4. Populating an economy, kick-starting inclusive growth

Populating an econonmy kick- statring Inclusive growth

Market Development Facility MDF

By the end of 2016, MDF helped increase the incomes of 6,000 Timorese, benefiting approximately 19,000 family members.For MDF, it is important to look behind these figures, and assess how it helps to change the functioning of the economy more generally and generate lasting benefits that will continue after the end of the programme. While MDF seeks to trigger transformative changes in any economy it works in, it did not know exactly what ‘end game’ it could aim to achieve in Timor-Leste’s economic environment. Based on the insights detailed in this case study, these changes can be broken down into eight categories – each of which is ultimately about helping the poor to be better integrated into markets and benefit from their growth:

 

Transformative changes in Timor-Leste’s economy that MDF is helping to achieve


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MDF has made significant progress across all these dimensions, showing that it is possible to do business – and kick-start inclusive growth processes – in Timor-Leste.While it is difficult to know if any new investments have been inspired by MDF partners, MDF’s team has registered a growing number of credible partnership enquiries. In 2016, MDF formed the highest annual number of partnerships since the programme’s start. What has clearly emerged for MDF is that the kinds of changes it can achieve in Timor-Leste are qualitatively and quantitatively different from the more advanced and bigger economies it is working in. This is explained in Lesson 7.

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Lesson 7: Transformative impact in Timor-Leste: How it compares to other MDF programme countries

As a multi-country programme, MDF has learnt that the kinds of inclusive growth outcomes achievable in a post-conflict, small island economy (as listed above) are rather different from ‘success’ in more advanced or bigger developing economies. Two differences are worth pointing out:

The first one is scale. A recent review of factors influencing the scale of results in inclusive growth programmes found that: “Getting to scale is easier in countries with ‘thick’ markets, big actors, and higher population densities. It is also easier to get to scale in industries that are tightly networked, geographically concentrated, and have high market concentration (a large number of small actors), such as banking ...”45  None of these conditions currently applies in Timor-Leste. The small size of its economy means that no single business model is likely to involve more than 1,000 suppliers in the foreseeable future; more often than not, the numbers will be lower. To scale up opportunities for jobs and incomes, a multitude of small to medium-sized investments will be needed.

The second difference is about the nature of the partners’ wider ripple effect on the functioning of the economy. One commonly cited scenario is that other businesses replicate the innovations introduced by partners of inclusive growth programmes. However, this seems too simplistic, and many domestic markets in Timor-Leste are not big enough for more than one significant player with the same business model. Another scenario could be for market players to respond to a successful business model, e.g. by introducing dedicated supporting services (such as distribution, finance or training). While this may be possible in Timor-Leste in the future, it is currently unlikely as there are few businesses with significant outreach, and too few specialised value-chain actors to respond to them.

Instead, transforming Timor-Leste’s economy is about building more dynamic business systems more broadly. As outlined in the list above, examples of this are a general ‘demonstration effect’ that investing in new products and services in agribusiness, tourism and manufacturing offers attractive long-term prospects, and a growth in joint initiatives and commercial networks among businesses.

 

Achieving scale in input access in another small island economy: Aglime in Fiji

High soil acidity is a major problem for agricultural productivity for sugarcane farmers in Fiji. Applying agricultural lime is a simple solution for this, but imports are expensive. MDF partnered with Standard Concrete Industries to produce aglime locally and sell it to farmers at affordable prices. Despite marketing efforts, rural uptake was initially lower than expected. MDF therefore entered a follow-up partnerships with well-established distributors who saw the business case in delivering aglime to the farmgate. By 2016, xxx farmers were regularly using aglime; in the future, 15,000 sugarcane farming households farmers – about 23% of Fiji’s farming households - could benefit from increased yields. Read more on the MDF website or watch this video here.

Alongside economic impact, MDF’s partnerships are also producing tangible social benefits. This includes a positive impact on health and nutrition, education and skills development, and women’s empowerment, as summarised in the following graphic.

The social impact of private sector development: MDF achievements beyond economic benefits


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Overall, this case study has shown that private sector development in Timor-Leste has started from a very low base; and the combination of the country’s historical circumstances and small island status means that inclusive growth will neither be easy to achieve nor happen very quickly. In fact, sobering interviews with researchers and development practitioners in Timor-Leste point out that the country’s development indicators may initially slide backwards in ten years from now: Few if any oil funds will be left to pay for government services, and taxes and jobs generated by the private sector will not yet be sufficient to address the needs of the growing population.

However, this case study also shows that there are distinct investment opportunities which are available to bold entrepreneurs, with the potential to become sources of future growth and poverty reduction. Economic dynamism outside the oil and gas sector has increased rapidly in recent years; catalysing it further needs to be a priority of the government and development stakeholders. This will require scaling down distortive government policies, such as in the agricultural sector; it also warrants a better regulatory environment; and it will require strategic support services to aspiring entrepreneurs engaged in promising economic activities. These activities and their development constraints will change over time and require the government to learn and to adapt its approaches.

MDF’s work illustrates how such adaptive and tailor made support can look and how it can benefit the poor.If more businesses follow the examples set by several of MDF’s partners, Timor-Leste will be able to increase its prospects for a more prosperous, inclusive and stable development phase.