IFC Study: Obstacles to Growth and Job Creation

A new study by IFC, a member of the World Bank Group, finds that much-needed jobs in developing countries can be created at a faster rate if policy makers and development institutions make it a priority to remove the key obstacles to growth that private-sector companies face.

The study, “Assessing Private Sector Contributions to Job Creation,” concludes that four obstacles pose a particular challenge to job creation in the private sector: a weak investment climate, inadequate infrastructure, limited access to finance for micro, small, and medium enterprises; and insufficient training and skills. Removing these obstacles can significantly increase job creation.

The study was released today as a companion report to the World Bank’s World Development Report 2013 on Jobs which was released last October.  In a joint communiqué issued at the launch, 25 leading international finance institutions immediately pledged to work together to address job creation, and learn from each other’s experience.

“Joblessness is a global crisis that is especially urgent in the poorest countries”

About 200 million people are unemployed globally. The World Bank estimates that 600 million jobs must be created by 2020, mainly in developing countries, just to keep up with population growth. The answer lies with the private sector, which provides nine out of every 10 jobs.

“Joblessness is a global crisis that is especially urgent in the poorest countries,” said Jin-Yong Cai, IFC’s Executive Vice President and Chief Executive Officer. “As the world’s largest development institution focused on the private sector, we believe that job creation offers the surest path out of poverty. Promoting it in developing countries is a top priority for us.”

Other key findings include:

• Micro, small and medium enterprises (MSMEs) generate the most jobs in developing countries but they are also less productive, pay less, and do not offer as much training and development opportunities for employees. Smaller companies are also often most affected by obstacles to job creation, meaning they are unable to grow to their full potential.
• Access to finance is a key constraint for MSMEs—easing it can result in significant job creation. For instance, IFC provides financing to a large network of financial intermediaries in emerging markets, which in 2011 financed 23 million MSMEs, which in turn employed over 100 million people.
• The largest numbers of jobs are created within companies’ supply and distribution chains. For example, an IFC loan to an Indian cement manufacturer helped the company expand and create more jobs. For every job created within the company, more than 20 were created in the supply and distribution chains.
• Lack of power is the most significant constraint in lower-income countries. Providing companies with reliable power could boost annual job growth by at least 4 percent.
• Women and youth face specific employment challenges. Legal barriers, lack of access to finance, and cultural norms often force women to work in jobs that pay less and are less secure. Young people are almost three times more likely to be unemployed. They also are more likely to work in informal jobs.

The study found that 45 million people enter the work force each year. Yet more than a third of companies studied across the globe were unable to find employees with the skills that they needed.

“IFC and the World Bank Group have a number of programs that focus on closing the skills gap,” said Roland Michelitsch, an IFC Manager and the study’s lead author. “But the potential to do more exists—not only for us but also for other development institutions, policymakers, and the private sector itself.”

About IFC

IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector. We help developing countries achieve sustainable growth by financing investment, mobilizing capital in international financial markets, and providing advisory services to businesses and governments. In FY12, our investments reached an all-time high of more than $20 billion, leveraging the power of the private sector to create jobs, spark innovation, and tackle the world’s most pressing development challenges. For more information, visit www.ifc.org.

About the Study:

• The IFC report draws on an extensive literature review and the experiences of more than 45,000 businesses in over 100 countries, as well as macro and micro case studies conducted in South Asia, Africa, and the Middle East.
• The study examines the constraints faced by private sector in developing countries, focusing on the most binding constraints to job creation that can be addressed by development finance institutions oriented toward the private sector.