 This afternoon we've got a couple of series of interviews. We're starting with John, Paige, and Muns Soderbaum. So I would ask them to come join me over here. Gentlemen, if we could begin. We're here to talk about firm dynamics in job creation. And John, I'm going to start with you. And basically, why do we care? We care because, whether it's advanced economies or, in fact, developing countries, small enterprises or big business. McKinsey estimates that certainly in low and middle income countries, between informal firms and formal small firms, let's say those with fewer than 30 employees, 90% of people work in that sector. We also care because, at least in US politics, it can't be lost on anyone who's been following the current presidential campaign. And I would argue also in the UK, where I know things, perhaps here in Denmark, it is routine for politicians to say that small firms are job creators. It's the small enterprise sector of the economy that actually creates the most jobs. So if you take the opportunity to create jobs, and you take the instrument, which is the fact that we have money for development finance, it's not too surprising to find out that there are some 300 firms today, some official, some private, some public private, all devoted to filling the, quote, financing gap between small scale enterprises and their needs for capital. So it's a big business in the aid industry to focus on small enterprises to create jobs. Okay. And it shouldn't be? Yeah, it shouldn't be. Let me be frank, it's right after lunch. This is only John's opinion, my John. Of course. And I'm not mine. And the reason why we need to have a little bit more subtle approach to job creation through industrial development than just focusing on small enterprises has to do with something we've always known about but haven't been able to deal with very much. And that is what's important is not gross job creation. Because if a job is created and then a firm fails and the job is lost and then another firm starts up and the job is recreated, the number of jobs seem to be quite large. But in terms of the quality of work, the duration of employment, and the security of tenure for the worker, just churning through the labor market in a series of successes and failures is not exactly what you would hope for when you entered the labor market. So we're really worried about his net job creation. What happens when a firm is created? Does the job remain? For how long does it remain? And what kinds of wages and conditions of employment does it offer? And on that one, the evidence is much more mixed in terms of the role of small scale enterprises than is the case with respect to just gross job creation. The good job, bad job thing and the difference between big and small firms, can you elaborate a little on that? Well, let me tell you what the U.S. evidence shows, and this was really, in a way, the inspiration for the work that Mons and I were doing. Martin Rahma mentioned John Holtwanger, who in fact has been an advisor to the World Bank on this. Very recently, he and a number of colleagues were able to get a hold of data that covers the life span of firms in the United States. You can't imagine how big this data set is. It's the sort of thing that now you can do on a PC that in my day you would have had to fill up a mainframe to do. What they found was very interesting. What they found was that the number of jobs that were created by small firms was larger than the number of jobs that were created by all other firms. But the number of small firms that died was also much larger than the number of other-sized firms. Net-net, there is no relationship in the United States between firm size and employment creation. Large firms and small firms create jobs, net jobs, at approximately exactly the same rate. On top of that, what they found was that in terms of any other condition of employment, large firms were able to offer jobs of superior quality to those of small firms. So what they came out was to say, let's have a little less loose talk from the politicians. Let's talk about the need to find dynamic firms, to find firms that are capable of growing, firms that are capable of finding good jobs, regardless of size. Let's think more broadly about the job creation problem than just going for one simple criterion. So Mons and I thought, let's see if we can find out a little bit about that in Africa. Maybe it's different, maybe it's the same, but we really don't have any hard evidence on that at the moment. So Mons, that's when we come to you. Are men in Africa? Was it the same? Yes, pretty much. But I should start with a caveat on all this. As John hinted here, the demands on data are really very strong. So if you live in this palace of data, which is the United States, then you can do this kind of stuff that John Haltiwanger and his collaborators have been doing, and it's very informative. But for those of us who have to work on African data, we have far less information. So having said that, I can just show you what we've got and get going. So what we're doing in this paper is basically a comparative analysis, so we're comparing the performance of small and large firms, and in particular their ability to generate good jobs for its employees. I want to start by putting some facts on the table. I said earlier that we don't have a lot of data that comes with the qualification. We don't have data that enable us to follow firms over time. If you want data on a cross-section of firms in Africa, then you live in a type of palace as well. But the problem is that that doesn't tell you a lot about firm dynamics. So what are the two most striking facts if you compare large and small firms in the cross-section? I want to highlight two facts. One is that there are enormous productivity differentials between large and small firms. So if we focus the comparison on, you know, you compare a firm with 100 employees to a firm with 10 employees, and let's just look at something really simple. And the first thing we're going to look at is labor productivity. So this graph illustrates the value added per worker as a function of firm size. Basically, if you work in a firm with 100 employees, on average that firm is three times as productive as the firm with 10 employees. That also spills over onto wages. So this shows us a similar graph. It shows the relationship between firm size and average wages in nine African countries, I should have said. These are Ethiopia, Kenya, Tanzania, Mozambique, Rwanda, Uganda, Ghana, Nigeria and Senegal. So fairly, you know, it's not, yeah, yeah, yeah. East, west and south. So again, it's not as dramatic as for productivity, but we see here the firm with 100 employees pays on average twice as high wages as the firm with 10 employees. Okay, so that's sort of, I want to set the scene by just showing you some striking facts in the cross-section before we get to the more interesting discussion which is about how these firms develop over time. Okay, now you're going to look a little bit focusing in on Ethiopia, correct? Yes, and the real reason why we're looking at Ethiopia is very simple. This happens to be a country where we have exceptionally informative data that enable us to follow firms from birth for almost a decade. It's true, it's a, you know, it's a very specific sector in the economy. This would be formal manufacturing firms in Ethiopia. So this, you know, in terms of their contribution to overall employment, this is not huge, okay? So which firms are successful? So which firms were successful? So let's look at today's large firms, right? These are the high productivity firms, the high wage firms. And let's in particular look at firms that have been in operation for eight years. And then let's just rewind and see how did they become successful and in particular how did they start out life, right? Because one of the, I hesitate to say myths, but you know, I'd say it anyway, is that these firms that start small tend to grow and become successful large firms. So where do they come from? If we rewind this, you see that the origins are basically that they started large. A couple started small. Yes, a couple. I mean, come on, this is very complex, but it's unusual for small firms to stay in the market and grow for eight years. Okay, so I think we've already done the small firms that started small actually grow, right? So this is a beautiful piece of modern art when you see it at the end. I want to make sure that we're in the middle here. Well, yes, we're just getting started. So I should have said so on the vertical axis is just number of employees and then time is on the horizontal axis. And do you want to look at the dynamics of small firms? Okay. And now we're going to start from both. So I've selected a subset of firms that start very small with less than 15 employees and do some of them grow quickly? Yes, they do. Some grow very quickly and become large firms. But let's go back on that one, right? So in terms of job growth, this particular class of firms generate a lot of new jobs for sure, right? So you have firms there employing 40, 50, maybe even 70 firms after eight years. But the typical development for these firms is very different. Failure rates are very high. And this then is exactly the same point as John explained for the American setting, where if you take into account the failure rates and the growth rates on balance, small firms do not create more jobs than larger firms. What you're saying is that for every Microsoft there are a lot of Microsofts we never heard of. Is that it? Yes. Okay. But basically the relationship is the same in the States as it is in Africa. Qualitatively, yes. Again, this is Ethiopia, a very particular sector. Is this true for Africa? We don't know. We don't have the information. Okay. But this is all we've got at the moment. So you can see the dynamics of small firms is really quite complex, but in a way it's simple, right? You either succeed or you die. It's kind of like liver die, but that's a James Bond movie, isn't it? Okay. So this is the full picture, enterprise dynamics in Ethiopia. So this is where we've actually tracked about 150 firms from the year of birth and tracked them for eight years. And you see that, so these lines that crash to the bottom, obviously, those would be firms that go out of business. It's certainly true that larger firms go out of business as well, but it's much less common. Okay. And then you were mentioning that smaller firms actually die faster than bigger firms. Yes. It's just... Yes. It's obvious from the graph, isn't it? And in particular... I think maybe if you could just tell us what you mean by a large firm in Africa. Well, I think one thing that is important to keep in mind that if we are using international standards to categorize firms, nearly all firms in Africa would be small or medium-sized, right? So I think if I may scroll back a little bit here, if we have the time, if you look at... That was a bad idea, but if you look at these types of patterns, performance patterns, wage patterns, you see there's a lot of difference if you compare firms with 10 employees to firms with 100 employees. Once you go beyond 100 employees, it doesn't much matter. Okay, so 100 is basically your line. But between 10 and 100, a lot happens, right? And there's even a big difference between a 10-man firm and a 30-man firm. Okay, what about the wage gap? Yeah. So the wage gap, of course, is one main reason why we care about these things. And to a large extent, of course, the wage gap reflects skill differences, right? Larger firms hire more experienced staff. They hire better educated staff. But that's not the entire truth. To some extent, this also reflects the productivity of these two types of firms. So here, we just try to, using a similar methodology, we track average wages for two types of firms, if you like, from birth for eight years. So basically, if Joe gets hired by a startup of 10 employees and his brother, John, gets employed by a startup size of 100 employees, John is always going to earn twice as much as Joe. That would be, yes, on average. On average. We are oversimplified, right? Yes. Hey, work in television. Okay, so I think we go back to John now. Final comment. John, so what does this mean? Well, two points. The first one is, let's be very careful with single targets. There's a love, and I can say this after 28 years in the World Bank, operating divisions, I managed five of them. We like an easy target. We like an easy target because it's simple to explain, and because we can get some resonance. So an easy target is, let's intervene to promote the growth of small-scale enterprises because small-scale enterprises are job creators. It ain't necessarily so. Because it ain't necessarily so, it means that we need to think much more carefully about what it is we're trying to do. Now, it's Muns, who is always much more cautious than I am because he's Swedish, of course. Is it pains to point out? We're working off one country, a relatively small sample, but the best data for Africa that are available. What I find extraordinary in the first instance is, it mirrors what we find in very good data from advanced economies. Maybe developing countries aren't that different in this part of the story. Okay, I just have to throw a grain of salt into this, or sand. Would it have something to do with, or where would you put in the fact that in developing, many developing countries, a lot of the big firms are either state-owned or... Well, again, if we're just thinking about what do we do in terms of an intervention for aid policy, the good news is that large-scale firms tend to survive. They tend to offer good employment conditions, and they tend to offer better security of tenure. That says to me, one of the things we talked about before the break, we need to have a strategy for how we get better foreign investment and more foreign investment into Africa than just mineral resources. We all know the limits of the state, and here there are some state-owned firms, but the state-owned firms aren't the story anymore. The question is, what is the private sector doing? If we come back to the story of what is a target, I mean, if I had to pick a target, which is more difficult to explain, what we're really looking for is firms with a capacity to grow. So that's harder, because we have to try to find a way of identifying those. A thought. We talked about financial constraints to firms. What about if we gave a small grant to a large number of firms simply randomly chosen, waited two years until we saw who survived, and then targeted the assistance of the type that Kay and Tetsushi and others are going to talk about to those firms, who are the survivors. If we could get a slight increase in the number of rapidly growing firms, even though they're small, we would get a major increase in the amount of employment generated. But if we leave things as the status quo, we'll have pretty much the same amount of employment creation as we've seen in the past. Okay, in a moment now I'm going to start taking some questions, comments from the floor, and of course from the panelists. I can see buttons starting to go. So please, if you have a question or a comment. First of all, I would like to start with Klaus Bustrup. Thank you so much. Well, I understood that small is beautiful, but big is better. We're talking about job creation, but this morning also job transition was mentioned. And John Page talked about structural change. Most jobs, in fact, are within agriculture. And if we want to secure food security, there is a need for structural development, structural change in agriculture. It is necessary to increase productivity. But if we do so, at least in the short term, we risk to reduce employment. And I wonder whether John Page could expand on this. I'm not sure we risk to reduce employment, but since our concern right now is really on a particular aspect of the aid business, which is lending for small-scale enterprises that are not in the agricultural sector. It could be rural-off-farm employment. I think the issue is you need a balanced approach. We've talked a lot about the need to raise agricultural productivity and no one would disagree. The question is here. If you have 300 various types of social and private enterprises created for the purpose of lending to small-scale firms, it sounds to me like we've already made a decision about what should be the objective of policy in this other part of the economy. And I'm just a bit worried that we haven't done it with a good basis of facts. Mr. Siddharth Sareen. May I? Yep. Okay. My questions are about illegal financial flows. And for instance, through inflationing prices of imports so as to transfer funds to developed countries from developing country contexts. And that's quite important in terms of development, regardless of whether it relates directly to jobs or not. I'm curious to see whether you consider this in any way, especially since data is probably never going to be very good on this. Am I clear enough? Yes. I think that suddenly if you talk to the managers, I've been doing some field work in Kenya a while back and you hear lots of anecdotes of exactly what you're describing here, presenting a big problem. How can we get data on this at the micro level? I think that will be very challenging. But I think it's a problem that is not to be underestimated. Martin Rahma. I would like to get a reaction from a kind of provocative or dissenting comment to see how it works. You said the industrial countries are the palace of data. Unfortunately, we have this palace of data in Ethiopia. At the same time, we said, you said all these for manufacturing firms in the formal sector, which makes us think is a bit small. We conducted for the World Development Report this exercise which is to reconstruct the distribution of firms out of household service where people say, oh, I work on my own or I work in a small company and from plant level service like the one you use in Ethiopia. If you do that for an industrial country, you get the same story. You do that for a developing country, you don't get the same story. And we did this in detail for Ethiopia, Indonesia and Chile. And even the story of who creates jobs and all that is one that is different. Our conclusion was that in fact, it is not like industrial countries. And it is not like industrial countries in two ways. One, which you showed clearly, is that in developing countries, we have a very nice comparison on Ghana versus Portugal. In developing countries, firms are born large and stay there. In industrial countries, the dynamics come from the gazelles. These things that are born in garages and they may be called Honda or they may be called Microsoft. And where the big difference is that it is much more churning in developing countries and much fewer gazelles. And so if you ask me for a developing country, should you target the big ones or the small ones, I would say that's not the question. The question is how we make the distribution function as an industrial country so there are more gazelles and fewer big firms that live out of privilege. Yep. Okay, I just want to make sure I heard you right. Okay. William Martin, you said there was more churning in developed countries. No, in developing countries. Developing countries. Yeah, in developing countries, you have a lot of these dynamics that goes nowhere that you described and fewer of the gazelles, fewer of the Hondas and the Microsoft. Yeah. No response. Okay, the next one. I mean, from a policy point of view, we're saying the same thing. Okay, fine. Which is look for the potential to grow. Yeah. Karen Norberg. Yeah, I just wanted to know, is capital for big firms really the bottleneck? Is it the bottleneck for development? Capital. Oh, for big firms? Yes. No. Okay, so why focus aid on the big firms? No, I didn't say that. I said, besides neutral. Okay. If Hillary had given us enough time, we would have given you some ideas about how to be size neutral. Blame the moderator. Of course, the immoderate moderator. But since you've opened the door, I mean, we can go back to a couple of things we talked about before. One is the investment climate. We're back to that. We're back to infrastructure and skills. The second one is, say, I'd promise that we talk a little bit about capabilities, and I don't want to steal what Kay and Tatsushi are doing, but the new literature on management training coming out of the business schools suggests that we've really neglected the idea that you can actually increase the capabilities of firms, regardless of size, though you might need different skill sets for different sizes of firms. Those would be two ideas that would be size neutral, but pushing more toward Martin's dimension of let's find the gazelles wherever they're born. Okay, Martin. Well, if small firms face more market imperfections, for instance, they don't have access to capital as bigger firms have, then I mean, you're presuming, I guess, that everybody is sort of working on the same conditions, but this is not the fact. You say we should focus on firms that can grow, so the interesting question is, what are the constraints, the market imperfection, that prevent the small businesses to grow if they're different than the big ones? So I mean, we need to do more, I think, analysis before we can really get any policy conclusions from your paper. Absolutely. I think that's extremely interesting. I've been doing some work in Rwanda recently, which, of course, is a landlocked country and where transportation costs are enormous. So if you want to do business profitably in Rwanda, you better be large-scale because they're going to be significant and high-fixed costs of doing business. So this is just one example of where the market imperfections or the business environment more generally sort of disadvantages the small firms. So the small firms, yes, they can live their lives supplying the local market because that, by definition, doesn't involve big transport costs, but they are going to struggle big time if they will attempt to grow and supply more distant markets. Fintharp. Thanks a lot for some interesting points. I have a couple of questions I'd like to sort of kind of reflect on and maybe elaborate on. Before I can buy you a story, I need to understand where the large firms come from. Who are they? Which background do they have? And I'll motivate my question by saying that in the case of Vietnam, one of the findings that we have is that there are quite a number of firms that switch. In other words, firms live their life, they die. No, they don't die. They close the business in one manufacturing sector, then move to another sector. Now that's not caught normally. So I'm just sort of challenging you a little bit to what if the large firms that you're talking about were previously small, they closed because from your data, they close before they enter the new sector. So I'm just sort of interested in understanding that because is that where the missing link is? Well, we've looked into that. It's a very good question. Again, we've done it for, well, John Sutton has been doing these enterprise maps for, I don't know how many African countries now, but a bunch of them. And we've been doing similar work in Rwanda. So I'll focus on Rwanda, which I happen to know some things about. And if you look at the 50 most successful firms today, the largest firms, the firms that managed to export, two thirds of them started life as groups. So either Rwandan conglomerates or foreign groups and also foreign entrepreneurs. And the remaining 33%, if you like, would be in this case for Rwanda, what you're describing here, i.e. firms that started fairly small and that managed to grow in Rwanda. That's different. And if you compare that to Ethiopia, we see much less of growth from firms that started small initially. So I think there's a lot of work to be done on these things. And I think that these patterns will vary quite a bit across countries in Africa. And as I say, I think these patterns will also differ because of differences in the market imperfections and the business environment. Okay. Sung-young Park, you have the last one? Yes. I would like to ask about the, as I come from South Korea, South Korea is one of the few countries successfully used the foreign hands for the development. And I want to ask John about the, as kind of East Asian industrial policy kind of invest kind of governments to kind of finance these heavy industrial markets, a big firm to grow and to lead the economy. This kind of policy can kind of, can give a lesson to the African countries to use the foreign hands. Yeah. I don't think North Asian industrial policy is very easily transferred to Africa. Having said that, you need a strategy for industrialization. And that, to my mind, is the real lesson of East Asia. Different policies in different countries. Taiwan was very different from Korea, for example. Malaysia and Thailand are very different. But in each case, governments have strategies. One of the responses that one often hears when you say, well, you need a strategy is, but isn't that picking winners? Isn't that intruding? Because every day governments make decisions about strategy. As soon as you have a budget discussion and you decide to add a lane to the road to the port, as opposed to building a feeder road, you've made a decision that favors one group against another. The question is, do you have any idea of where you want to go? And my argument would be, in most cases in Africa, there isn't a coherent idea of where you want to go. So I think what we're advocating in a way is, if part of where you want to go is to accelerate this process of structural transformation, then you have to think about how you use the orthodox instruments of public policy in a coherent way to get there. You don't necessarily need a new, quote, industrial policy. Thank you very much.