In countries such as India, Bangladesh, Ghana, Madagascar, Mali, and Kenya, about three-quarters of the working populations are engaged in self-employment. Typically, these are not good jobs: earnings are usually lower and social protections fewer than in wage employment. So why are so many people self-employed in low- and middle-income countries? It is not because the people there are born entrepreneurs trying their hand at growing their own businesses. For the majority in most countries, it is because they have no better choice.
In view of this, what should governments, development banks, and others seeking to promote better livelihoods do?
First, support self-employment for those who have no better way of earning a livelihood and try to raise the returns to self-employment. I discuss specific measures below.
Second, in those places where policies work toward other objectives—for example, “orderly urban areas” in such major South African cities as Johannesburg, Cape Town, and Durban—reform or remove those regulations and restrictions that hinder the self-employed poor and prevent them from earning even a meager living.
Third, stimulate wage employment so that some of today’s self-employed can be hired into better-paying work. Economic growth is important, but it is not enough. Job creation is important too.
Within this broad three-part framework, the options for policy interventions are many.
Policies that can raise the returns to the self-employed in their current activities and sectors include:
- designing productive inputs (such as irrigation equipment) that can raise the productivity of the self-employed;
- providing poor farmers with more to work with, such as more land, equipment, extension and outreach services, and fertilizer and other inputs;
- facilitating off-farm wage employment and self-employment in rural nonfarm enterprises;
- making capital available to the poor at affordable rates;
- building skills and business know-how;
- stimulating micro-finance and micro-franchising; and
- adopting a positive policy stance toward the self-employed that avoids hampering them.
Policy interventions can also expand opportunities for wage employment so that the self-employed poor can move into more remunerative employment. These include general measures affecting labor markets:
- Stimulating job-enhancing economic growth.
- Working toward a more open, but not predatory, international trade environment.
- Encouraging more foreign aid.
- Harnessing the energies of private companies.
They also include labor-market measures such as:
- Avoiding above-market labor costs that reduce employment opportunities.
- Removing excessive barriers to employment.
- Increasing workers’ skills and productive abilities in areas where job vacancies go unfilled because not enough people possess the skills needed to fill them.
- Establishing workfare and other programs aimed at creating jobs for the poor.
The highest priority interventions vary from country to country, from place to place, and group to group within a country. However, the best interventions have one characteristic in common: if better work opportunities are created, the poor will step up to seize them.
The self-employed in the developing world are an important target group. They should be aided, not hampered or ignored.
© Gary S. Fields
Read Gary S. Fields’ full article: “Self-employment and poverty in developing countries.”
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