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 Industrial Development Organization (UNIDO), examined the linkages between industrial clusters and poverty and develops a methodology to conduct poverty and social impact analysis of such clusters. Clusters encourage competition and collaboration between businesses. Local cooperation and joint action can particularly benefit small firms as it enhances their ability to compete in global markets. Linkages across different industrial clusters promote better access to distant markets and to new knowledge.

Reviewing evidence from several cluster studies, the authors find that:

• In the early stages of industrialisation, clusters can provide employment to poor families engaged in labour intensive work. The shoe cluster of Agra in India, for example, employed 60,000 workers in 5,000 mostly informal small scale firms.
• Clusters help employment growth: employment levels in the garment industry in Torreon, Mexico went from 12,000 in 1993 to 75,000 in 2000 when it became a major garment exporter to the United States.
• Wage levels in clusters are usually better than in non-clustered firms or regional average wage levels.
• Clustering reduces transaction costs, helps labour sharing and sub-contracting in industries where it is possible to break down and share the manufacturing process.
• Joint action is less common in newly emerging or young clusters than mature clusters.
• The growth of a cluster can disadvantage small firms or sub-contractors as they are more vulnerable to shifts in demand and may have to lose out to larger and stronger firms.

The researchers argue that it is important to measure and understand the effects of cluster development programmes. The ‘value-chain’ method of mapping clusters identifies links between business cluster entrepreneurs, workers and organisations. With this method, it is possible to identify poorer groups within the cluster and to understand the poverty alleviation effects of different 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 research suggests that cluster development programmes have to explicitly include poverty alleviation as a goal and that it is important for policymakers to:

• distinguish between young clusters where poverty incidence is often high and mature clusters that can generate incomes for poor people
• support local organisations that strengthen the ability of clustered actors to take  collective action
• make policies that are more pro-poor - such as poverty targeting, training, and microcredit provision
• concentrate on labour and ethical standards, conditions of work and health and safety issues which are often ignored by cluster development programmes
• develop policy networks by bringing together civil society and government to promote wider poverty and social development goals within clusters
• assist clustered small and medium enterprises to meet global standards relating to environmental, labour and social concerns.

Source(s):
‘Industrial clusters and poverty reduction: towards a methodology for poverty and social impact assessment of cluster development initiatives’, UNIDO, Vienna, by Khalid Nadvi and Stephanie Barrientos, July 2004 Full document.

Funded by: Swiss Agency for Development Cooperation

id21 Research Highlight: 14 June 2005

Further Information:
Khalid Nadvi
Institute of Development Policy and Management
University of Manchester
Harold Hankins Building,
Precinct Centre, Booth Street
West Manchester, M13 9QH
United Kingdom

Tel: +44(0)161-275 0417(ext.50417)
Fax: +44-161-273-8829
Contact the contributor: khalid.nadvi@manchester.ac.uk

Institute of Development Policy and Management, University of Manchester, UK

Stephanie Barrientos
Institute of Development Studies
University of Sussex
Brighton BN1 9RE
UK

Tel: +44 (0) 1273 877355
Fax: +44 (0) 1273 621202
Contact the contributor: s.barrientos@ids.ac.uk

Institute of Development Studies, UK

Other related links:
'Clustering under the spotlight in Taiwan'

'Seedbeds for development? Nurturing industrial clusters in Indonesia'

'Clustering for collective efficiency helps small firms compete'

'Chains of success? The Rio Pardo Valley Tobacco Cluster in Brazil'

The Cluster Initiative Database from the Competitiveness Institute

'SME Cluster and Networking Development' from the United Nations Industrial Development Organisation