Guest Articles

Monday
April 27
2020

Stephen Hunt / Neil Fleming

Africa’s Youth Employment During a COVID-19 Recession: We Must Innovate to Achieve a Job-Rich Recovery

Editor’s note: This article is part of NextBillion’s series “Enterprise in the Time of Coronavirus” and The (R)evolution of Work.”  Learn more about NextBillion’s 2020 series here. For news updates and analysis, virtual events, and links to useful resources related to the COVID-19 crisis, check out our coronavirus resource page.

 

In response to a global COVID-19-induced recession, the international community is responding with ideas and innovations for stability and recovery. This is happening across the development landscape, with both traditional aid actors and non-traditional “new-aid” partners (like large tech or pharmaceutical companies) mobilizing to address economic security.

Yet this response begs the question: How best do we protect existing jobs – and nurture an economic recovery that quickly produces new ones? And how can we ensure that these jobs are accessible to the youth population, and that the recovery extends to small and medium enterprises (SMEs) – which make up 40% of GDP (even higher if you were to include informal businesses), and up to 80% of employment in emerging markets?

The economic shock of the pandemic will be especially harsh for these two groups. For instance, in Africa most of the youth population is low-skilled, and likely to struggle in any economic downturn. And many of the SMEs where these young people find employment are at risk of collapse, if effective measures to respond to COVID-19 are not implemented. Moreover, Africa was already facing a youth employment crisis: The effects of COVID-19 are an unwanted addition to this burgeoning challenge.

 

How Will the COVID-19 Recession Affect Young People?

The latest International Labour Organization (ILO) COVID-19 and the World of Work report forecasts that the equivalent of 22 million full-time jobs will be lost in Africa in the second quarter of 2020 alone. In addition, 26.4% of workers in Africa are working in at-risk sectors, and only 17.8% of the population is covered with some form of social protection. These statistics don’t only include youth, but as 15-34 year-olds make up close to half of the continent’s working age population (according to the ILO) and also account for a vast majority of vulnerable agricultural and informal workers, young people will be the first to feel the effects of this recession – and likely the last to recover.

Further complicating this picture, the nature of this recession is quite different from the 2008 financial crisis, which has implications for aggregate supply and demand – and so our responses also need to be different. From the demand-side perspective, the virus will reduce private consumption, and neither African SMEs nor their countries have the market infrastructure (such as internet connectivity or e-commerce markets) to help mitigate this shock. From the supply-side, the virus will affect workers in terms of employment and access to work, and virus mitigation measures will cause a slowdown of economic activity. In fact, the sectors that are most at risk of COVID-19 disruptions in Africa are: wholesale and retail trade, manufacturing, administrative services, and hospitality (including tourism). Along with agriculture, these sectors represent many of the key industries where young people currently find employment.

Many of these “at-risk” sectors are also the growth sectors targeted for Africa’s longer-term youth employment strategies. However, these strategies tend to feature a longer-term inclusive growth agenda, rather than one which offers shock-responsive protection in response to an economic crisis. And so COVID-19 will add an additional layer of burden to the very strategies already working to support youth employment. Without proper protection for these sectors and the youth that work in them, the pandemic’s effects are likely to be amplified.

Unfortunately, the specific needs of young people are rarely the focus of social protection systems, so they often lack access to many basic forms of support. And those services they do have access to, such as health insurance or unemployment benefits, are often contributory programs geared toward older people with a longer formal work history. Moreover, due to the high rates of vulnerable working conditions and informal labour in Africa (where 71.9% of non-agriculture work is currently informal), young people are at disproportional and prolonged risk of suffering the effects of the COVID-19 recession.

Yet while the current outlook may seem bleak, there are a number of opportunities for us to respond to the crisis. Let’s explore some of the ways we can innovate upon existing tools and infrastructure to meet some of this youth employment challenge.

 

Rethinking our Response to Youth Employment After COVID-19

The response to youth employment during (and after) COVID-19 requires an agenda of resilience and recovery, but also one of innovation. Despite the risks posed by a global recession, it offers us a unique opportunity to re-write some of the rulebook we have been following for the past decade. In fact, breaking rules and trying new things might be essential.

One focus of this innovation should be supporting the resilience of SMEs, the largest employers of young people in Africa and the engines of an economic recovery. These businesses will be looking to bounce back quickly after the pandemic, so benefits like cash incentives to create opportunities for internships and apprenticeships might help stimulate quicker recovery. Productive inclusion mechanisms within social protection programs, such as cash transfers that include training, could be aligned to the needs of SMEs, which might also help resilience. However, quick relief incentives from government are not sustainable for job creation, which must come from the private sector. So we must also look at how these current interventions can improve the longer-term outlook for job creation and private sector stimulus.

Another key area of innovation for donors may be revisiting current interventions in terms of the “cost of a job” for a young person. The cost of a job is a value-for-money measure used by donors in employment programming, and though it varies widely between donors and programmes, many donors aim for lower values – in other words, they hope to create the maximum number of jobs at the lowest cost. Though donors need to report to stakeholders on their impact and efficiency, prioritising “breadth of reach” over “depth of impact” by running mass skills training initiatives or lower-value interventions will not foster the types of sustainable job creation and economic recovery needed. It will be better to invest in higher-value jobs and innovative programmes which are already linked to the market.

Similarly, stand-alone skills and entrepreneurship training-based programmes, while good, do not create jobs and should be avoided unless properly linked to existing work opportunities or markets. A better approach, based on our experience at Challenges Worldwide, is to focus on youth-led SME resilience and recovery support. For instance, our Youth to Work programme in Uganda, part of Standard Chartered’s Futuremakers initiative, demonstrates how well-trained young people can successfully contribute to the growth and development of SMEs by delivering structured support services. The cost of this opportunity is relatively low, it provides market-led skills development, and it offers a return on investment through both the employment opportunities for young participants and the economic contributions they make to SMEs over the long term.

Following the 2008 recession, entrepreneurship initiatives were one of the biggest focuses of youth employment interventions in Africa. Muhammad Yunus’ famous axiom “everyone is an entrepreneur” became a guiding principle of those efforts, and remains so today. However, there is reason to re-think that approach in light of COVID-19. Based on several recent and comprehensive systematic reviews of interventions over the past decade, we know entrepreneurship support initiatives have not had lasting impact – and in some cases, have had no impact at all. Additionally, many interventions have largely targeted micro, small and household enterprises from a livelihoods and/or supply-side perspective. While this might help young people to survive, in terms of employment elasticity, these interventions do not create the types of productive jobs or growth-businesses needed to recover well from this recession. Striking the balance with these interventions – and integrating them with others – will be vital during COVID-19. But in the long term we need to diversify our responses and move away from – or at least innovate upon – mass livelihood entrepreneurship support initiatives as the main policy response to unemployment. In the aftermath of COVID-19, it is highly likely there will be an even greater demand for formal job security and protection, and perhaps less of an appetite for this focus on entrepreneurship.

 

Supporting SMEs by Reimagining Investment

In addition to traditional development-sector responses, there are also high net-worth entrepreneurs that will be seeking to launch ventures in a post-COVID world. While these entrepreneurs will be essential for rebuilding African economies, there are several disconnects between the types of entrepreneurial ventures getting investment and the types that will be needed for mass (youth) job creation. For example, in terms of private equity investments across Africa between 2014-2019, there were declines across key sectors that are more prone to absorbing youth labour, such as the industry (goods and manufacturing), food and service sectors, and stark increases in sectors like communications, which are traditionally less labour-intensive. The geographical distribution of these investments is also skewed, with countries like Kenya and Nigeria accounting for many high-value deals. More concerning is the issue of where the investment has been going, with local founders increasingly excluded from access to investment, and the majority of capital being invested in expat and foreign-owned enterprises.

The current approach to impact investment – once seen as a shining light for Africa’s development – is simply not working as well as hoped. Traditional impact models of investment taken from investors in the U.K., U.S. and Europe are constrained by the expensive operating costs of Northern Hemisphere salaries and real estate, meaning smaller deals are almost exclusively off the table. These investors’ long due diligence processes, lack of a local presence and high return expectations mean they have a narrow pipeline focus, and typically follow other investors in the market.

To date, there is a lack of good and accessible funding options for smaller, riskier SMEs that need small amounts of capital to grow, thrive and ultimately create jobs. To address this, investors need to explore how capital can be deployed more efficiently, with patient approaches that truly understand, from a demand-side, what SMEs need to achieve their ambitions.

Earlier this year, the Collaborative for Frontier Finance highlighted key approaches that could improve this situation and move the sector away from older models of investment. Now is the time for these types of innovations to be widely adopted, and for investment facilities to transform their approach in response to COVID-19. In this current climate, SMEs will urgently need investment, but we cannot provide it through a broken model of direct equity or expensive debt – that is going to be a noose that kills off many already-struggling enterprises.

At Challenges, we believe that one vehicle that could help SMEs survive COVID-19 is an investment facility providing affordable royalty-based lending solutions. In this approach, an investor offers the business a loan whose repayments are based on a percentage of ongoing gross revenues, so the repayments fluctuate based on performance, rather than being fixed amounts. This will allow investors to provide SMEs with an injection of capital, returned over a flexible period of time, once a company recovers to previous revenue levels. This will ensure flexibility, allow for longer-term planning, and establish a fair partnership built to achieve shared success. Key to this model is a lean infrastructure, a speedy due diligence process built on relationships, and an efficient distribution of capital. We are now in the process of finalising a facility model based on this approach, and will be seeking philanthropic funding to allow us to get needed capital to SMEs quickly.

Youth unemployment in a COVID-19 world is a huge challenge, and it will require players across the development sector to innovate and adjust our current systems of support. But if we act now, and do it right, we can support a job-rich recovery, improve economic resilience, and reduce the impact of the pandemic and its economic fallout on young people.

 

Stephen Hunt is a research manager and Neil Fleming is a director at the Challenges Group.

 

Photo courtesy of Gavin Allanwood.

 


 

 

Categories
Coronavirus, Entrepreneurship
Tags
coronavirus, emerging markets, job creation, SMEs, social innovation, youth employment