In October, the German Ministries for Labor and Social Affairs (BMAS) and Foreign Affairs (AA) unveiled the “Skilled Worker Strategy India – India as a Strong Partner for Germany.” This initiative articulates Germany’s commitment to enhancing the mobility of Indian workers, aiming to bridge the talent gap in key sectors. Together with the new legal framework, which went into effect June 1, 2024, this serves as a significant step toward operationalizing the ambitions to make a dent in Germany’s shortage of skilled workers.
The strategy rightly outlines the importance of improved cooperation on migration, recognition of qualifications, labor market policies and skills training – all areas where government collaboration are crucial and necessary. Furthermore, the strategy also lists a many great initiatives and pilots that have been started to turn these ambitions into practice.
To further scale these initiatives and to build a more robust framework for the private sector to do more heavy lifting when it comes to recruitment, the German government should also develop an innovation and private sector financing strategy to get this market properly off the ground.
Challenges in India’s Labor Mobility Pathway with Germany
India has steadily emerged as a key supplier of skilled talent to Germany. A burgeoning labor mobility industry has seen many small recruitment firms enter the market, yet they face significant barriers in scaling their operations fairly and sustainably. These include:
- German bureaucratic processes are complicated and not yet optimized- time delays in the process are financially relevant for recruiters
- Limited access to affordable capital to finance the liquidity gap between funding operations and payment from employers in a new market
- Difficulty in building trust with prospective clients in Germany due to lack of proven track record or sizeable pipeline for quick deployment
Simultaneously, prospective migrants find themselves trapped in a challenging situation: they must either secure a fully financed spot in one of the limited pilot programs or face high fees that need to be invested into language training and paid to often questionable recruiters. This dilemma particularly affects workers in high-demand, non-university degree occupations, who often lack the financial resources or access to credit to facilitate their migration opportunity.
Bridging the Gap: The Role of Blended Finance
Innovative financing mechanisms are needed to ensure fair practices, access to migration opportunities across the income spectrum, and support the growth of a robust labor mobility industry. Rather than continuing to channel resources through direct grants that offer short term wins but often act counter to long term sustainability, public investments should focus on catalyzing private investments that allow services to continue after the funding period. This shift can enhance the labor migration pathway for both workers and recruiters, which is currently fraught with risks and obstacles.
Blended finance emerges as a promising investment approach: utilizing public funds to reduce investment risks for commercial investors hesitant to enter this nascent market. By tying capital to tangible outcomes, blended finance can restructure the ecosystem around positive social impacts and support responsible actors within the labor mobility space.
An example of a blended finance solution is Western Union Foundation’s partnership with LaMP to create a specialized language skilling loan product for migrants that would otherwise have no access to capital to fund any form of migration related upskilling. This pioneering effort, which currently seeks philanthropic investments into a guarantee to give commercial banks the cover to offer the product in an untested market.
A guarantee is necessary to mitigate risk for lenders, as losses up to a certain threshold could be recovered while still enabling lenders to test a new product in a promising market. As our proposed loan product is still untested, lenders are “data blind” when it comes to our target segment – unlike microfinance, higher education, or retail lending, there is little comprehensive or structured data related to lending to this segment; financial institutions need to learn and iterate before scaling.
Creating a Sustainable Financial Ecosystem
While individual financial instruments can solve specific challenges in mobility, scaling the India-Germany pathway to the stated goal of authorities on both sides requires an ecosystem approach. Germany, in collaboration with aligned partners, should develop a financial infrastructure that encourages these innovations and offers them a variety of different solution providers. Possible blended finance solutions could include:
- Guarantee Facilities: Unlocking commercial investment in migration by absorbing losses and mitigating risks
- Lending Funds: Providing capital for loan products where commercial lenders are reluctant to participate.
- Innovation Funds: Testing experimental financial designs, such as income share agreements and surety bonds, which hold the promise of impact but are largely untested in this context.
The German Development Ministry (BMZ) is making steps towards this high-impact and groundbreaking approach as it announced a closer examination of the use of innovative financing methods for labor mobility in recent policy brief which followed consultations with LaMP. Furthermore, LaMP is commited to help other ministries involved in the migration process, translate the needs of the labor mobility ecosystem into the policies and practices relevant to each of them, creating a coordinated effort towards scaling labor mobility.
Conclusion
As countries look to harness the benefits of labor mobility, Germany and India are well positioned to pioneer the use of blended and innovative finance as a model for expanding labor opportunities while ensuring fair practices. By supporting a sustainable recruitment industry, Germany can not only meet its workforce demands but India can also empower its workers to pursue better livelihoods—creating a win-win situation for both nations. Together they can be a solution role model for other countries worldwide struggling with labor shortages or high numbers of youth employment.
Finance terminology explainer:
- Blended Finance: Blended finance refers to the strategic use of public or philanthropic capital to attract private investment for projects that address social or environmental challenges. By mitigating risk and providing initial funding, it creates a financial ecosystem where private investors are incentivized to support initiatives that may not otherwise be commercially viable but deliver broader societal benefits.
- Guarantee Facility: A Guarantee Facility is a financial mechanism where a third party, such as a government or development institution, provides a guarantee to cover potential losses or risks associated with private investments. This safety net encourages private investors to fund projects that have a positive social or environmental impact but may be considered too risky under normal circumstances.
- Fund: A Fund is a pool of capital raised from multiple investors, which is then managed and allocated by professionals to finance a portfolio of projects or assets. These investments are typically focused on specific goals, such as supporting sustainable development or innovation, and the pooled resources allow for risk diversification and more significant impact than individual investments might achieve alone.