Developing countries must prioritize the removal of the key obstacles to growth that private sector companies face to increase job creation, a study released by a member of the World Bank group revealed.
The World Bank said that about 200 million people are unemployed globally and estimated that 600 million jobs must be created by 2020, mainly in developing countries, just to keep up with population growth.
It noted that the answer lies with the private sector, which provides nine out of every 10 jobs, however, four obstacles pose a particular challenge to job creation in the private sector.
According to the International Finance Corp.'s (IFC) study entitled Assessing Private Sector Contributions to Job Creation, these challenges includes a weak investment climate; inadequate infrastructure; limited access to finance for micro, small, and medium enterprises; andnsufficient training and skills.
"Cumbersome and costly regulations are preventing companies from operating and growing in the formal sector," the IFC study stated.
To solve this, it mentioned that comprehensive investment climate reforms help create or improve jobs. Multi-reform programs are also more effective than single reforms, however, it requires sufficient information and the ability of regulatory institutions to make sound policy decisions.
"Certain stand-alone reforms--such as those affecting business entry, taxation, competition, and secured transactions--have demonstrated a positive impact on growth and jobs. A lower tax rate and investment promotion efforts both can help attract foreign direct investment," the study further said.
Meanwhile, the study added that the lack of infrastructure is a big problem in lower-income countries, especially a reliable power supply.
It observed that the most significant job effects often come from having improved services like more reliable power. The private sector has increasingly invested in infrastructure, and going forward there will be a big need to improve urban infrastructure, as more people move to cities.
"Infrastructure investments also can be very effective in reducing poverty and promoting more inclusive and equitable growth," the IFC study claimed.
On the other hand, the study remarked that micro, small, and medium enterprises, and women entrepreneurs were the most affected by lack of access to finance. Firms operating in less developed countries also tend to face more financing constraints that prevent them from growing.
Reform of financial sector regulations, policies that help financial institutions broaden their lending activities to underserved groups, increased competition in the financial sector, and enhancement and development of financial infrastructure were some of the measures that can improve access to finance, it said.
More skilled workers needed In addition, the study noted that technology and productivity trends are producing a shortage of high-skilled workers for larger companies in higher-income countries.
"At the same time, the demand for low skilled workers is decreasing, which increases the surplus of low-skilled workers both in developed and developing economies," it stated.
The IFC study added that investing in education, training, technology, and innovation can boost job creation.
"While effects from training and skills programs seem to be mixed, combining classroom with on-the-job training seems to work best, focusing on disadvantaged groups appears to have greater impact, and employment effects from training programs seem to be more significant in the medium term than in the short term," it said.
IFC said that the study examined how and under what conditions the private sector can best contribute to job creation and poverty reduction, drawing on a review of the literature and evaluations; surveys of more than 45,000 businesses in over 100 countries; a website, blog, and essay competition to solicit outside views; macro and micro case studies of IFC clients; and the institution's own operational experience and lessons learned.
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