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Summary note- Enterprising Africa: What role can financial inclusion play in driving employment-led growth?-Roundtable 2

By Foreign Policy Centre.

Financial inclusion and jobs: Drivers of development and growth in Africa?

How might improving the access, distribution and use of a wide range of affordable and appropriate financial services and products (financial inclusion) facilitate job creation and stimulate balanced economic growth across Africa? In addition, how might the private sector build partnerships to champion strong leadership, sustainable innovation and responsible engagement in order to help develop an enabling environment where universal financial inclusion and employment-led growth can thrive?

Through a series of three roundtable discussions and the publication of a report supported by Barclays, the Foreign Policy Centre seeks to explore how greater financial inclusion has the potential to help drive the development of new businesses and new jobs, thereby igniting development transformation across Africa.

Promising African economic outlook 2013 and addressing the financial inclusion-job creation challenge

The global financial crisis has led to an economic age of austerity, mounting uncertainty and rising inequality. Yet, according to the 2013 African Economic Outlook, both 2013 and 2014 promise to illustrate Africa's ability to withstand domestic, regional and international volatility. The continent is projected to grow by 4.8% this year and growth rates are expected to increase further to 5.3% in 2014. Nonetheless, this impressive economic growth and its accompanying resilience have made little impact on soaring unemployment levels, endemic underemployment and escalating income inequality . According to the World Bank's 2013 World Development Report, 10 million new workers enter the labour market in Sub-Saharan Africa each year . Predictions from the report suggest that by 2035, Africa will collectively boast the world's largest labour force, exceeding the size of the work force in China and that of India. This increasing demand for employment will be accompanied by rising income levels. Between 2010 and 2020, 40% of the world's poorest people will experience an almost two-fold increase in their purchasing power. Incomes for this demographic are set to rise from approximately USD $3 billion to USD $5.8 billion . The burning question is therefore, how to accelerate the creation of decent employment for all, particularly young people. In addition, how might improved access to inclusive financial services across a wide range of client groups – with rising disposable incomes – impact on employment expansion? More significantly, can universal financial inclusion be achieved at an affordable cost and will it be economically viable for the private sector to deliver?

An enabling policy environment for financial inclusion

Alongside a growing economic and social demand for employment-led growth, financial inclusion is also being championed as a critical global public policy priority to help reduce global inequality and poverty. Promoting universal access to financial services and products has enjoyed rising prominence, ranging from recommendations in shaping the post-2015 UN Millennium Development Goals to the G20's reassertion of the centrality of financial inclusion in its development agenda. In addition, only recently, the World Bank President called for collective action to achieve universal financial access by 2020.

Mapping the links between financial inclusion and expanding employment

As attempts are made to stimulate the world economy and rebalance economic growth, never before has the need to forge a new global consensus on how to accelerate productive employment creation been such a pressing economic and development priority. Understanding the impact that full financial inclusion plays in accelerating job creation is critical for improving the lives and livelihoods of vulnerable people globally. Arguably, a striking example of the importance of this is that 97% of manufacturing jobs across Ethiopia are in microenterprises. In addition, economies such as Rwanda and Ethiopia have experienced impressive reductions in poverty rates due to modernisation in the agricultural sector. Yet, building such productive capacity is often constrained by a lack of access to finance, financial capability, appropriate skills and training and access to markets, as well as an absence of an enabling business environment, unresponsive infrastructure and a lack of supportive regulation. Under such circumstances, the potential to create employment is increasingly limited .

When financial inclusion may not be a sufficient condition for job creation and growth

Financial inclusion is by no means a magic bullet. There is a growing body of evidence suggesting that not all small- and medium-sized enterprises (SMEs) may have equal potential for generating jobs and growth. The job creation impact and growth potential of SMEs is determined by a number of factors. Those small business owners who set up enterprises, not through choice, but because they are unable to secure other employment, often develop enterprises which remain small and are concentrated in only a very small number of industries, are focused mainly on sustaining their own livelihoods, are concentrated on the need to manage risks (as opposed to taking risks) and, arguably, have limited future prospects. In contrast, young businesses that are established by those with the energy, drive and capacity to innovate, take risks, build peer networks and identify talent with complementary skills are those more likely to drive economic growth and employment . Taking this into account, how can providers of financial services and products, in partnership with policymakers and policy advocates, ensure that interventions are appropriately targeted to support dynamic enterprise that generates a multiplier effect on wider economic development?

Download Summary note 2-Financial inclusion and employment-led growth (130 kilobyte PDF)