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ETC Initiative boosts businesses, jobs

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Kyrgyz family survives on traditional hat-making financed by EBRD micro-credits.

Region's rural poor can use micro-finance to build businesses.

Does the EBRD, with its focus on boosting economic development by investing in the private sector, help to alleviate poverty in the poorest countries in its region of operations? The answer is undeniably yes, according to two studies revealed to donors backing the Bank’s Early Transition Countries (ETC) Initiative for those seven countries of the Commonwealth of Independent States.

“You would think it would be obvious that economic growth necessarily reduces poverty but that’s not the case,” said Deputy Chief Economist Steven Fries who initiated the studies.

“There are situations where countries that are not growing much still manage to address poverty by redistributing income. This is the case on some OECD countries. On the other hand, there are countries that grow rapidly but where most people remain very poor. Among many reasons this may be historic inequality between groups in society or misuse of government assets and revenues such as in some countries rich in oil, gas or minerals.”

In contrast, he said, strong and sustained growth is delivering significant poverty reduction in countries in transition from command to market economies. A recent World Bank study showed robust economic growth in transition countries since 2000 has lifted 40 million people out of poverty including in the ETCs: Armenia, Azerbaijan, Georgia, Kyrgyz Republic, Moldova, Tajikistan and Uzbekistan. Many of the people lifted out of poverty were the working poor.

Does EBRD address poverty?

In theory, the EBRD helps the working poor by financing their employers’ growth: this should mean more jobs, or at least more secure jobs, with higher wages. Has the theory worked out in practice?

To find out, Francesca Pissarides of the Bank’s Office of the Chief Economist and Jan Svejnar of the University of Michigan surveyed 1272 micro, small and medium-sized enterprises (MSMEs) in Bulgaria, Georgia, Ukraine and Russia’s Nizhny Novgorod region. MSMEs in the EBRD region typically have difficulty in accessing credit to finance growth.

Two-thirds of those surveyed had been financed in 2002 by local banks and other financial institutions through which the EBRD channels credit targeted at small businesses. The other third was a control group of businesses active in 2002, Mr Fries explained to the February 24 meeting of donors supporting the ETC Fund.

In the preliminary analysis of the survey, his team discovered that, compared to the control group, firms with EBRD-backed financing had better survival rates, were 60 per cent more profitable, had lower labour costs because their staff was 30 per cent more productive, and created five per cent more jobs. “This is a story about what capital-starved firms can accomplish once they get some financing,” said the economist.

While the study did not look at the impact of EBRD financing on wages, Mr Fries said that research shows “a very clear link between productivity improvements and wages, and between small business growth and increasing employment.”

Banking still inadequate

The EBRD-financed businesses were also more likely to get renewed financing, albeit from their local EBRD-backed bank rather than from elsewhere in the financial sector. Explained Mr Fries: “This is due to the inadequate sharing of credit information between banks, the institutional difficulties in pledging collateral, and the fact that many local banks simply are not interested in financing small businesses.”

A second, related study by Steven Fries and Anita Taci of the Office of the Chief Economist shows that through its engagement with local banks, the EBRD has helped to improve the overall efficiency banking systems, reduced their customers’ banking fees and fostered greater competition between banks.

Several donors expressed their great satisfaction with the study which they said bolsters the EBRD’s commitment to focus increasingly on its poorer countries of operation south and east of the eight that joined the European Union in 2004. Poverty reduction “is one of the core issues under the ETC Initiative,” said Netherlands representative Hans Sprokkreeff. He was one of several who argued that projects under the initiative should be assessed in part by their impact on wages and job creation.

Written by EBRD's Senior Writer Kate Dunn.

Contact:
Office of the Chief Economist
Tel: +44 20 7338 6037
Fax: +44 20 7338 6110
Email: brownm@ebrd.com

3 March 2006