Business Environment

Working Group Policy Brief

Business Environment
Reform and Labour
Productivity

Labour productivity matters

Labour productivity is key to economic development. Gains in productivity
lead to more goods and services being produced, which contributes to
lower prices benefiting consumers and down-stream firms. Productive At a glance
firms are more competitive, increasing returns, profits and employment.
Productive employees enjoy better working conditions and earn more. Improvements in labour
More profit and income leads to higher tax returns, which boosts the productivity can reduce
capacity of governments to deliver services. All of which lead to a poverty. Particularly
reduction in poverty. promising are interventions
linked to training, innovation,
The large differences in national income per capita mostly reflect employee engagement,
incentives and safety.
differences in labour productivity. Indeed, the Organization for Economic
Cooperation and Development (2015, The Future of Productivity) suggests Donor and development
productivity will be the main driver of economic growth and well-being agencies should customise
over the next 50 years. Similarly, the International Labour Organization their interventions based on
(2016, World Employment Social Outlook) argues that a one percentage a clear analysis of the drivers
of labour productivity and
point increase in the contribution of labour productivity to Gross Domestic allow sufficient time to
Product per capita growth reduces poverty by around 0.18 percentage ensure the implementation
points. of these reforms.
Good partnerships with key
Analysing labour productivity at the sector level market actors are essential
when applying market
Many economies are experiencing a slowdown in productivity. Some of system development
the general reasons put forward for this are the fallout from the global approaches to enhancing
financial crisis, less innovation, a boost in the supply of labour based on labour productivity. Where
population growth and migration, and stagnating wages leading to lower possible, build on the
demand and a reduced motivation for productivity improvements. importance and influence of
such actors to champion
However, it is important to go beyond these general explanations to reforms.
consider the changes occurring to productivity at the sector level.
Engage public and private
A sector level analysis shows staggering differences between industries. partners to co-design and co-
For example, agriculture, which still employs the largest share of workers implement interventions.
in low and middle-income countries, exhibits no employment growth, but
shows particularly high productivity growth. This is likely due, at least in
part, to the rise in agricultural prices. Financial services on the other hand April
has high employment growth, but negative productivity growth.1
2018
1Data stems from the 2006-2011 period (source: Groningen Growth and Development
Centre). This dataset systematically covers industries and countries around the world.
 Focusing donor support for business What influences productivity?
environment reforms
Donor and development agencies must consider Many business environment factors influence
which industrial sectors to focus their business productivity. This Policy Brief focuses on a subset of
environment reforms on: those where growth is five ‘framework conditions’ that are both workforce
high or those where growth is low? While data on and productivity related. These conditions
past performance is only one consideration, it is encompass the legal framework and collective
important to ask why productivity is low in one agreements among public and private stakeholders,
sector and not in another. This question can only be as well as their implementation through policies,
answered on a case-by-case basis. Keeping in mind institutions and processes. The table below shows
the differences in industry performance between that labour productivity is influenced by a number
countries, it is crucial to use up-to-dated local of workforce related drivers. 2
industry data for such an assessment.

Table: Labour productivity drivers

Framework
Strong driver Weak driver Inconclusive evidence
conditions
1 Recruitment and –– –– Employment protection
retention legislation
2 Workforce skills, Training (some types or Training (some types or ––
knowledge, settings) settings)
capacities Actions to overcome the
skills mismatch
3 Productive Innovation (some types or Innovation (some types or ––
workplace settings) settings)
technology
4 Motivation Employee engagement Employee participation Minimum wage and
Incentives Working time collective bargaining
High performance Work-life balance, family
workplaces friendly programs
5 Workplace risk Occupational safety and Occupational safety and ––
health (safety) health (health)

2 Data This table lists drivers identified in a broad review of the literature. The drivers are classified based on their estimated effects on
labour productivity according to the following crude rules: When the evidence predominantly points in one direction (i.e., either to a
positive or to a negative effect) and the estimated effects are substantial and statistically significant (or in the absence of quantitative
results, the studies themselves discuss the effect as ‘strong’), they are classified as strong drivers. If the effects are smaller and frequently
statistically insignificant, but predominantly still point in one direction, the driver is ‘weak’. Otherwise it is ‘inconclusive’.
 While donors may wish to focus on ‘strong’ drivers, this may not guarantee success. For example, while
relevant, high quality training, innovation, employee engagement initiatives, and safety measures often have
a positive influence on labour productivity, it is necessary to address the factors that hinder productivity
improvements in a given context. Whether or not a positive impact can be generated also depends on the
implementation design.

Labour productivity drivers can be addressed by single firms or by a group of firms (e.g., through their
business associations), or by public policy, legal and regulatory reforms. However, this is a complex task and
it is important to ensure reforms create an equal playing field for all firms. Reforms should boost
competition through improvements in productivity.

Success factors in donor interventions

The table overleaf provides a summary of the success Key lessons learnt are:
factors and constraints to donor-supported business
environment reform interventions. The main success  Leverage important and influential key
factors identified are: market actors (e.g., well-known brands) to
champion improvements and reform;
 Longer and more customised interventions;  Design interventions that yield immediate
 Good partnerships with key market actors; and benefits for key actors;
 Market system development approaches.  Engage public and private partners to co-
The main constraints to success are: design and co-implement interventions; and
 Focus on a particular sector and the entire
 Insufficient access to beneficiaries; value chain to increase the depth of an
 Low levels of trust among market stakeholders; intervention and reap the benefits of
and engaging multipliers along the entire value
 The difficulty of scaling up and influencing chain (i.e., a market systems development
broader policy approach).

Donors are increasingly supporting initiatives designed to improve skills through private sector partnerships.
Training is a potentially strong driver of labour productivity, while private sector partnerships are critical to
success.
 Table: Success factors and constraints of BER interventions on labour productivity
Project phase Success factor Constraints
Project  Longer-term project durations (with follow-up phases)  Innovative or complex productivity growth
acknowledge that systemic change requires time. methods require resources to being adapted to
Design cultural, country, development context.
 Customise interventions, methods or approaches fit
the economic, social and cultural country context.  Complex and overly sophisticated
measurement and assessment tools (not
 Top-level government support for the intervention, ‘customised’ to MSME enterprises)
including financial support or contribution.
 Political cycles may be shorter than the entire
 Ensure good project governance (e.g., regular project implementation time.
meetings of a steering committee).
 Engage with political champions for change

Project  Make use of change agents.  Lack of, or insufficient or incomplete, access to
beneficiaries.
implementation  Build strong relationships with market actors.
 Low levels of trust among market stakeholders.
 Share best practice in ‘safe spaces’ among market
actors who are not in direct competition.  Inadequate skills of market stakeholders to
work with foreign enterprises.
 Support collaborative implementation between
different stakeholders.  Weak enterprise culture.
 Support intra-governmental and public-private  Costs and limited access of enterprises to
partnerships. finance

 Use practical first-hand experience to feed the policy  No up-scaling or changes at the policy or
dialogue. systems level, limited influence on this level.
 Invest in awareness, information and media  Weak local enforcement.
campaigns.  Infrastructure and customs challenges.
 Promote women’s empowerment and participation in  Time needed to change mentalities.
dialogue.  Time needed for visible impact.
 Ensure buy-in and the identification of market
stakeholders (private sector partners, civil society and
governmental partners).
 Deploy experienced, technically and personally
versatile consultants.

This Policy Brief is based on a technical report

prepared by Michael Morlok and Harald Meier.
The report was based on a review of academic
literature, data from the Groningen Growth and
Development Centre and the World Bank
Enterprise Surveys, a review of ten selected
project documents, and interviews with
selected BEWG members. The full report is
available here: www.enterprise-
development.org/implementing-psd/business-
environment-
reform/#Other_DCED_publications_on_BER

Acknowledgement
The Business Environment Working Group (BEWG) of the DCED produced this Policy Brief. Michael Morlok, Harald Meier and Simon White are
the principal authors. The following BEWG members were closely involved in the production of the guidance: Alexander Widmer (Swiss Agency
for Development and Cooperation), Liliana Sá Kirchknopf (Swiss Secretariat for Economic Affairs), Farid Hegazy (International Labour
Organization and Chair of the DCED BEWG), Henrik Vistisen (Danida), and Andreja Marusic (World Bank Group).