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Small Is Beautiful in Job Creation

Otaviano Canuto's picture

Investing more on roads, bridges and schools is an essential part of President Obama's American Jobs Act. If this is important in the current U.S. context, the role of both infrastructure and education in job creation is even more fundamental in developing countries, where there's much more to be done than in the U.S. and other advanced economies.

Let's start with the global economic context. Many developing countries, particularly in East Asia and Latin America, have been resilient in the midst of the economic crisis. And in some, like Brazil, employers are actually having some trouble finding enough qualified labor for certain industries. But as I explained in a prior blog titled Jobs, Jobs, Jobs, in most economies the employment picture is not a rosy one. According to Job Trends, released by the World Bank in September, labor market recovery from the financial crisis remains sluggish in some countries, with employment and earnings growth far below their pre-crisis rates.

In this sluggish environment, one big thing we can do to create more jobs is to support entrepreneurship and small businesses locally, as this week's Economic Premise, Who Creates Jobs?, shows. According to Ejaz Ghani, William R. Kerr, and Stephen D. O'Connell, there is a strong link between initial levels of young and small firms and subsequent job growth, as evidenced in India. So instead of "firm chasing" -- trying to attract mature firms from other locations -- policy makers should encourage entrepreneurship in their own communities. How would they do that? Precisely by investing in things that tend to attract new entrepreneurs the most: improving education and physical infrastructure.

Research by Edward Glaeser and others show that in the U.S. economic growth is highly correlated with the presence of many small, entrepreneurial employers. Well, we know now that's also the case in many developing countries, where they have the potential to unleash business creation and job growth at a time the world needs it most.

So let's keep it small.