Three things Development Finance Institutions can do to help reduce poverty

25 September 2019
Insight
Employment services centre in Kathmandu, Nepal, 2016. Photo: ILO/CC BY-NC-ND 2.0.

In 2018, approximately $2.5 billion of bilateral donor aid was invested by and in Development Finance Institutions (DFIs) in private sector projects in developing countries. As this investment grows, DFIs will be under increasing pressure to provide evidence of their impact on the first Sustainable Development Goal (SDG) – ending poverty.

So, if donors are investing more aid in DFIs, what do we know about the impact on tackling poverty? The simple answer turns out to be – not as much as we should.

DFI investment creates jobs, but what impact do they have on poverty?

There’s no doubt that DFI investment creates jobs. And as we noted in our recent essay series on DFI impact, the collective investment of members of the European Association of Development Finance Institutions (EDFI) supported 5.4 million jobs in 2017. This is approximately 0.2% of the global workforce — a number not to be sniffed at.

Jobs offer people the chance to escape poverty. And we know that nine in ten jobs in developing countries are created in the private sector, so it is not surprising that DFIs see the creation of job opportunities as the main measure of their impact on the SDGs – specifically SDG 8. But what impact do these jobs have on poverty?

Three ways DFIs can step up their game

The problem is that we know very little about where these jobs are created, who gets them, their quality, and the impact they have on poverty. This was a key finding of our evidence assessment where we were simply unable to draw any firm conclusions on whether DFI investment truly contributes to alleviating poverty. This is a worry given that the $2.5 billion invested in and by DFIs is set to rapidly scale.

If DFIs are to target the first SDG and claim that their investments have a poverty-alleviating impact, they must step up their game in three areas.

1. Increase focus on job quality

SDG 8 – promoting inclusive and sustainable economic growth, employment and decent work for all – is not just about job numbers. It’s also about quality, something that DFIs’ current reporting offers no insight on. A job doesn’t guarantee a decent living.

The International Labour Organisation (ILO) has estimated that one quarter of workers in developing countries live in poverty and identified poor working conditions as the main challenge in global labour markets. DFI investment is not focused in the poorest countries, which is worrying as the ILO expects the number of the working poor to rise in these countries.

One of the main ways DFIs address the issue of job quality is through the integration of labour standards into their investment policies. Some have also integrated ‘decent work’ into their impact management frameworks. But we found a huge gap in understanding how this translates into the actual creation of ‘quality’ jobs.

The few studies that consider this issue do not evaluate key issues such as productivity, formality, pay rates, excessive working hours, child labour, or job tenor – all of which are central to the issue of job quality.

2. Develop a clear theory of change

As DFIs will increasingly be expected to demonstrate the pro-poor and inclusive nature of their investment and the growth it supports, a clear theory of change needs to be developed.

The poverty reduction pathway of DFI investment is weak and not proven, and very few studies exist which evaluate this. The ones that cover this suggest that DFIs assume investing in poor countries and/or sectors such as financial services, infrastructure, agribusiness, and health and education, could help tackle poverty.

But the problem is that the actual impact is not evaluated. DFI investment is not substantial in the agribusiness sector, let alone the health and education sectors. If we look at infrastructure and energy investment, for example, we know it creates jobs and increases the supply of energy, which contributes to economic growth. But how many people – especially poor people – access this energy? How do they use it, and it is affordable for them? The evidence is silent on these questions.

DFIs need to better understand and clearly articulate the poverty reduction pathway of their investment. This will need to be informed by independent and published studies, which more thoroughly examine the impact on poverty once the investment has been made.

3. Get better metrics and data

DFIs must have data to substantiate claims of poverty-alleviation. Currently, this doesn’t exist – at least in the public domain. Most DFIs report a set of common indicators which focus on:

  • total number of jobs created;
  • tax revenue mobilised and paid to government;
  • increase in energy supplied and;
  • CO2 emissions avoided.

DFIs will need to disaggregate some of these and develop new ones. The specific metrics will depend, of course, on the theory of change, the country context and the impact pathways identified. On jobs, I would want to see metrics which shed light on:

  • the distributional impacts on the division between skilled and unskilled jobs;
  • rural and urban employment divide;
  • average incomes and national poverty lines and;
  • impact across gender and youth – among others.

Stepping up efforts in these areas will help DFIs shrug off claims of SDG 1 ‘impact washing’. Aid is a precious resource that can be used in a variety of ways to tackle poverty. We need to be confident that investing aid in and through DFIs alleviates poverty. And by taking on these three steps, DFIs will be able to better target their investment to reduce poverty and paint a clearer picture of their impact on achieving the first SDG.

Authors

Samantha Attridge
Senior Research Fellow
Samantha is a Senior Research Fellow, with a particular interest in innovative finance, [...]