Without jobs, most people have no way to earn an income and support themselves and their families. Unfortunately, in many developing countries, unemployment rates are very high, jobs are not very good, and the general environment for running a successful business is undesirable.
Many poor, unemployed people in developing countries would love to take jobs if they could find them – on Ecuadorian man, while responding to a World Bank project, said that “I would like to have work of any kind.” Creating greater opportunities to join and create businesses is one long-term solution to ending poverty.
In most developing countries where unemployment is a problem, reforming the economy is often the best way to create jobs and businesses. Reforming the economy refers to passing legislation that decreases the amount of time needed to accomplish simple procedural tasks (such as registering a business) and creates an environment where running businesses, hiring employees is easy to do.
For example, in the Eastern European country of Serbia & Montenegro, economic reforms simplified many business-oriented tasks: the cost of starting a business fell by 90%, the number of days it took to register/start a new business fell from 51 to 15, and the time it took to resolve business disputes dropped by nearly half. As a result, Serbia & Montenegro experienced a 42% increase in the number of formal businesses – a huge success.
While many countries have been reforming their economy – encouraging new businesses and increasing the number of available jobs – other nations, especially in Africa, have not followed suit. In Sierra Leone, for example, taxes on businesses total to 164% of gross profit – insanely high. Of the 16 countries in Western Africa, there were only two reforms in 2004. Of all the countries in sub-Saharan Africa, just over 40% made reforms, compared with 100% in Easter Europe/Central Asia.
The 'Informal Economy'
Reforming the business environment to increase what the World Bank sometimes calls the ‘ease of doing business,’ has a profound effect on the ‘informal economy’ or ‘informal market’ of unregistered businesses often run by poor individuals. While these businesses can be life-savers for the poor, providing a steady income to the aspiring entrepreneurs (informal businesses are often supported by microcredit operations as well), the goal of any nation should be to help these ‘microenterprises’ expand into the formal economy and hire more workers.
Most often, these businesses are withheld from expanding by too-strict regulations in the formal economy that require prospective business owners to wade through masses of paperwork, pay numerous and expensive fees, and deal with a lengthy and complex registration process. In Burkina Faso (and African country), for example, it is very expensive to register a business. Because of this, many people choose to work in the informal economy – of the 12 million people in Burkina Faso, only 50,000 work in the formal economy. That’s less than half a percent.
By eliminating fees and long delays, making it easier for businesses to hire employees, and simplifying business tasks through economic reform, developing countries can increase the number and productivity of their businesses, create jobs for millions of people, and through this lift families out of poverty.
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Doing Business in 2006: Overview (PDF). 2006.
Harford, Tim. 'Why Poor Countries are Poor'. March 2006.
Labor Markets: Workers in the Informal Economy. 2006.
Reducing Administrative and Regulatory Barriers. 2006.