Youth and enterprise: the new development drivers in Latin America?

The XI Ibero-American Business Congress was held in Cartagena de Indias on 27th and 28th October 2016, as a forerunner to the XXV Ibero-American Summit of Heads of State and Government. This forum for dialogue, attended by 300 companies, was organised by Colombia’s National Association of Businesspeople (ANDI), The General Ibero-American Secretariat (SEGIB), the Council of Ibero-American Businesspeople (CEIB) and the Inter-American Development Bank. The meeting focused on Youth, Enterprise and Education for Development, drawing on the Economic Outlook for Latin America report written jointly by the OECD, CAF and ECLAC.

Latin America is a region of micro and small entrepreneurs with the second highest percentage of entrepreneurs per capita in the world.

SMEs make up 80% of all companies and account for between 16% and 36% of GDP, depending on the country, but they only receive 12% of all credit. The low productivity of Latin America’s businesses is a sign of the difficulty firms have in generating jobs in general, and value-added ones in particular, which then impacts on the skill levels of the labour force.  Both factors feed into one another, creating a vicious circle of low productivity, lack of job opportunities and a black economy.

We are talking about a region where microenterprises with less than 5 workers employ 40% of all wage earners in the private sector. Their limited size is due to the origin of these businesses which spring up out of need, not opportunity. They are known as “subsistence enterprises”, generally with one person or using family members, who begin their activity with the purpose of earning the income they cannot satisfy with formal employment. This is the reality for 85% of the entrepreneurs in Colombia, 78% of those in Peru and 72% of those in Dominican Republic, according to Global Entrepreneurship Monitor (GEM) figures.

Most of these enterprises suffer from limited and volatile growth that does not enable them either to generate employment or to acquire the skills or know-how that would allow them to graduate to formal employment. In fact, this transition is only viable for 1 in every 4 people, while for the rest their easiest option is to remain in informal firms, with wage levels that are no different from what they earn in their microenterprises. For this reason, they prefer to remain in their low-income occupations. This decision has an impact on the calibre of human capital they acquire and, in most cases, the initial level they had goes down even further.

The result is that the returns from education are perceived as being weak, and higher levels of educational attainment are not perceived to result in additional earnings. In addition, most micro-entrepreneurs have low levels of education, which also affects the incentives to accumulate human capital for those young people who believe, given their family environment and its opinions, that this type of occupation is the only possible option for them.

Most of these entrepreneurs are women with family commitments (being an entrepreneur is compatible with household tasks), who have not completed secondary education, who live in low quality housing, come from disadvantaged family surroundings (parents with little education and low incomes), are involved in trade, have low wages, work in the informal economy, in premises either on the street or in the home, and have a low level of innovation.

Furthermore, they suffer from a low level of financial inclusion: only 54% have a bank account (compared to 49% of those in informal employment, 78% in formal employment and 86% of entrepreneurs in medium and large enterprises).

This is the environment in which 163 million young Latin Americans between the ages of 15 and 29 are looking for a future. 42% are in a vulnerable situation or in poverty. Even though access to education has doubled in the past decade (university entrance places have risen from 22.3% to 44.5%), young people lack the opportunities to get a job in the formal sector because of the very characteristics of the business ecosystem explained above. In addition, 1 in 5 young people is outside the system; they neither study nor work, and of those who are employed, a similar proportion are in the informal economy. The more vulnerable young people are, the more informal is their employment.

Working in the informal economy makes it very difficult to transfer later to a formal job, which ends up perpetuating these young people’s vulnerable circumstances into adulthood. For many of them, becoming an entrepreneur represents a real opportunity for the future, but at the cost of increasing the rates of early school leavers and of their levels of education continuing to be low. In consequence, there is a gap between education and productive needs: while a third completes primary school, only 23% on average completes secondary, and 14% have a university education. In other words, of the 72 million who begin university, only 23 million complete their studies.

For all of these reasons, young people face rate of unemployment and underemployment that are three times as high as those for adults. They have more difficulty in getting a job, especially a good one. Only 50% are employed and of those who finish primary school, only 1 in every 4 or 5 works in the formal economy.

Despite this environment there are opportunities for young people and entrepreneurship to become the drivers of economic development in the region over the next few years. This is the conclusion of the 2017 Latin America Outlook report: “Encouraging youth entrepreneurship can become a driver of productive transformation”. Furthermore, the Development Bank of Latin America (CAF) believes: “There is scope for enormous productivity gains if labour and capital are reallocated away from these small establishments towards medium and large companies.” There are possibilities to develop skills enabling entrepreneurs to run their enterprise successfully, so that these people who have been obliged to keep their businesses small out of necessity will become entrepreneurs with real opportunities for growth.

But how can this change be pushed through? The answer seems to lie along 4 main fronts: access to financing, better regulation and public policies that support entrepreneurship, greater digitisation and education that meets market needs.

In the first place, the decision to become an entrepreneur and family wealth seem to be highly correlated, which suggests there are probably restrictions to accessing credit. Whatever the problems of scale, inefficiencies and, at times, poor corporate governance, the financial system, whilst developed, is incapable of smoothing the information asymmetries of customers in the informal economy. These customers have unstable incomes, no collateral as guarantee, no credit history, very little financial knowhow and are far away from financial service providers.  This is why a third of the micro- and small enterprises in the region find that lack of access to financing is their main obstacle to growth. Many of these enterprises start by using their own resources (85% of BBVAMF clients’ assets come from their own patrimony) or informal financing; when the time comes to expand, they frequently go into the “valley of death”.

Secondly, there are state failures in the regulation for creating formal companies (for example, the average time needed to set up a company in the region is 29 days, and the cost is 29% of per capita income, the second highest percentage in the world after Africa). Regulation limits the way in which a company can be set up and managed, with the result that informal mechanisms are used to create them, as the World Bank acknowledges in its latest Doing Business 2017 report. Moreover, tax policies make it difficult for formal companies to grow and raise their productivity, at the same time as they create incentives for the survival of microenterprises that only provide employment for the founder and family members, with little added value and frequently operating in the informal sector.

Public policies supporting companies in Latin America tend to focus on the phase of consolidation and sustainability. They are principally based on equity borrowing and support traditional economic sectors, neither of which contributes to a dynamic and thriving corporate base. Policies and programmes promoting entrepreneurship need to be developed that nurture the will to be an entrepreneur, which motivate and develop business management skills as well as supporting implementation and sustainability (financing through accelerators, mentoring, training, etc).

Some best practice case studies from civil society and multilateral bodies are already being looked at by UNDP and the ILO, and may shed light on how to design these policies: Junior Achievement, that encourages the entrepreneurial habit among young people of school age, Values in Action [Valores en Acción] that helps with self-assessment workshops, leadership and life programmes for young people in unfavourable surroundings, YEP, the regional platform created by the Multilateral Investment Fund (MIF) and Youth Business International in 2013 for business training and the creation of entrepreneurial ecosystems for 65,000 low-income young people, as well as Start Up Chile, an accelerator for women’s enterprises, seed capital and escalation.

Thirdly, the technology access divide needs to be narrowed and a Latin American digital market maximised, to harness the economies of scale in an area containing 700 million people. Only half the population is connected to the internet and has a mobile phone, while only 1 of every 4 most popular webpages has been created locally. Although the region is the second biggest consumer worldwide of digital content (78% of the connected population is on social media), internet is not being included in production chains. Digitisation represents an economic opportunity for the region and it must be driven by public policies that support enterprises that are part of the fourth industrial revolution, as well as training young people in digital skills.

Finally, it is crucial to ensure that the incentives for young people to accumulate human capital are not eroded (and that they do not imitate their parents’ employability models). The goal is to make them more employable with first job programmes and work experience, together with training and courses that match productive sector demands. To design public policies in coordination with the private sector guaranteeing access to education through subsidies and the provision of high quality, public education. To ensure the calibre and relevance of studies, to give job and careers advice, to encourage mobility and to drive a regional labour market; all these are strategies that can offer the right incentives for young people to stay in the educational system.

We should draw attention here to the Ibero-American programme of exchange grants and academic mobility, Campus Iberoamérica, approved during the XXV Ibero-American Summit, which aims to provide 20,000 grants by 2020. Also worthy of mention is the Ibero-American Youth Compact, in which 22 Ibero-American countries have agreed to set up an alliance across governments, civil society, the private sector, the academic world and international cooperation groups to develop policies to help young people. These include the creation of an education package to include employment generators, setting up a regional innovation and digital leadership programme, increasing the role of young people in entrepreneurship and accrediting studies and university qualifications awarded across different countries. Also a creation of an Ibero-American Observatory for Entrepreneurship & Innovation to encourage the exchange of good practices, which will monitor public policies and generate applied knowhow throughout the region.

Another challenge is to reform the educational system so that it properly prepares young people for the productive sector’s future needs. 50% of firms in Latin America claim not to find the workers with the skills they need to carry out their activity. This involves training in new technologies, driving knowledge in the sciences, technology and engineering, as well as improving levels of English, creating shorter training programmes that are linked to formal education. It also involves teaching people the soft skills identified by the World Economic Forum in its document “New vision for Education. Unlocking the Potential of Technology”: teamwork, problem solving, communication, creativity and innovation, working in multi-disciplinary teams, above all. Also on the To-Do list is finding labour intermediation services, both nationally and regionally.

Finally, we should not forget that there is also a gender gap among young people that must be addressed. 30% of young women neither study nor work, against 20% of young men. And those who manage to achieve higher levels of education do not turn that into greater labour participation, nor in higher quality employment or income. According to World Bank figures, the gender gap in entrepreneurship and employment is 14% in Latin America. There is also a training bias. Young women tend to choose studies related to their traditional roles: education, humanities and the arts, rather than engineering or sciences; the former are less well paid and linked to care-giving activities. There are a number of initiatives in place to give young women incentives to pursue scientific, mathematical and technology studies. This dimension was included in the Ibero-American Youth Compact signed at the summit: “to promote the economic empowerment of young women by developing their productive capabilities, as well as with enterprise, microfinance and cooperative programmes.”

Another regional initiative, Laboratoria, develops the socio-economic capabilities of young, low-income women with the potential to become web developers; this hopes to reach 10,000 students by 2010, improving their employability by 85% and multiplying their incomes fourfold.

Latin America faces huge challenges in the area of youth, education and enterprise, all embedded in a complex macroeconomic ecosystem. But facing up to these challenges could turn both young people and enterprise into drivers of opportunities and growth over the next few years. In the words of Rebeca Grynspan, General Secretary of Iberoamericana: “Ibero-America will only succeed in competing on the basis of talent and, in particular, young talent.” The best way of combatting poverty is job creation, which is intrinsically linked to higher education levels. Young people’s skillsets and abilities need to be reinforced so that they can be employed in the formal sector; at the same time public policies must promote and support their business ventures at their initial stages. On the supply side, thousands of microenterprises must be helped to turn into SMEs capable of generating growing opportunities for them. Only by improving corporate productivity and the employability of future generations will it be feasible to transform the current scenario into a virtuous circle of productivity, employment and transparency that activates the region’s economy.