( i ) E c 2 q ≤ + − s.t. i c w q w θ i i 2 i
Decentralized solution − α 1 α − µ x ( 1 ) q = π − = − b z b γ − α µ 1 x z α µ q x z = = w θ − µ ( 1 ) q Optimal solution α 2 2 z x q − α max − µ − − µ 1 m n ( 1 ) − α γ θ 1 2 2 ( − µ ) 1 q = µ = < < s.t. ; ; m x n 0 x , q 1 µ x
Decentralized and social planner’s solution 1.0 Social planner's solution 0.9 0.8 Search effort (x) 0.7 0.6 Decentralized equilibrium 0.5 0.4 0.3 0.2 0.1 0.0 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 Training effort (q)
Policies towards entrepreneurship Start-up subsidies 2 x + π + − − + ; i = Y, A i max w x ( 1 x ) b sx < < γ 0 x 1 i i i i 2 i − α 1 α − µ x ( 1 ) q = π − = − − ( b ) z ( b s ) γ − α µ 1 x z s = b Support for training − σ 2 ( 1 ) x − + π + − − ; i=Y, A i max ( w z ) x ( 1 x ) b < < γ 0 x 1 i i i 2 i − α 1 α − µ ( 1 ) q − σ − ( 1 ) x z b = π − = − α µ ( b ) 1 x z γ σ = γ b / x
Equity considerations When the government subsidizes search of adult entrepreneurs by the amount b , the equal search effort of young entrepreneurs would be s Y > achieved through subsidy to young entrepreneurs that exceeds b , b , amounting to: γ − γ = + A Y s b γ Y Y > = > γ > γ where since . s s b 0 Y A A Y In the government-sponsored entrepreneurial training , youth should be prioritized for the training: γ − σ 1 = 1 Y Y γ − σ A A γ > γ It follows from (11) that since , the government needs to A Y sponsor training for young entrepreneurs more so that youth search σ > σ efficiency rises more than that of adults: . Y A
Optimal solution with social costs of (youth) unemployment When the society experiences disutility from unemployment, the social planner’s objective function then changes to: α 2 2 z x q A − α max − µ − − µ − µ − µ 1 2 m n ( 1 ) ( x ) − α γ θ 1 2 2 2 ( − µ ) 1 q = µ = < < s.t. ; ; m x n 0 x , q 1 µ x A A = µ − µ where 2 2 is cost of unemployment; with m denoting m ( x ) u u 2 2 entrepreneurs who did not find a productive business opportunity and are unemployed/in the informal sector. Solution is characterized by: − α 1 α − µ ( 1 ) q x = + µ − 2 z A ( x 1 ) − α µ γ 1 x z When the society assigns social costs to youth unemployment only, problem becomes: α 2 2 z x q A − α max − µ − − µ − µ − µ 1 2 m n ( 1 ) ( p px ) − α γ θ Y 1 2 2 2 ( − µ ) 1 q = µ = ( − µ = + s.t. ; = ; < < ; and m p x m 1 p ) x n 0 x , q 1 m m m µ Y Y A A Y A x
Optimal search with and without youth unemployment cost
Underdeveloped private sector -- The size of the private sector in Swaziland and other SACU countries (1996-2008) Change in Private Investment, 1996 - Private Private Sector 2008 Investment Credit % of Total % of Total % of GDP, Investment % of GDP Investment 1/ 1996 - 2008 Botswana 65 25 17 17 Lesotho 88 29 -1 25 Nambia 65 15 5 29 South Africa 71 12 -1 64 Swaziland 61 10 -19 18
Cost of doing businesses in Swaziland Cost of Starting a Enforcing Contracts (days) Business (% of income)
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