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UK steps up investment in jobs and economic transformation

Written by Dirk Willem te Velde

​Earlier this week the Senegalese President Macky Sall provided a useful reminder of what matters for the world’s poorest countries. ‘For most African countries,’ he commented during the UN conference on Financing for Development, ‘the key challenge nowadays is structural economic transformation. Simply put, our economies must be able to create enough good jobs to employ growing populations.’  

Justine Greening, the UK Secretary of State for International Development, made a similar point during her recent speech here at ODI – and it is not difficult to trace the source of concern over employment. With 11 million additional young people set to enter labour markets in Africa each year over the next decade, the region faces a jobs creation imperative – and economic transformation holds the key.

The good news is that the UK’s agenda for jobs and economic transformation is being translated from principle to practice. In a policy statement at the end of the Addis summit, the Department for International Development announced the first recapitalisation of UK CDC (formerly Commonwealth Development Corporation) in 20 years. The move is part of a well-planned strategy to support the demands of the poorest countries through the use of financial instruments for private sector development.

While policies to promote economic transformation are mostly domestic in nature, international action, backed by finance, can play a critical supportive role. The CDC provides a key delivery mechanism for the UK government’s efforts to support jobs and economic transformation in the developing world – and recent reforms have strengthened the focus on job creation in the poorest countries. Although most of its positive achievements are not in the public eye, CDC claims that its investments support 1.3 million jobs directly.

The announcement of more funds for the CDC – £735 million over three years – is very much in tune with the agreement hammered out at the UN conference this week. The Addis Ababa Action Agenda has helped to shift the discussions towards job creation and economic transformation.

For example, the agreement says: ‘We encourage both international and domestic development banks to promote finance for micro, small and medium-sized enterprises, including in industrial transformation… We recognise that both public and private investment have key roles to play in infrastructure financing, including through development banks, development finance institutions and tools and mechanisms such as public-private partnerships, blended finance.’

The hope now is that the Addis Action Agenda will prompt governments, donors and private sector to combine finance and policies to support these objectives.

It is true that it is not always easy to understand direct – let alone indirect – impacts of development finance institutions (DFIs) such as CDC. However our initial research indicates that there is evidence to suggest that DFIs can catalyse more investment than would otherwise have been the case, and that they can support increased productivity and hence structural transformation.

Our research also shows that we need to look for indirect effects which are difficult to identify without careful analysis. This can make the measurement of transformative economic growth effects different from what the development sector has traditionally looked at: for example, counting direct outcomes such as number of school teachers and nurses supported.

Of course finance on its own is not enough to create jobs and economic transformation. The recent European Report on Development on financing for development, which ODI led and which was used intensively by Commissioner Mimica and other negotiators in the run-up to the Addis conference, shows that policies and finance have to be viewed in an integrated fashion: more finance channelled through the wrong policies will not deliver results. While the report argues for a more catalytic use of aid through DFIs, it also suggests that policies in developing and developed countries can steer, mobilise and even reduce the need for finance.

The decision to provide more funding through CDC is a good first step, even though the job is not yet done in its entirety.