82040 ESTIMATING THE SOCIOECONOMIC IMPACT OF IFC FINANCING: MACRO CASE STUDIES FROM GHANA, JORDAN, SRI LANKA AND TUNISIA THEME: ACCESS TO FINANCE SUMMARY OF MAIN FINDINGS THE FULL REPORTS BY STEWARD REDQUEEN ARE AVAILABLE ON ICOLLABORATE: HTTPS://IFCICOLLABORATE.IFC.ORG/GROUPS/IFC-JOB-STUDY 1. OBJECTIVES AND METHODOLOGY example, in Sri Lanka and Tunisia, investments in food processing generate relatively more indirect jobs than in- As part of the IFC Job Study, the consulting firm of Stew- ard Redqueen has conducted four country studies to vestments in other sectors (Figures 1 and 2). Direct invest- estimate the number of jobs and value-added sup- ments in agriculture, for example, are associated with the ported by IFC’s past investments in Ghana and Jor- highest number of direct jobs but a smaller number of dan, and by the potential or hypothetical effects of indirect jobs are generated. investments (of $1m in various sectors) in Tunisia and Sri Lanka. The studies entail analyses of the quanti- Figure 1 and 2: Estimated direct and indirect fiable socioeconomic impacts of IFC’s investments. More job impact of $1m investment into each sector qualitative aspects, such as the role of advisory services, in Tunisia (top) and Sri Lanka (bottom) are mentioned, but a full assessment was beyond the scope of these studies. Indirect 2nd - dependent on linkage throughout economy Indirect 1st - dependent on linkage throughout economy The studies are based on input-output methodol- Direct employment in sector invested in Business Services Utilities Communication ogy. By taking into account linkages across sectors, this Agriculture Public Services Construction Transport Trade Manu- facturing Mining Food Processing method allows quantifying the wider impacts (direct, in- 5 6 8 7 8 12 9 18 12 12 direct and induced) throughout the economy on jobs 17 35 and value-added arising from investing into various in 69 % economic sectors. This methodology has several limi- 94 71 67 tations, among which are the assumption of constant 53 70 47 productivity (“Leontief” or fixed-proportion production 20 functions - without regard to structural changes over 654 245 613 37 99 125 44 213 54 46 554 time); equal treatment of different types and terms of number of jobs financing; no distinction of different sizes and produc- tivity levels of beneficiary firms; as well as equal treat- Indirect 2nd - dependent on linkage throughout economy ment of the impacts of IFC and other financiers.i Indirect 1st - dependent on linkage throughout economy Direct employment in sector invested in Business Communication 2. MAIN OVERALL FINDINGS Services Mining Public Construction Transport Food Manu- Agriculture Utilities Services facturing Tourism Trade Processing Direct jobs at IFC’s clients are only the tip of the ice- 17 berg, as additional employment is supported along 22 27 35 46 45 in the supply and distribution chains (“indirect jobs”) % 94 39 50 53 71 and throughout the wider economy (“induced 71 67 56 53 jobs”). For example, in Ghana, 17,800 direct jobs are 37 37 34 32 19 15 directly supported at recipients of IFC capital injections, while 18,900 indirect and 13,200 induced jobs are sup- 2057 738 733 426 463 92 340 1230 245 187 412 567 ported in the wider economy. number of jobs In fact, any investment decision also influences the Source: Steward Redqueen (2012). extent to which local supply chains are strength- Modeling of the Socio-Economic Impact of Potential IFC Invest- ments in Tunisia: and Modeling of the Socio-Economic Impact of ened. Some sectors have stronger linkages to the rest Potential IFC Investments in Sri Lanka. of the economy than others. This is country-specific. For 1 There may be a trade-off between the number of 3. ADDITIONAL SPECIFIC FINDINGS FOR jobs supported and the value added per job, at GHANA AND JORDAN (BACKWARD least over the short-to-medium run (see Figure 3 LOOKING STUDIES) for the case of Ghana).ii Investments in labor-intensive sectors, such as agriculture and trade, are supporting a IFC investments in Ghana and Jordan are support- higher number of jobs but the value-added per job of ing a large number of jobs. As of June 2011, IFC’s those sectors tends to be relatively low. By contrast, cap- outstanding investment portfolio in Ghana amounted ital-intensive sectors (e.g. mining, business services) were to $317m (equivalent to about 4% of long term debtiii), found to support fewer overall jobs but typically these 40% of which was channeled through financial institu- are of higher productivity, contributing relatively more to tions (FIs) while 60% was invested directly into com- GDP. Investing in these sectors, and thus potentially in- panies (Non-FIs). It is estimated that including indirect effects, this portfolio supports $235m of value-added creasing productivity, may lead to more long-term wealth (equivalent to 0.7% of GDP) and about 37,000 jobs creation and possible transformational effects. (0.4% of the labor force) (Table 1). For Jordan, of the Capital scarce sectors, such as agriculture and construc- $296m investment provided by IFC (equivalent also to tion, generally have higher multipliers in value-added and about 4% of long term debt), 80% is invested directly employment generation. Presumably, as more capital in companies while 20% is channeled through FIs. In is invested in these sectors, productivity would increase total, this portfolio is estimated to support $212m of overtime. value added (equivalent to 0.8% of GDP) and about 9,100 jobs (0.6% of the labor force) (Table 2). Figure 3: Trade-off between jobs and value- Further, financing mobilized by IFC supports addi- added per job in Ghana tional jobs. IFC mobilized $40m in Ghana and $139m Value added per job in Jordan from other investors, supporting an additional 20,000 estimate of 1,000 jobs in Ghana and 3,200 jobs in Jor- 18,000 10,422 dan. This illustrates an estimate of IFC’s support for job 16,000 14,405 creation through mobilization. It is also important to note 14,000 14,256 that overall, IFC’s client companies support more than 12,000 3% of GDP and 1% of the labor force in Ghana, and 10,000 more than 6% of GDP and 5% of the labor force in Jor- 8,000 dan, with their entire operations. 6,000 4,435 4,000 Ghanaian Average 2,185 2,000 1,624 Number of Tables 1 and 2: Estimated impact of IFC’s Jobs (,000) 10 20 30 40 50 investment portfolio in the economy of Construction Services Transport & Communications Industry Trade Agriculture Ghana (top) and Jordan (bottom) Ghana IFC Source: Steward Redqueen (2012). Client Segment Outstanding Finance Associated Value Added Associated Employment in $ mln in $ mln in $ mln Socioeconomic impact of IFC financing in Ghana Direct/Indirect Induced Effect Direct/Indirect Induced Effect NON-FIs 189.6 63.5 16.3 7.7 3.6 FIs 127.3 171.1 44.5 29.1 9.7 Sectoral investment decisions affect the distribu- TOTAL 316.9 234.7 60.8 36.7 13.2 tion of value-added across different beneficiaries, Participants in the forms of salaries, profits and taxes. In Ghana, TOTAL 39.8 12.5 3.1 1.0 0.7 about 65% of value-added takes the form of salaries, 25% is company profits and the rest is taxes. In Jordan, Jordan IFC almost 45% of value added takes the form of profits Client Segment Outstanding Finance Associated Value Added Associated Employment in $ mln in $ mln in $ mln and 43% salaries. For Tunisia, workers in public services Direct/Indirect Induced Effect Direct/Indirect Induced Effect and agriculture would receive the highest share of value- NON-FIs 243.7 90.5 27.3 3.4 1.5 added, reaping 65% and 50%, of the total respectively. FIs 52.8 122.0 40.1 5.6 2.3 TOTAL 296.5 212.5 67.5 9.1 3.8 Manufacturing would distribute a higher share of value- added in the form of taxes, benefiting the government, Participants while mining value-added would go largely to corporate TOTAL 138.7 37.5 11.8 3.2 0.7 profits. In Sri Lanka, business services were found to have Source: Steward Redqueen (2012). the highest share of value-added as wages and salaries Socioeconomic impact of IFC financing in Ghana and while agriculture has the highest share of value-added Socioeconomic impact of IFC financing in Jordan. among all the sectors in the form of profits. 2 With IFC’s existing investments in Ghana, agricul- Sri Lanka and Tunisia. The effect of these services on ture, trade and manufacturing provide more jobs jobs and value-added is not quantified, but the report than other sectors. In the case of Jordan, business highlights that they can be very significant. In addi- services are also a strong contributor.iv In Ghana, tion, they can bring about transformational impacts the least number of jobs are being supported in con- that contribute to long term development, such as struction and utilities while in Jordan, mining provides demonstration effects. For example, IFC’s involvement the least number of jobs supported by IFC’s existing in- in the public-private partnership of the Queen Alia vestments. This is determined by the structure of IFC’s International Airport in Jordan gave a positive signal portfolio, FIs’ portfolio and the employment intensity of for foreign investors. In Ghana, a study using a similar the different sectors. The assumption of constant pro- methodology estimated a very high jobs multiplier for ductivity despite new capital investments, including in a mining project (28 jobs supported throughout the agriculture, also comes into play. economy for every job in the mine) and attributed this A trade-off may exist between indirect invest- high multiplier at least in part to the community devel- ments through FIs, which tend to support more opment and supply chain linkage program supported jobs, and direct investments in non-FI companies through IFC advisory services.v which tend to generate fewer jobs but lead to higher value-added per job. Direct IFC investments 6. POLICY IMPLICATIONS tend to benefit larger, more capital-intensive firms, with Any policy implication must acknowledge that high labor productivity and which face international the findings rely on strong assumptions and are competition. In contrast, the portfolios of IFC client FIs meant to be “directionally correct” over the short- are more diversified, reaching smaller, more labor-inten- to-medium run. Due to the assumption of “Leontief” sive firms. or fixed-proportion production function, for example, As a result, while investments in FIs represent 40% of the findings are more suited to illustrate the effect of total investment in Ghana and 20% in Jordan, they sup- incremental investments using the same technology, port 80% and 60% of jobs, respectively. Also, employ- rather than large-scale or transformational investments ment multipliers per $1m invested are much higher for –such as those significantly improving infrastructure or Ghana than for Jordan. This is explained by the higher introducing new technology– that would affect the pro- labor intensity and reliance on FIs of IFC’s existing port- duction function. folio in Ghana. Depending on the stage of development, • In countries with large numbers of unemployed 4. ADDITIONAL SPECIFIC FINDINGS or under-employed, significant job creation ef- FOR TUNISIA AND SRI LANKA (POTEN- fects could be achieved by: a) investing in labor- TIAL $1M INVESTMENTS IN VARIOUS intensive sectors (agriculture, trade and labor- SECTORS; FORWARD LOOKING) intensive manufacturing), which concentrate Investments of $1m into various sectors in the Tunisian mostly on low-skilled and lower salary workers; economy are estimated to support, on weighted aver- or b) investing in FIs, which leads to more total age, $2.9m value-added in each sector. In Sri Lanka, value-added and jobs than investing into high this figure is slightly higher at $3.1m. Depending on the labor productivity sectors. capital productivity of a particular sector, $1m invest- • In countries where increasing productivity is ment into specific sectors can have a larger effect (e.g. important, job creation could be achieved by: $5.4m value-added supported in Tunisia’s food process- a) investing into transformational projects, that ing industry) but in a well-financed sector, the effect will introduce new technology or increase the pro- also be smaller (e.g. $1.1m value-added supported in ductivity of a large number of enterprises (e.g. Tunisia’s trade sector). through improved infrastructure; b) investing into On average $1m invested into Tunisia’s various sectors is larger (usually more capital intensive) non-FIs; estimated to support 247 jobs (excluding 18% induced or c) investing into sectors facing international effects) throughout the economy and the same amount competition, which tends to strengthen labor invested in Sri Lanka supports 650 jobs (excluding 43% productivity. induced effects). The extent of these multipliers is deter- Depending on the stage of development and other mined by the labor intensity per sector. country circumstances, policy makers must prioritize. Focusing on direct job creation may miss the point. 5. THE IMPORTANCE OF ADVISORY Assessments of job creation effects need to go beyond SERVICES the impact on a specific client or sector and include IFC also provides advisory services, including capacity the effects along the supply and distribution chains building and technical assistance, in Ghana, Jordan, throughout the economy. Some sectors have more link- 3 ages than others (but the extent of linkages is country- Country specifics have to be taken into account. For specific), and should be the target of programs designed example, the sectors with largest linkages in the supply to strengthen local supply chains. chain differ across countries. In general, low income coun- Advisory services can generate large economic tries are typically more labor intensive and thus invest- effects, especially transformational effects. While ments can have larger direct and indirect job effects. (On these effects were not quantified, it was shown that the other hand, because of lacking local production capac- they can be significant. ity, low income countries may need to import more than others, which could limit indirect effects.) In more devel- There is some indication that mobilization effects oped countries, however, supporting greater more value can have a substantial impact. IFC can therefore play added per job might be a higher priority than supporting a role in catalyzing private capital in sectors and coun- pure job creation. Thus country specifics have to be taken tries where this capital is still scarce. into account before extrapolating from these results. Authors: Junko Oikawa (CDI), Ferran Casadevall (CDI), Steward Redqueen. i For further details on methods and assumptions, please see the methodological note. Regarding the data, the input-output tables have been obtained from GTAP (Global Trade Analysis Project) and have been updated to 2009 or 2010 (2007 for Sri Lanka). Employment data have been extracted from national sources. ii Value-added per job is calculated by dividing the total related value added in a sector by the total number of related sector employment. Higher value-added per job does not to suggest a higher wage or income per job. iii IFC. CIR. iv Sectors are: agriculture, mining, manufacturing, utilities, construction, trade, transport, communications (only for Ghana), business services, public services. v The Socio-Economic Impact of Newmont Ghana Gold Limited, Kapstein & Kim, 2011. 4