Thinking small about inclusive growth

Today I’m posting my fourth and final blog in this inclusive growth mini-series (you can click here for the first, second and third blogs).

Working on economic justice issues here at CAFOD one of my main areas of work is on small businesses: the role that these play in economies and to the lives of the poorest women and men and the support that they need (you can see some of our other small business blogs here). So what’s the connection…? Do small businesses have a role to play in inclusive growth?

What’s so inclusive about growth?

Franklin Roosevelt once said “We are trying to construct a more inclusive society…. We are going to make a country in which no one is left out”.

Fast-forward to 2014 and it would seem that an ‘inclusive society’ is harder to achieve than hoped with US inequality levels soaring.

So back to the question – What’s so inclusive about growth?

Historically? Well as the case of the US shows(along with many other experiences from around the world) nothing really. As the OECD highlights, there are three problems that even the record levels of growth of the 1990s and decade of 2000s failed to tackle: poverty, unemployment and inequality.

What would ‘thinking small’ look like in global value chains?

The challenges I face are obviously affected by being a small business. Middlemen buy my product and sell it to the big company. They impose their price. (Jose Luis, Nicaragua)

Big business only rarely listen to our needs because they don’t need us (Abdul, Afghanistan)

Whilst it is never as simple as “big” versus “small”, small businesses do describe a view that they are often exploited in their supply chains. The above two views were expressed by small business owners that we talked to in our (second) Think Small research that’s currently underway (see our first Think Small research here). The question is, can Global Value Chains (GVC) ever be beneficial?

The promotion of GVCs has become a hugely popular approach to enterprise development and one which is becoming a bigger focus for donors. The argument for inserting small businesses into GVCs is that this will help them to develop as businesses and thus provide jobs and benefit the economy overall; and ultimately, be good for poverty eradication.

But, given the views of small and micro enterprise (MSE) owners, we think this enthusiasm needs some tempering. It is clear, that the lived experiences of small businesses in GVCs are not automatically positive. Fairtrade research, for example highlights how value does not reach the ‘bottom’, stating;

“…there is clear desire among some to get more value out of their product. From experience, this desire comes from producers’ experience of long-term declining farm gate prices, their sense of powerless in the face of this decline, and, for those with access to the information, a painful knowledge of how their income represents an ever smaller fraction of the final retail price.”

So the question should be how can GVCs be made to benefit MSEs (who generate most of the jobs and a significant proportion of the GDP of developing countries)? Our research has highlighted 3 things that are important to consider towards this end;

1) POWER

The relative power in GVCs can determine whether these will be a negative or positive experience for MSEs. All too often, small business’s lack of voice and power leads to market marginalisation or unfavourable terms on which to do business.

In Zambia small businesses often found that they had to do business on poor terms because they needed customers and had limited options. They were also in a precarious position when things went wrong as they lacked resources, (especially financial) skills and expertise to enforce contracts when agreements were broken. Ultimately, their lack of political, social and economic power kept them trapped in this weaker position.

It’s essential to consider voice and power when inserting MSEs into GVCs to avoid exploitative relationships. Initiatives which seek to improve the bargaining position of MSE suppliers, to reinforce their rights to land and water or to tackle social and political exclusion rather than simply ‘integrating’ them into supply chains have lead to greater benefits for those participating in these GVCs.

2) RISK & VULNERABILITY 

Being included in global markets and supply chains can result in higher risks for MSEs (as the example from Zambia highlights). MSEs are often the most risk sensitive and vulnerable and short term risks can have long term impacts for them. Unfortunately, in some cases, buyers are able to pass risk down the chain, so that the MSE can bear the majority of risk in the bad times, whilst reaping a smaller portion of the gains in the good times. (Vorley & Fox write an interesting, if slightly dated, paper on this).

Initiatives which consider risk and vulnerability, on the other hand, can mean that GVCs can have a much more positive impact on MSEs. There are various activities which could help people cope with risk and so mitigate their vulnerability, for example;

• Social protection schemes can provide a safety-net when times are difficult.
• Macro-economic policies can reduce risk and decrease vulnerability of small-scale traders and businesses. Small scale producers and traders in our research talked about the importance of price stability as a tool to help in managing and planning their finances.

3) SUPPLY and DEMAND
Demand is a key consideration which is often neglected in livelihood development programmes but which our research found is a major issue for many MSEs. GVCs can potentially be a really good mechanism in addressing this demand challenge by providing stable and good buyers for MSEs (provided issues of risk and power have been addressed!).

However, GVCs are not the only solution and other, often more appropriate options, should not be neglected.

Focussing on local and regional markets can bring more widespread benefits. MSEs often produce goods and services that are more locally appropriate and are better able to compete at a local than global level. Inserting small businesses into global markets requires intense efforts to meet standards and other demands, and only benefits a small proportion of MSEs. Improving access to and conditions in local and regional markets is more likely to have more widespread benefits more easily. A critical problem in many of these is a lack of demand – quite simply it is harder to sell when most of your customers are poor. Again, social protection can be a way of injecting cash and boosting demand in these local markets. [See footnote: 1] 

Another useful tool in this regard would be encouraging countries to use public procurement to support local businesses or encouraging countries or localities to develop trade and investment strategies that support MSEs and have a local and regional focus and which prevent enclave development.

Supply issues are also a major concern for small businesses. The supply constraints that most MSEs face can make it difficult for them to be inserted into GVC as they can’t provide the goods or services in sufficient quality or quantity to meet the demands of the buyer. Helping MSEs to meet these supply constraints requires comprehensive and proactive support, based on local needs and context. This is often inadequate or neglected in favour of size-blind policy reforms.

These three considerations are essential to making sure that the effects of GVC are positive for small businesses.

With these three considerations in mind, the role of Government can’t be ignored; government needs to play a proactive role if we’re going to see GVCs being more positive for MSEs. They need to play an important role in guiding national development and trade and investment strategies so that MSEs are able to benefit. They also need to play a role in supporting MSEs and facilitating discussions between big and small business to ensure that MSEs are not marginalised.

And so we come back to the voice of a small scale entrepreneur…

Those representing small-scale fishing to the government are the big companies, not us fishermen… and that’s when the fisherman loses. (Edmundo, Nicaragua)

For GVCs to work for small businesses there needs to be change around the three issues raised here. The role and contribution of MSEs in these systems needs to be valued and rewarded fairly. Power, risk and vulnerability need to be addressed and strategies to include them fairly need to consider issues of supply and demand. The benefits of GVCs may not be automatic; but with some work and careful consideration the benefits can be there.

——

[1] These can be beneficial because that injection of money into local markets is likely to stay within that local economy – through people buying local goods and services.  These transfers can stimulate and support the local economy during difficult times and also have significant multiplier effects – the cited Malawian study for example, found that for every $1 transferred; at least an extra $2 was generated within that community. (Davies, S & Davey, J. 2008. “A regional approach to estimating the importance of cash transfers on the market: the case of CTs in Malawi.”)

Are Small Businesses getting a Bigger Profile at the World Bank?

The importance of small businesses has been getting more profile at the World Bank (and beyond), if this week in Washington is a good indicator.

CAFOD is pleased to see that this realisation seems to be catching on. At a meeting of a right-wing think tank on the World Bank’s controversial Doing Business project, former World Bank President, Paul Wolfowitz suggested that the project’s flagship report should be renamed “The Small Business Report”.

At a meeting with civil society, Russia’s G20 Sherpa said that she “could not agree more” with CAFOD that small businesses should be central to the efforts of the Development Working Group’s future work plan.

But it is too soon for the Economic Justice team at CAFOD to relax and take a break – even if we think we’ve earned one! We still have our work cut out to turn this emerging consensus into a real benefits for poor entrepreneurs in developing countries.

Take, for example, the Doing Business project. The four top priorities that we often hear from small businesses are: access to credit, corruption, property rights and the need for better education and health services (most poor businesses rely on labour of one or two individuals – so their health and skill set are important to success). Examining how Doing Business rates in helping them to overcome these constraints indicates some important directions for reforms.

Starting with corruption – Doing Business does not tackle the issue, despite its importance to the ability to operate and the success of poor entrepreneurs. The Doing Business team have started to pay attention to the results of enterprise surveys to more closely align their topics with the priorities of firms – but clearly more needs to be done.

Credit, on the other hand, is tackled by Doing Business, but highlights another short-coming of the project. Zambia ranks very highly on the indicator, yet over 90% of firms still cite access to credit as a main barrier to success. This suggests that Doing Business does not, by itself, do a good job of guiding government reforms. The Zambian government, guided solely by Doing Business might think it has done a great job. However, a discussion with local businesses would soon put them straight. This is why we are recommending Doing Business should only be used in combination with such dialogues and other more specific and detailed diagnostic tools and we must be sure to use Doing Business cautiously and appropriately in the policy reform process.

Doing Business also falls down with respect to property rights. This time the failing is that Doing Business is biased towards one-size-fits-all and is not well-designed to support context-specific solutions. For example, Doing Business promotes one kind of property rights and does not recognise the importance of community, collective rights or rights of use and access on which many poor people’s livelihoods depend.

Finally, it is right that Doing Business does not directly address health and education issues in its indicators – it is a specific, limited tool, not a panacea to all problems. There are some things better left to other tools However, Doing Business does promote low overall rates of corporate taxation, which undermines the ability of governments to provide this broader support to their working populations. Examining the impact of specific indicators and revising them according to their impact on poor enterpreneurs also needs to be on the to-do list of the World Bank review process currently underway.

The World Bank needs to take these next steps to support small business if it is to achieve the vision of new World Bank President, Jim Yong Kim, presented at these Spring meetings. This vision, to underpin a new strategy to guide the Bank’s work, has at its core goals to achieve shared prosperity and poverty eradication and recognition of the importance of the private sector in achieving these ambitions. Although it does not explicitly mention small businesses, they will be central to this endeavour.

Schumpeter’s nightmare and CAFOD’s vision

Only time for a very quick blog on this, but the British Academy released a report today looking at legitimacy and trust in Britain’s business culture entitled ‘Schumpeter’s Nightmare’ by Professor Michael Moran. Link here: https://www.britac.ac.uk/policy/Business_Legitimacy.cfm.

Whilst not an in-depth research piece the report raises some fascinating questions about public trust in business and the business response as well as the advocacy carried out by NGOs like CAFOD.  For those who would like to know more detailed and accurate information about CAFOD’s views on these issues, take a look at these links: http://www.cafod.org.uk/content/download/584/5694/file/Policy_Private-sector_Everyones-business-discussion-paper.pdf

http://www.respublica.org.uk/item/It-s-the-common-good-economy-stupid

Social protection and small businesses – missing the obvious

Social protection has risen rapidly up the policy agenda and rightly so, the benefits of “just giving money to the poor” are important.

For example, it helps to mitigate risks which prevent poor people making the most out of their livelihoods and it helps to overcome shocks with otherwise cause them to suffer long-term impacts from short term shocks. Small business owners that CAFOD interviewed to inform its “Think Small” report informed us that they undertook several different kinds of activities because the market was not always good for any one of them (undermining their efficiency and profitability). We know from economic crises that short term shocks can cause losses in health or education that affect economic prospects long-term (as well as human ones). Having something to fall back on can stop these barriers to successful livelihoods for the poorest.

A lack of demand – simply having no one to sell to – was also a barrier to small business owners who didn’t have the skills, connections or capital to sell except locally. Injecting cash into the local economy through social protection helps here too.

Boosting inclusive growth is cited as a key objective in the renewed interest in social protection by policy makers – so why are the needs of small businesses run by poor men and women so little evident in new proposed strategies of the World Bank or G20 discussions?

Most social protection schemes do not help these poor entrepreneurs – because they are in the informal sector which is poorly served by government safety nets and schemes. This despite the fact that these enterprises make up the majority of employment opportunities for poor men and women, as well as provide a de facto safety net for the majority who are not reached by government schemes.

This should be a critical area of review for the World Bank, G20 and other donors as well as national governments.

However, it is also important that the renewed interest in social protection as a means to boost inclusive growth, does not detract from social assistance programmes, such as pensions or benefits to other vulnerable groups. These can help small businesses if they are spent locally, especially if payments are systematic, sufficient and over the longer term.

Analysing the impacts of social protection on local markets and poor people’s livelihoods is important and under-researched. There is too little monitoring of who money goes to or how, let alone how it is affecting the local economy. As well as direclty helping poor entrepreneurs to have the confidence to invest and manage risk directly, we also need to better understand how who we give money to and what instruments are used affect their economic prospects and design interventions bearing this in mind.

Will women always be a bit on the side for the World Bank?

At the London launch of the World Bank’s latest report on gender today, one of its contributors praised the report as being a departure from previous “just add women and stir” approaches to gender in development policy and practice.

 There is much to be welcomed in the new report, in particular recognising the importance of the economic empowerment of women and tackling the barriers in formal, informal, economic and social institutions that can prevent it.

But the report is short on action – a challenge that needs to be picked up by Bank staff, member countries and civil society to make sure that the good analysis gets put into practice.

As the title of this blog suggests, this doesn’t mean just doing a few extra things to help women, but instead truly shifting thinking, policy, practice and the incentives, measurements and targets that guide policies and reforms.

A good example of a case for reform are the Doing Business rankings of the World Bank. Back in 2008, these were criticized as being gender-blind. A lack of data and methodological limitations of constructing the rankings have meant that three years on, they remain that way – although we now have a side report on business women and the law. It doesn’t receive a fraction of the marketing support, media attention or policy influence that the main rankings do. Despite making up a significant majority of small-scale entrepreneurs in poor countries, women remain a bit on the side.

Does it matter if we are doing both sets of things – the ones for women and the ones for the “mainstream” business community? The answer lies in opportunity costs, an issue raised by one of the commentators at today’s launch.

This year’s gender report lays out a raft of things that should be done to help women become more successful in their economic life – they are only marginally touched upon by the Doing Business rankings. If the profile of these essential reforms is sidelined by gender-blind, conventional economic policy tools like the doing business rankings, governments simply cannot do their best – either for women or the economy at large – with the limited financial and human resources at their disposal.

Small cheer for the poorest countries at the G20

Rather heartening at the end of a day when the G20 felt more like a blow-by-blow account of the troubled career of Greek Prime Minister Papandreou than a conference on fixing the global economy, President Sarkozy chose to talk a lot about the poorest countries in his final press conference.

Understandably, there is still a lot of attention on the threat to the Eurozone, but it was encouraging to have headlines about innovative financing, and particularly the Financial Transaction Tax which he described as feasible, financially necessary and morally unavoidable (my rough translation).

This is largely because of the high profile report by Bill Gates to the G20 on financing development, which among other things calls for an FTT, legally binding transparency requirements for extractive companies so that developing countries can better tax their activities, and taxes on transport industries.

Of course, we always look for more and better – CAFOD, for example, is seeking country by country reporting by all multinationals to be enshrined in international accounting standards – but that global leaders are talking about new sources of finance and targetting them at eradicating global poverty and adapting and mitigating the impacts of climate change is a welcome development.

Perhaps these announcements would not stand out so much if we had had the G20 we hoped for when President Sarkozy set out his amibitious agenda last year. Development issues and key issues of global financial regulation remain largely unaddressed or have unambitious, watered down proposals.

But the G20 is an unlikely forum to deliver such things. It has proven to be too responsive to the financial sector, in particular, and too exclusive – with nominal input from civil society and indeed from those poorest countries that President Sarkozy was so concerned about.

G20 & Development? It’s all Greek to them (sadly)

Poor old Greece has unfairly become the whipping boy of the G20. But you can’t help feeling that if the likes of Greece and the Greek people – whose desire to have a say in how their economy gets out of the hole that it’s in has caused all the kerfuffle – had more of a say, the G20 might do a better job.

The G20 thinking on the Greek debt problem goes something like this: Greece has gotten into a mess because of the irresponsible behaviour of the financial sector, the Greek government (and people) need to pay the price to get out of this mess in order to keep the financial sector onside.

The G20 slavish obsession with reactions of “the market” in the absence of real efforts to manage the market better is bewildering.

CAFOD agrees with the recent Vatican statement (perhaps unsurprisingly) that there must be a better way for governments to manage global markets, rather than be managed by them.

One aspect of this would be an independent and predictable framework for arbitrating on sovereign debt claims alongside standards for responsible lending and borrowing.

The lack of such a system has left developing countries, and more recently Eurozone ones, forced to negotiate from a position of weakness “austerity measures” (that’s cuts to us) and held the G20 summit hostage to negotiations and brinkmanship – rather than finding the fixes for what got us into this mess in the first place.

If you asked the people in developing countries and in Greece, if they wanted a more sensible way out of debt problems than watching nervously for market reactions (in the name of stability and growth), forcing cuts to keep them happy and jeopardizing stability and growth as a result, the G20 priorities might look somewhat different.

Follow @CAFODwire on Twitter for all the latest updates on the G20 Summit

Supporting people behind small businesses

Last week, DFID published its private sector strategy. Like us, DFID recognised that small businesses are a vital source of jobs in poor countries.

It’s not a difficult or technical economic issue – small businesses provide jobs, income and self-respect for millions of poor men, and especially women. It’s even simpler, if someone can make a cartoon of it: