- Knowledge base
- Policy question
To make growth more inclusive, policies can be designed to improve the business environment and make it easier for SMEs to access growth capital in an investor friendly manner. Blended finance can be an effective tool to encourage investments into targeted SMEs by transforming the risk-return profile for investors. There are reasons to focus additional support towards the most disadvantaged groups such as women and youth. In the long term they are likely to provide the most significant contribution to a more equitable society. Financial inclusion, access to training and education, engagement into agricultural value chains have proven to be effective strategies if executed and measured appropriately.
Economic growth is commonly considered to be a necessary ingredient for poverty reduction, but is not sufficient to guarantee equal benefits for the poor. In fact, the higher the existing disparity in a given country, the less likely it is that benefits of growth will accrue to the low-income communities. The World Bank reports that while a 1% increase in the most equal countries produces a 4.3% lessening in poverty, in the most unequal countries, the same 1% results in a paltry 0.6% reduction.
Researchers report that interventions to improve the business environment strongly correlate with poverty reduction and allow for growth in the small to medium enterprise sector which is key for job creation. Such an environment is dependent on enabling policies, progressive private sector leadership, solid environmental, social and governance (ESG) standards, and methods for enforcement. SME growth can be accelerated by blended finance – capital (loans, equity investment, trade finance) and donor grants – that offers opportunities for equitable, sustainable and ethical growth. UNCTAD reports that financing of SMEs is more effective when business services improve the capacity of SMEs to grow and repay loans. Conversely, well operating SMEs (exhibiting strong ESG standards) are better able to attract the needed investment for growth.
The most disadvantaged groups require additional measures to benefit from economic growth, and this is an area where donors can be especially proactive. For example, on a macro level, donors can support governments to fight corruption, increase transparency, and strengthen the judiciary. At the program level, donors can also insist on targets and budgeting that promote inclusion in the development initiatives that they fund. Recently, for example, AusAID (DFAT) has mandated that all development programs must allocate 80% of their budgets to activities that are primarily or secondarily gender focused. This means that programs are accelerating their capacity and innovations in the area of women’s economic empowerment in order to maintain their ability to attract programming dollars. Civil society can support such efforts with their knowledge of local communities and the disadvantaged amongst them, their networks, their ability to negotiate socio-cultural barriers and so on.
Market development (MD) programs promote private sector development for poverty reduction and inclusion of the poor and marginalized. Through the identification of incentives for private businesses, such MD programs have seen significant gains. For example, agriculture provides incomes to 70% of the world’s poor, and agricultural value chains (domestic, regional and international) require more raw materials from farming enterprises. By enabling poor farmers to deliver increased volumes of raw materials, with consistent delivery and higher quality outputs, there is the potential to integrate smallholders into sectors that are commercial and sustainable. On the other hand, private sector delivery of affordable and appropriate products (e.g., smaller seed packets or laundry detergent sachets) enables households at the bottom of the pyramid to satisfy their consumption needs
Horizontal inequalities in fragile and conflict-affected regions represent a particularly egregious and challenging problem faced by marginalized groups (and may have been a significant factor in escalating conflict in the first place). Evidence suggests that while improvements can be realized in some areas, these can easily be offset by other factors relating to group inequality or ineffective reforms. Policies to correct economic, social and political horizontal inequalities need to be prioritized in order to redress imbalances and avoid the return to conflict – for example, policies that aim to reduce discrimination, increase participation and promote socio-economic advancement for all. Moreover, the stronger the economy, the greater likelihood of job creation and equal hiring practices that can in turn promote the reduction of horizontal inequalities and the resulting tensions/conflicts.
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