Can industrial clusters alleviate poverty?

Policy-makers and donor agencies are keen to promote industrial clusters - groups of businesses in the same area, doing the same type of work. Clusters emerge because there are mutual advantages for related business to work closely. But do clusters have any impact on poverty levels?

Research from the Institute of Development Studies and the United Nations IndustrialDevelopment Organization (UNIDO), examined the linkages between industrialclusters and poverty and develops a methodology to conduct poverty and socialimpact analysis of such clusters. Clusters encourage competition andcollaboration between businesses. Local cooperation and joint action canparticularly benefit small firms as it enhancestheir ability to compete in global markets. Linkages across differentindustrial clusters promote better access to distant markets and to new knowledge.

Reviewing evidence from several cluster studies, theauthors find that:

• In the early stages ofindustrialisation, clusters can provide employment to poor families engaged inlabour intensive work. The shoe cluster of Agra in India, for example, employed 60,000 workers in 5,000 mostlyinformal small scale firms.
• Clusters help employmentgrowth: employment levels in the garment industry in Torreon, Mexico went from 12,000 in 1993 to 75,000 in 2000 when it becamea major garment exporter to the United States.
• Wage levels inclusters are usually better than in non-clustered firms or regional averagewage levels.
• Clustering reducestransaction costs, helps labour sharing and sub-contracting in industries whereit is possible to break down and share the manufacturing process.
• Joint action is lesscommon in newly emerging or young clusters than mature clusters.
• The growth of acluster can disadvantage small firms or sub-contractors as they are morevulnerable to shifts in demand and may have to lose out to larger and strongerfirms.

The researchers argue that it is important to measure andunderstand the effects of cluster development programmes. The ‘value-chain’ methodof mapping clusters identifies links between business cluster entrepreneurs, workersand organisations. With this method, it is possible to identify poorer groupswithin the cluster and to understand the poverty alleviation effects ofdifferent categories of firms on its workers.  Differences in poverty effects by gender,ethnicity or religion can also be analysed.

For clusters to have any effect on poverty, the researchsuggests that cluster development programmes have to explicitly include povertyalleviation as a goal and that it is important for policymakers to:

• distinguish between youngclusters where poverty incidence is often high and mature clusters that cangenerate incomes for poor people
• support local organisationsthat strengthen the ability of clustered actors to take  collective action
• make policies thatare more pro-poor - such as poverty targeting, training, and microcreditprovision
• concentrate on labourand ethical standards, conditions of work and health and safety issues whichare often ignored by cluster development programmes
• develop policynetworks by bringing together civil society and government to promote widerpoverty and social development goals within clusters
• assist clustered small and medium enterprises tomeet global standards relating to environmental, labour and social concerns.