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?

Helping Developing Economies Grow: the UK Government Approach

By Geoffrey Chongo: Head of Programmes, Jesuit Centre for Theology Reflection

The last week of February has been an eventful week for me. I have had a rare privilege of participating in a trade out of poverty event in Parliament, an event that was graced by the Minister of State for International Development, Mr. Alan Duncan. My role in the event was to give a Zambian perspective as a response to the UK’s new approach of supporting developing countries’ economic development agenda.

The UK’s new focus on economic growth through private sector development is welcome. Like they have rightly put it, economic growth is an important means of raising people’s incomes and reducing poverty in the developing world – it creates jobs and opportunities for poor people to support their families and build more stable futures. However, I hasten to say that from my experience, the manner of this growth will determine whether it will raise incomes and reduce poverty in an equitable way. Growth alone is not sufficient to reduce poverty unless it is guided so that it is inclusive. Otherwise it creates other concerns like income inequality.

UK Government should therefore ensure that the growth it supports is inclusive by way of including small businesses, where most poor people work, in its growth approach. Small businesses should be consulted on the support that the UK Government intends to give to private sector development so as to incorporate their needs.

It is also important to note that small businesses in developing countries particularly Zambia have developed entrepreneurial mindsets and thus any support given to them is not likely to be treated as aid simply for consumption but for applying in their small businesses. Reflecting on the blog comments on the article that we wrote on how to achieve pro-poor economic development it is evident that the role of small businesses in equitable economic development cannot be ignored. Small businesses’ challenges need to be addressed if they have to be helped out of poverty.

It was interesting to see Government agreeing to an open discussion on a very important government policy. It is my hope that CAFOD will continue to work in this area to effectively influence government policies as they relate to the poor.

Trademark Southern Africa – what could be done differently?

 

By Paul Spray (Traidcraft) with inputs from Sarah Montgomery (CAFOD)

Paul is the Director of Policy and Programmes at Traidcraft. CAFOD and Traidcraft have been working together for a number of years on the aid for trade and small business agenda (see the footnotes below). It is great to welcome Paul as a guest

This month, DFID for the first time cancelled a programme as a result of a review by the government’s Independent Commission for Aid Impact (ICAI). It was a flagship programme called Trademark Southern Africa, whose purpose was “to improve southern Africa’s trade performance and competitiveness for the benefit of poor women and men”.

Thinking small… who, me?

In February this year I walked into our Freetown office, in Sierra Leone, and was greeted with “Think Small! You’re here! Welcome!” – who needs a name when one has a project so closely associated with you?

Private Sector and development at the World Bank

Written by Tina Chang with inputs from Anne Lindsay and Sarah Montgomery

“Engaging the private sector is not about how we feel about business; it’s about how high our aspirations are for poor people. If we rely only upon foreign aid, then our aspirations are far too low.” (Jim Yong Kim)

President of the World Bank Group, Jim Yong Kim made the above statement in a recent Oxfam blog. Similar statements were made at this year’s annual meetings in Washington and the Bank is increasingly seeing a central role for the private sector in the fight against extreme poverty.

It may be stating the obvious to say that the impacts of the private sector on development are as diverse as the private sector itself but it does bear repeating. Ultimately this understanding is important for unlocking the (we would agree with Dr Kim) significant role of the private sector in development.

Let them do it for themselves: the Compass revolution

By Christina Chang

The idea that having a decent income would be a priority for someone living in poverty might seem screamingly obvious rather than revolutionary. But the shift in approach to economic development strategies that this would require is, in fact, rather radical.

The need to help poor men and women to help themselves by supporting their livelihoods was a key finding of the Compass project, which asked 1420 poor men and women across four countries, what was their agenda for a new global deal to fight poverty.

“The first thing that anyone needs is a job. We all need to be employed to fight poverty” Mrs Bhebhe, 58, Bulawayo, Zimbabwe

Over recent decades, economic development strategies have focused on getting the macro-economic conditions right, putting in place a good regulatory framework and helping countries to attract foreign firms and develop export industries that can help to transform their economies.

Helping local small businesses has at best come a sorry second to these efforts. Sometimes these “livelihoods” interventions have been seen as more social endeavours to help people out but not really relevant to economic development. Sometimes they have been criticised as counter-productive – distracting from the real business of economic development or locking people (and countries) into low-grade jobs. Sometimes policy makers have argued that the best thing to help small businesses is to focus on those more glamorous, big win economic development outcomes –having bigger GDP growth or export figures than your neighbours.

Getting the big stuff right is still important, but evidence is mounting that this is not enough to ensure that jobs are created or poverty reduced.

Compass research points to another economic development strategy proposed by poor men and women to help them get themselves out of poverty and contribute to their local, national and, yes, global economy, rather than wait for benefits to “trickle down” to them.

The first element of this strategy is unsurprising – many poor men and women still lack the basics to participate in economic life. These range from a lack of land to farm to a lack of access to health and education services that enable you to be fit and skilled enough to earn living.

“Those who live well have more land”  Wage worker, Charagua, Bolivia

“..when you have gone to school and got a job, you will be getting a regular salary”  Uganda farmer, 25

Getting the basics right is something governments have committed to do and making progress on – notably over 180 governments committed to a “social protection floor” giving all citizens the right to a basic income and access to essential services. Our job now is to make sure that these promises are realised in a way that supports poor people’s livelihoods.

Perhaps more surprising is the emphasis that Compass participants put on addressing issues of power and risk as critical to successful livelihoods.

Just having access to land is not enough, if you then don’t have enough power to ensure a profit from what you grow there. Farmers often had to share their income with landowners and to sell to middlemen on unfavourable terms so that:

“no matter how we work hard in the farm, our standard of living still remains low.”  Ricardo, 45, farmer, Philippines

Risk, and the measures that people need to take to deal with it, undermines livelihoods. Risks were described as multiple and increasing – risks of ill health, poor labour conditions, volatility in global markets and also due to climate change.

“When the price of nuts drops, it affects us all, us, the traders, the pickers. All the village is affected when the nut price drops because the entire economy works around this.”

Poor communities are ill-equipped to deal with such risks, which can have devastating and long-term impacts as a result. To cope, some take on several jobs and extra work (or over-exploit themselves, as one participant explained it), undermining their longer-term earnings or even their health. Others migrate, which can provide much needed income, but which can also increase the vulnerability of the migrant, as well as create new problems for those they leave behind.

The views of the men and women participating in the Compass research, chime with the findings of CAFOD’s Thinking Small work with hundreds of poor, small-scale entrepreneurs. This research found that traditional donor priorities and approaches did not match well with the needs and priorities of poor entrepreneurs. For example, initiatives often helped them to become better at producing things – such as handicrafts or honey – but they didn’t succeed because didn’t pay enough attention to demand, as one Compass participant put it: “There is not much selling, there is no money”.

With initiatives such as Compass and Thinking Small, we begin to hope that the era of assuming that overall economic development will benefit poor men and women and of assuming that others know best what they need and what works for them, is beginning to come to a close. It’s a slow revolution, but it’s a start.

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.”)

Bold Rethink of ‘Doing Business’ at the World Bank Too Important to Leave to Politics

For decades CAFOD has helped poor men and women set up micro and small enterprises. We know that helping people start and run a business is only half the job. Without the right business environment, the odds are stacked against their success and they can easily end up back at square one, or never getting off the ground in the first place.

This is why we have been so interested in the World Bank’s Doing Business project and congratulated President Jim Yong Kim for taking the decision to commission a comprehensive review of this flagship publication.

The Doing Business project ranks countries’ business regulations and laws across ten key indicators, but the group of experts led by Former South African Minister of Planning and Finance, Trevor Manuel, who reviewed the project, found that many of these indicators were a poor tool for policy-makers.

We would tend to agree. For a long time CAFOD has been asking why the Bank is using indicators that drive down labour standards and corporate tax rates; questioning the usefulness of indicators on “getting credit” which place Zambia sixth in the world rankings while 90% of small businesses in the country cite this issue as a major problem. And why the project doesn’t cover corruption – a major hurdle to business success in many countries.

The Panel’s report will not be comfortable reading for the lobby groups who have defended Doing Business in corridors of power and in the media, who have even claimed the review process itself was a “tragedy”. But a tool that gives guidance to policy makers in developing countries on how to manage their private sector regulation matters too much not to be open to scrutiny and reform.

But the project should not be abandoned. The Panel is absolutely right to call on the Bank to keep Doing Business, but to do it better and make it fit-for-purpose.

They have recommended some far-reaching changes including:
• renaming the report (because it does not actually tell you that much about what “Doing Business” is like in any country);
• re-homing it in the research department (so that it is more aligned with the Bank’s broader development thinking and clearly promoted as a “knowledge” document); and finally
• removing the controversial ranking of countries (as it suggests that the indicators show the “right” reform under any circumstances).

But whether or not the Panel’s report is adopted and what happens next is far from a done deal. The Panel raises many questions it does not fully answer and its report does not contain comprehensive ideas for reform. This is not the first time that far-reaching changes to Doing Business have been proposed. In 2008 the World Bank’s independent evaluator reached similar conclusions, but little changed and the same problems persist. The Panel does recommend ongoing processes and further examination in order to reach the best results for Doing Business.

Those key decisions now lie with the Bank’s leadership – specifically President Kim and the Executive Directors, representing different countries and regions that make up its board. This will not be an easy consensus as, although countries are almost unanimous in the view that something needs to change, they do not yet agree on what that change should be.

The debate has become polarised and politicised. Whilst US officials have heavily supported the project, China has often been portrayed as its sole critic. But criticisms of Doing Business come from a wide-range of governments and a wide range of groups – labour unions, small business groups, civil society and academics have all voiced concerns. Refusing to listen to critics or refusing to change the project as result of evidence from the ground is no way to defend it. The only real way forward is an open consultation with a broad range of groups.

This project is too important and the stakes too high to leave to politics. The 2008 financial crisis has shown very clearly that everyone is affected by what kind of regulatory regime is in place. This publication should be an important guide for policy-makers in the developing countries wishing to provide jobs and a route out of poverty for the poorest men and women.

The World Bank’s Doing Business report is its highest profile publication and an incredibly influential project. To ignore these calls for reform and to let this become an increasingly irrelevant and criticised project will be doing the World Bank and the small businesses we work with a real disservice.

 

Originally on Huffington Post

Making Small Business a Big Deal at the G20

By Sarah Montgomery & Tina Chang

Small Businesses in Sierra Leone

To Mariamata Sbangara, struggling to sell groceries on the streets of Kenema, Sierra Leone, the world’s “premier economic forum” must seem a world away.

But there are good reasons for President Putin and his G20 colleagues to put small businesses such as Mairamata’s front and centre of the agenda for their St Petersburg summit this September.

At this Summit the G20 will revisit its agenda on supporting the economic development of low income countries, as the Seoul action plan expires. Improving the focus on small businesses within this work plan would do a lot to improve the development impact of the G20. For example, the G20 has paid a lot of attention to infrastructure – a key constraint to most small businesses in poor countries. In recent research that we have conducted in 12 developing countries, access to markets due to poor infrastructure provision is a major barrier. In Kenya one livestock business owner reported that getting customers could be a problem for him as ‘sometimes customers are unable to reach markets due to bad roads.”. In Mondul Kiri, Cambodia a rice farmer reported that “the road to our community is bad and so the rice collectors don’t want to come to buy from us.” The message from small enterprises was clear; you cannot be successful if you cannot get goods to market.