Vibrant Enterprise Sector Unlocks Jobs

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World Bank president Jim Yong Kim.png
World Bank president Jim Yong Kim

The fear of losing or not finding a job is a primary concern for most people. According to the World Bank Development Report (WDR) 2014, about three quarters of respondents in developing countries worry a “great deal” about being unemployed. The survey notes having a job is indeed valuable: it produces income to support consumption and to help meet important goals, such as providing education, health care, and assets for family members.

A job also contributes to self esteem, a sense of personal security, and even social cohesion.

The Bank insists these benefits are pillars of resilience and prosperity for households and communities alike. The WDR, however, notes that not all jobs are the same for purposes of risk management.

From the perspective of workers, jobs that provide secure and increasing income and a safe working environment are preferable to jobs that do not carry those benefits. Moreover, jobs that produce goods and services that consumers want and can rely on and jobs that respect and conserve the environment are better from society’s perspective, the report observed.

The Bank argues that a vibrant enterprise sector is best situated to provide such jobs through its potential to mitigate the risk of unemployment, reallocate resources to create opportunities, and contribute to worker, consumer, and environmental protection.

The Bank further argues that two characteristics—flexibility and formality can greatly help enterprises support people’s risk management.

The WDR highlights two examples of continents apart and illustrates how flexibility and formality can improve the enterprise sector’s capacity to foster people’s resilience and promote prosperity.

The first example illustrates the importance of flexibility. In Europe, Denmark, Germany, and Spain are among the many countries hit hard by the recent global economic and financial crises: Denmark from an overheated labor market, Germany from a shock to global demand, and Spain from a popped real estate bubble.

“By the beginning of 2013, more than 25 percent of Spain’s labor force was unemployed. Denmark’s unemployment rate also increased, but to a much lower 7.4 percent. In Germany, the rate was just 5.3 percent,” the WDR stated.

According to the WDR, many factors explain the different experiences of these three countries. For one thing, the shock that hit Spain was larger than those affecting Denmark and Germany.

But explanations of the widely different unemployment outcomes should also consider the flexibility of the labor markets in those countries.

Labor market reforms in Germany, the report explains, helped moderate wage increases before the international crisis and enabled employees and firms to adjust hours worked through work sharing without the need for layoffs.

In Denmark, job separations were high, but unemployment spells were short and eased by a robust safety net and retraining programs for the unemployed.

In Spain, in contrast, where a high percentage of the workforce was employed in the hard-hit construction sector, stringent employment regulations with significant severance costs, along with other structural factors such as the relatively high share of unskilled young labor, have added to the high and persistent unemployment.

The second example shows the benefits for enterprises of becoming formal. In Peru in recent years, informal mines have sprung up in response to rising gold prices. Ignoring existing regulations, these informal mines have caused significant deforestation, notes the WDR.

The mercury used in the extraction process has contaminated rivers and the atmosphere and threatened human health. In the La Libertad region, according to the report, the Poderosa Mining Company took an innovative approach to the problem after informal miners invaded one of its mining concessions.

The Bank explained that the company began to formalize the invading miners, signing agreements that allowed them to continue mining under its direction. The agreements, which meet international environmental management quality standards, have increased the small miners’ income and decreased the harm from deforestation and mercury contamination.

These two stories convey the main message that flexibility and formality enhance the enterprise sector’s ability to contribute to people’s resilience and prosperity.

An enterprise sector that is flexible is more capable of responding to shocks by reallocating resources within and across enterprises and of innovating in an ever-changing world, the WDR adds. “An enterprise sector that is formal is better situated to take advantage of legal protection and contract enforcement and to make better use of public infrastructure.”

In addition, formal enterprises can be more easily held accountable for their impact on worker safety and on consumer and environmental well-being. There are both synergies and trade-offs between flexibility and formality.

In countries with responsible and strong state institutions and streamlined regulations, formality enhances flexibility.

In countries with weak state institutions and cumbersome regulatory regimes such as Liberia, however, the cost of formality can be too large for the majority of enterprises and workers.

 In this case, “informal is normal,” and informality is a means for the economy to achieve a certain degree of flexibility and for workers to access a practical safety net.

A diverse array of workers and enterprises then remains informal because they are excluded from or choose not to join a formal sector that offers limited benefits.

Informality is often a second-best response, however. The majority of the poor work in the informal sector out of necessity rather than choice.

In Ghana, for example, more than 60 percent of informal salaried and self-employed workers without employees would rather have formal wage jobs. Informal mechanisms may be effective for small firms and simple transactions, but are insufficient for larger firms and complex relations with workers and markets.

That may be why wage employment as a share of total employment increases as a country develops.

Notwithstanding significant variation across and within regions, self-employment—a large part of which is likely of a subsistence nature—is widespread in the developing world. If the enterprise sector is to fulfill its role in supporting people’s risk management, public policy for the sector requires reforms that balance the economy’s need for flexibility with society’s need for legal and regulatory protections.

The WDR argues for a combination of reforms to help the enterprise sector become flexible as it gradually becomes formal.

These reforms, according to WDR, include improving the basic foundations of the enterprise sector by strengthening property rights and reducing uncertainty about government policy; implementing and enforcing sound regulations; and providing inclusive social protection.

In the longer run, when sound regulations for flexibility are in place, the government can pursue reforms that encourage both flexibility and formality by spurring innovation; increasing the skill level of the labor force; and enhancing worker, consumer, and environmental protections.

These reforms are necessary not only to increase growth but to enhance people’s resilience and to promote prosperity.

Although the risks that enterprises themselves face and their risk-taking decisions are very important aspects of a vibrant enterprise sector, the WDR maintains its focus on risks faced by people. It thus focuses on the enterprise sector as a sector and on its function of supporting people and society in managing risk in different ways.

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