Employment creation: policies for a key development challenge

Economic transformation does not automatically lead to increased employment. Policies matter, as the example of Denmark’s windmill industry shows—and some initiatives such as the European Union’s Africa-Europe Alliance are promising. This column argues that it is time to focus on innovative policies that address the shortcomings of past strategies of employment creation.

Across the globe, economic inequality and job precariousness have increased. While high-income earners have benefitted from globalization and growth, many low-income earners face stagnating salary levels, decreased job security, and a higher likelihood of working in informal jobs—if even finding any jobs at all. While many developing economies are experiencing economic transformation, large segments of the population are being left behind.

The challenge of creating inclusive growth—that is, economic transformation based on employment creation—is well illustrated by South Africa and Botswana, countries that I have both studied and lived in. Despite some differences in policy focus, both countries face exceedingly high levels of unemployment and underemployment. Official figures put unemployment in Botswana at 17% of the total labor force and 27% in South Africa.

While these unemployment rates are high, they do not reveal the full picture. For example, of the total employed working-age population in Botswana, half are in informal or temporary employment or doing non-wage activities; in South Africa, this proportion amounts to about 40%. In addition, by some calculations, the labor earnings of the richest 10% of the population in Botswana are 28% higher than the earnings of the poorest 10%; in South Africa, the difference is about 14%.

The governments of Botswana and South Africa have pursued different strategies for improving employment levels and economic security among the population. Botswana, for example, has sought to keep minimum wages low, whereas in South Africa, the strategy has been to keep minimum wages at a higher level. In neither case has the strategy worked well.

Economic policies supporting private sector growth as well as state-funded public works programs have been pursued in both countries, but they have not had sufficient long-term effects to make a dent in the employment creation challenge. And while South Africa has implemented a generous social protection system (unlike Botswana), it has not been enough to improve employment opportunities, although it has brought down the poverty level significantly.

The cases of Botswana and South Africa highlight how employment creation, particularly for low-income segments of the population, is a difficult challenge. In Gaborone and Pretoria, as in other capitals around the world, all agree that high levels of unemployment are undesirable, but identifying and agreeing on the best strategies is much more difficult.

Complex problems are unlikely to be solved by simple solutions. So to find solutions to sustainable employment creation, perhaps we need to look in unlikely places to identify possible strategies.

I would like to highlight an example from my own country: Denmark. From humble beginnings in the 1970s, the wind turbine industry there has grown tremendously to become the world leader. Of course, building industries that are competitive on world markets and which require rising levels of employment is key. But the main point with this example is that the Danish wind industry was supported by a broad portfolio of government policies that stimulated development, technological change and learning.

Early on, the Danish government was active in stimulating demand for wind power and, via subsidies and cost reductions, encouraged the expansion of wind power solutions. As the market grew and the windmills became more cost-effective, the subsidies were gradually removed.

You might question the relevance of this example by saying that Denmark is just too small, wealthy and well functioning. Yet strikingly, Norway—equally small, wealthy and well-functioning—has failed to build a strong wind power industry to the same extent. Arguably, this is due to the lack of supportive policies by the Norwegian government.

Tellingly, while employment figures in the Norwegian wind industry in the mid-2000s were about 200–300 people, around 21,000 were employed in the Danish wind industry, a figure that has since grown to more than 33,000. This might not seem many, but recall that Denmark is a country of under six million people and that the growth of windmill production has been accompanied by growth in related industries.

The example of the Danish wind power industry highlights the critical role that governments can have in supporting strategic sectors through subsidies, product development and learning. It also indicates how the government must gradually remove its support as the sector grows and becomes self-reliant.

Many developing countries do not necessarily have the capacity or the resources for their governments to do as the Danish government has done. But other stakeholders might take the supporting role instead.

For example, in 2018, the European Union (EU) launched an initiative called the Africa-Europe Alliance for Sustainable Investment and Jobs. A notable element in the initiative is the idea that the EU backs investments by private entrepreneurs with a guarantee. Thus, public funds support private initiatives with the common objective of encouraging the development of enterprises and employment creation. It will be interesting to follow this initiative to see whether it might succeed where so many other efforts have failed.

 

Author:

Marianne S. Ulriksen works at the Danish Centre for Welfare Studies, University of Southern Denmark. Her research focuses on comparative politics, welfare policy development, social protection and social justice, poverty and inequality, and taxation and redistribution.