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Universal recipe will secure prosperity for all

28 August 2013 04:45 am - 0     - {{hitsCtrl.values.hits}}


By Andrea Iffland and Paul Holden
The recent Small- and Medium-Sized Enterprises Summit in Madang had job creation and growth as its worthy goal. Although Papua New Guinea (PNG) has grown rapidly over the past decade, this has not translated into jobs in the non-resource sector and unemployment is worryingly high. The SME Summit is a welcomed step towards promoting the creation of jobs and reducing the cost of doing business. It is therefore timely to outline some of the factors that have proved to be successful in generating employment in other countries. First, in the longer run, employment, growth and prosperity are determined by one thing alone, namely how productive the economy is. Productivity is a function of many things – technology, how educated the workforce is, how effective government services are, the legal system, and the levels of investment.

Second, this in turn suggests that the government should act to provide a business environment that is conducive to long-term investment. Uncertainty and frequent changes in policies increase risk and discourage investment. A low cost investment climate is the surest way to encourage entrepreneurship and growth. Third, PNG is blessed in being a resource-rich economy. Its natural resource wealth provides the opportunity to set the economy on a long-term growth path that will bring prosperity to its citizens for generations to come. However, resource wealth also causes the exchange rate to strengthen, which suggests that for the foreseeable future, employment growth outside the resource sector will mainly occur in services because a strong exchange rate makes it difficult for manufacturing industries to compete with imports.

Fourth, SMEs will undoubtedly provide many employment opportunities and their growth needs to be encouraged. It is important to remember, however, that it is larger firms that are the most productive, which pay higher wages and which provide the best employment opportunities. All over the world, companies that start small, as SMEs, but which grow large are the dynamic drivers of employment and prosperity. Policies therefore need to ensure that barriers to growth are minimized. Restrictions on entry and firm expansion need to be low. This means that it should be easy to start firms; there should be finance for expansion and minimal regulation. Fifth, the government presence in the economy should be light, with minimal intervention. In fact, a consistent finding from studies of countries that have experienced rapid employment growth has been that the government spending, as a proportion of the gross domestic product (GDP), is low and the regulatory burden placed on the private sector is limited. Government monopolies, which have been proven to raise costs and limit employment opportunities, are also rare or non-existent in high employment economies.

Finally, while it is understandable that the government would like to reserve some activities for its own citizens, this should be kept to a minimum. In a country such as PNG, where entrepreneurial and technical skills are currently limited, there is much to be gained from foreign entrepreneurs, who bring knowledge to the local economy. The general pattern of development is one where local people gain skills from working for foreign companies and then start their own businesses. Countries that have reserved a large number of activities for locals have found to their cost that this does not result in an upsurge in employment. It fosters ‘front’ companies, where locals are figureheads for foreigners, while not providing the flow on benefits for genuine investors. For example, Malaysia, which ran an extensive programme that reserved many activities for its own citizens, is realizing that this has been counterproductive and has reduced rather than expanded employment.

The principles outlined in this article are universal. They apply equally in high income and low-income economies. PNG’s future depends on it transforming its mineral wealth into prosperity for all its citizens. PNG’s entrepreneurs have nothing to fear from foreign investment, the benefits of which will flow through the whole economy. Promoting such investment, while at the same time encouraging its citizens to become investors and entrepreneurs, will ensure employment growth and long-term success.

(Andrea Iffland is Regional Director of the Asian Development Bank’s (ADB) Pacific Liaison and Coordination Office in Sydney, Australia. Paul Holden is Senior Economist with the ADB’s Private Sector Development Initiative (PSDI))

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