Microfinance, self-employment to curb poverty, says IFC

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As the country’s population grows, the need to create more jobs intensifies.

And countries like the Philippines may get to address this need, as well as that of poverty reduction, by widening people’s access to finance and supporting self-employment in low-income areas such as agricultural villages, according to a study released by the International Finance Corp. (IFC).

The world needs to create 600 million new jobs to support a surging population and yet, there are currently 200 million unemployed (mostly women and young people living in developing countries), said the IFC, a unit of the World Bank group focused solely on the private sector.

“The private sector provides 9 out of 10 jobs in developing countries, and therefore plays a key role in creating the new jobs needed and fostering growth. It is crucial to understand the constraints that prevent the private sector from growing and generating jobs. Governments and development finance institutions must help build an environment where these constraints are minimized or removed,” the IFC said.

Among the sectors, services has grown the most, followed by manufacturing. The agricultural sector, on the other hand, shows a steady decline, the report said.

The IFC said that for countries such as the Philippines, better access to finance—especially microfinance—can reduce poverty because it decreases inequality and gives low-income people access to basic financial services that may be difficult to get otherwise.

“Evaluations of microfinance investments done in six different countries (the Philippines, Mexico, Bosnia, Mongolia, Morocco and India) found that five of the projects resulted in the creation of more enterprises or higher rates of self-employment. Self-employment can be an important way out of poverty when few jobs exist in an economy. The study found that in agricultural villages that received financing, households hired more people from outside the immediate family,” IFC reported.

According to the World Bank’s enterprise surveys, major obstacles for private enterprises in developing countries include poor investment climate, inadequate infrastructure, lack of access to finance, and inadequate skills and training.

IFC said the cumbersome and costly regulations hinder company operations and growth in the formal sector, and that multireform programs are more effective than single reforms given efficient information coordination and the ability of regulatory institutions to make sound policy decisions.

“Certain stand-alone reforms—such as those affecting business entry, taxation, competition and secured transactions—have demonstrated a positive impact on growth and jobs. A lower tax rate and investment promotion efforts can help attract foreign direct investments,” the World Bank unit explained.

However, IFC noted, lowering tax rates to attract investments only works in countries with good investment climates. It added that many countries also use targeted investment climate tools, such as creating a special economic zone or improving regulations in a specific industry.

Infrastructure investments also can be very effective in reducing poverty and promoting more inclusive and equitable growth, IFC said.

Lack of infrastructure, especially a reliable power supply, is a big problem in lower-income countries.

Technology and productivity trends are producing a shortage of high-skilled workers for larger companies in higher-income countries.

While the effects of training and skills programs seem to be mixed, combining classroom with on-the-job training seems to work best, IFC said. Focusing on disadvantaged groups appears to have a greater employment impact than training programs which, in turn, seem to be “more significant in the medium term than in the short term.”

In compiling the report, IFC utilized an open-source study to assess the direct and indirect effects of private sector activity on job creation.

The report drew on reviews of literature and evaluations; surveys of more than 45,000 businesses in over 100 countries; a website, blog, and essay competition to solicit outside views; macro and micro case studies of IFC clients; and IFC’s own operational experience and lessons learned. – Riza T. Olchondra