PSD Blog - The World Bank Group

Who Creates Jobs?

Editor's note: Dorsati Madani is a Senior Economist at the World Bank's Strategy and Analysis Unit (CICSA) of the Investment Climate Advisory

There is widespread perception that small businesses are the primary creators of jobs in most countries. A presentation from the World Bank's recent Conference on Entrepreneurship and Growth entitled, "Who Creates Jobs? Small vs. Large vs. Young" used US census data to add an interesting twist to the debate regarding the role of firm size in employment creation.

The paper finds that business start-ups contribute substantially to both gross and net job creation, but that young firms also have very high rates job destruction due to frequent failures. Conditional on survival, young firms grow more rapidly (in terms of employment) than their more mature counterparts. A related finding is that once the authors account for firm age, it becomes the definitive factor in job creation. Firms employing 5-499 employees are found to have lower net growth rates than the largest firms (10000 or more workers) in the economy. 

These results raise an interesting policy issue. Assuming a similar pattern of job creation for developing countries, how do we reconcile the emphasis placed by development institutions - including the WBG - on small and medium enterprise (SME) development? Is this sub-sector the right focus of our PSD efforts? If so, how can we ensure not only SME creation, but survival to support net job creation over the medium to long term? On the other hand, if the SME approach does not create the net medium to long term jobs so desperately needed in high unemployment developing countries, what should our policy recommendations be?

In search of PSD’s “holy grail”

The “holy grail” for those working in PSD is the scalable and sustainable business model that engages the poor while delivering social and developmental outcomes. Finding the PSD grail will potentially empower large numbers of poor men and women to find their own way out of poverty as well as generating, on a commercial basis, socially desirable goods and services. But there have been many false trails in the quest for the PSD grail. Among them are supply chain development initiatives that remain external to the economic lives of the poor, and heavily subsidized models that engage the poor but have limited prospects for wider replication, scaling or longer term sustainability.

Occasionally something comes along that captures our imagination and seems to offer a glimpse of the elusive grail. Mohammed Yunus' recent speech on social business at IFC was a widely reported example. Another similar but smaller event was more quietly inspirational. Harold Rosen, IFC’s former in-house serial entrepreneur and inspiration behind many of the IFC’s small and medium enterprise interventions, returned to IFC to discuss the performance of his Grassroots Business Fund (GBF), which was spun off from IFC in 2008.  

The day you’ll be able to stumble upon development funds

Quite literally…

Imagine walking around the streets of DC with your mobile phone in hand. You "point" to, say, a building or a bridge and an application on the phone allows you to detect whether the project is a beneficiary of some of the $787 billion allocated by the US Government American Recovery and Reinvestment Act. The amount of money spent for the building and the name of the beneficiary are also displayed. Public spending could not get more transparent – and tangible – than this. Science fiction? Not anymore, thanks to the augmented reality mash-up just released by the ever inspiring folks at Sunlightlabs (hat tip: David Osimo).

 

The Market for Aid 2.0: Collaborative markets

A couple of years ago, former PSD blogger Tim Harford and co-author Michael Klein argued for more market-like mechanisms in the aid industry in The Market for Aid. A new working paper by Owen Barder (Beyond Planning: Markets & Networks for Better Aid) picks up where Tim and Michael left off. Owen argues that aid agencies are stuck between a rock (donor countries) and a hard place (recipients and recipient country governments), in which the interests of donors and recipients don't fully align. Better planning alone won't make this problem go away. 

Owen offers up an alternative, something he calls a collaborative market. The concept draws on some of the ideas in The Market for Aid, but goes a step further:

A considered combination of market mechanisms, networked collaboration, and collective regulation would be more likely to lead to significant improvements [in the aid system]. A “collaborative market” for aid might include unbundling funding from aid management to create more explicit markets; better information gathered from the intended beneficiaries of aid; decentralized decision-making; a sharp increase in transparency and accountability of donor agencies; the publication of more information about results; pricing externalities; and new regulatory arrangements to make markets work.

A Chinese Marshall Plan?

Geoff Dyer explores the idea of using China's massive foreign exchange reserves to form an investment vehicle for emerging markets. He has assembled a series of proposals from leading Chinese thinkers, including some from within the government.

For example:

• Hu Xiaolian, deputy governor of the central bank, has proposed the idea of a "supra-sovereign wealth investment fund" which would invest in developing countries so that "these countries (can) serve as new engines in global recovery and growth."
• World Bank Chief Economist Justin Lin thinks that "Chinese companies should step up investment in Africa and south-east Asia, including outsourcing some low-end manufacturing, to boost consumer demand."
• And finally, Xu Shanda, former head of China's federal tax bureau, has "called for the creation of a ($500bn) Chinese 'Marshall Plan' to lend money to Africa, Asia and Latin America to boost living standards in those regions and create demand for Chinese products to replace struggling US and European customers."

I find myself in agreement with Dyer's take on the idea:

If China can channel even a modest portion of its vast liquidity to the developing world in a responsible way that boosts demand without creating new, suffocating debt burden, it will be pushing on a door that is already opening.

Non-habit forming development aid

Does too much aid lead countries to become aid dependent? Clearly this is a possibility, and one that some aid critics believe is an inevitability. But I wouldn't say that aid is necessarily habit forming. The key issue is whether the aid is sustainable—in other words, whether the recipient country is taking the necessary steps to wean itself off aid over the longer term. And that means private sector development, without which governments will never have a tax base to replace development aid.

Mainstreaming prediction markets at development institutions

I just recently finished reading James Surowiecki's The Wisdom of Crowds, and I've been thinking a lot about how prediction markets could be mainstreamed into the work of development institutions. Sure, the Iowa Electronic Markets are great at predicting the outcome of elections, and Hewlett Packard can get a much better forecast of future sales, but how can the World Bank or USAID use these tools to make themselves more effective?

At least one part of the World Bank Group is already experimenting with this technology. CGAP, an independent research center housed in the Bank and focused on microfinance, is trying to use prediction markets to assess the future of mobile banking. My colleague Jim Rosenberg over at CGAP explains:

CGAP and DFID are trying to figure out what mobile banking might look like in the year 2020. [We are] consulting industry with a prediction market around key driving questions on “How can government and private sector most affect the uptake and usage of branchless banking among the unserved majority by 2020?”

The market is open to anyone - through Aug 10. Get a login by writing to technology@cgap.org.

Aid vs. development

Guest blogging for Bill Easterly, Lant Pritchett warns against any simple enthusiasm that mainstreaming aid evaluation at USAID (or anywhere else, for that matter) will by itself help bring about development. Pritchett draws a distinction between aid purely as assistance and the much larger goal of development:

Coming your way: International Development Data Barcamp @ the World Bank

Here’s a great quote from Esther Dyson’s interview on the future of social media (via Working Wikily):

The opaque institutions around us are becoming semitransparent, in ways that people care about. Twenty years ago, if you bought a tube of toothpaste, it might have had the address of the manufacturer so you can write to it if you had questions. Then they added a toll-free number. Now it includes a Web site, and you can find out more about the ingredients. And there are third-party Web sites, like a project called Barcode Wikipedia, where information is posted that the manufacturer might not want to volunteer: for example, where products are manufactured, and whether children are used in the factories.

The beef with Dambisa

A few months ago Dambisa Moyo came to the World Bank to present her new book, Dead Aid. I had a favorable impression from her talk, but quickly became aware of a host of criticisms of the book (see, for instance, Owen Barder or Dani Kaufmann). 

Now that I've had a chance to read the book myself, I appreciate what the critics are getting at. Their criticism focuses on the first half of the book, where Moyo argues not only that aid has not worked, but that it is really an obstacle to development. (I should be quick to add that she is talking about what she terms "systematic aid" and not humanitarian or charity-based aid.) I summarize the main criticisms of her argument here briefly:

1. Correlation does not equal causality: Moyo points out that "over the past thirty years, the most aid-dependent countries have exhibited growth rates averaging minus 0.2 per cent per annum." However, critics of the book rebut that just because much of Africa remains poor and has received lots of aid does not mean aid was the cause. Kevin Watkins puts it well: "Using her logic, you could argue that fire engines cause fires because you find them near burning houses."
   
2. It really does depend on the context: Moyo attacks the notion that aid works even in good policy environments. Kaufmann counters that "the reality is more complicated and less PR-sexy, I am afraid: ‘Aid Can Work’, yet it can also fail miserably, as it has done in many countries. The mediating factor for aid effectiveness is governance and corruption."
   
3. Cherrypicking: Moyo cites selective data points to support her arguments, e.g. the democracy agenda is oversold because Senegal has been growing slowly but Sudan has grown quickly. However, a more systematic approach to the data (e.g. Do Democratic Transitions Produce Bad Economic Outcomes?) reveals that democracy does have a positive effect on growth, even in low-income countries. (This particular example is my own, but others also make this general point.)