Second Pillar : Private Sector in Development

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Second Pillar : Private Sector in Development

The contribution of the private sector extends beyond economic growth, job creation and tax revenues. It also plays an important role in emancipating the mind, transforming thinking and promoting development, while assisting in the government’s functional evolution.


As the different elements of a Post 2015 Development gradually emerge there is at least one element that seems almost pre-ordained. That is, the private sector will have a feature role whether it likes it or not. A growing chorus of voices within multilateral institutions and donor aid agencies is championing the role of the private sector in development at a time, very probably not coincidental, when ODA budgets are declining and the funding landscape is shifting in more ways than one. While there is no established method to measure the volume of development focused private sector initiatives it is clear that ODA targeted at the private sector for development is steadily increasing and the private sector is seen as a key partner in the broader development finance arena.

Of the countries that have been most successful in development in the past five decades, it is the private sector that has driven the process. For example, a study, carried out by UNCTAD, the Indian government and the UK's Department for International Development (DfID) found that the sudden decade of boost in exports from India that led to the creation of 26m jobs and $55bn in additional income, was due to private sector initiatives in development. In China too, a recent study found that the private sector not only contributed to economic growth, but also helped the country to cope with the societal impacts of the decline in state industry.

Data and reports from various multilateral donors have also begun to better understand the mechanisms through which specific industries impact on poverty reduction and development. For Nepal, the case of tourism would be interesting to learn from, as that is an industry much touted as the driver of change (yes, next to hydropower). An Overseas Development Institute-World Bank review identifies three mechanisms. The first covers the direct effects of tourism – the earnings of those working in the sector, at hotels and in excursion companies. Second are the indirect effects as tourism draws inputs from other segments of the economy such as food, transport and furnishings. Third, tourism creates dynamic effects, such as the business climate for small enterprise development, patterns of growth in the host economy, and the infrastructure of the destination.

As the example of tourism illustrates, value chains of international investors are extremely powerful as a tool for broad-based development. According to the Dutch NGO, Centre for Research on Multinational Corporations, the value chains of international investors "may positively contribute to development in a number of ways ... including economic (economic growth and productivity), social (poverty reduction, employment creation and human rights) and environmental (pollution and environmental destruction) components".

Perhaps the most powerful ‘push’ factor explaining the increased interest in the role of the private sector in development circles is the opportunity for creating tied aid. Some donors are in fact very explicit about the link between efforts around the private sector and aid tying, despite the latter running directly contrary to the principles and commitments agreed to under the Aid and Development Effectiveness agenda.

Another important driver is the perception that the public purse has run dry, or more specifically, that ODA flows are declining. In other words, as public budgets are squeezed, there is a need to look to alternative forms of development financing or in this case, private sector finance. Key to this line of thinking are the notions of ‘value for money’ and of ‘leveraging’ private finance through public support. Yet these concepts are poorly defined and problematic. Importantly, tied aid appears to be a strong underlying motive for development initiatives targeting the private sector.

Finally, it may be grounded in the economic underpinnings of some governments and policy makers, and their belief that the market and hence the private sector simply ‘does it better’.

However, when we discuss private sector involvement in development, the private sector itself is often minimally represented at these events. Its voice is therefore often heard through associations or a token selection of speakers. Furthermore, there is a need for greater clarity on what we mean when discussing the ‘private sector’ and its role in development. An important distinction can be made between at least two forms of private sector involvement. The use of international commercial firms, organisations and private finance to leverage aid through Public Private Partnerships (PPPs) might be considered the ‘new’ aspect of private sector involvement in development. The old aspect is the promotion of policies to strengthen and encourage the foreign and domestic private sector in developing countries themselves. More specifically, the new form focuses on PPPs, philanthropy and investments with a development impact. 

The private sector clearly is an important engine of economic growth and wealth creation. But to be effective and benefit the people, it needs to be framed within a normative approach to development – one that guarantees rights – and a vision of governments that maintain its developmental leadership role. One major concern trade unions have with this gravitation towards the private sector is that it undercuts the developmental role of the state and its institutions for delivering public services. A government with a developmental role would help ensure country ownership, a core pillar of aid effectiveness, and re-direct private sector role towards the much-needed mobilisation of domestic resources.

The emphasis is on the importance of providing the private sector with incentives that link development initiatives to their core business, such as access to resources, market expansion, direct access to consumers, and supply chain efficiency. The combined resources and expertise of both public and private sector actors contribute to more effective and efficient development interventions, creating an enabling environment that can be beneficial for both sides. The private sector could be a driver for sustainable development due to the powerful influence it has on decision and policymakers on issues such as climate change and sustainability.

The lessons drawn from development success in Central and Eastern Europe, the immense work by multilateral development partners like the GIZ and the Swiss Development Corp and the mix of aid and investment, frequently employed by the Chinese in developing countries, is pushing Western policy-makers to re-think their aid policy and the role of the private sector of the countries they operate in. More multilateral donor agencies especially USAID, and institutions like the IMF and the World Bank have created ‘dependencies’ rather than ‘competencies’ whereas multilateral development focus agencies like GIZ, JICA, DfID and developing country government Aid & Assistance programmes have been successful in technical capacity building, knowledge transfer and enabling structures. 

The significance of this Second Pillar of development is gaining ground in development debates across the globe due to a larger argument that the development sector, the aid industry, has developed into such a separate sector, sometimes claiming to be a profession and a discipline, that now bears little resemblance with other sectors and professions from where it should (or at least did) draw its legitimacy. As a consequence, international development policies are not designed and implemented by, say, education, public health or energy experts, as would be expected in developed and developing countries alike, but by a motley crew of individuals who have little more than academic knowledge about ‘the aid industry’ to claim as their expertise. It is not an exaggeration to say that many of the most prolific ‘development experts’ would not be trusted with policy or development in their own countries but are still free to logframe the lives of millions around the world.

The private sector, the economic core of the country needs to get back to centre stage, alongside the government which is the first pillar of development, in defining, blueprinting, implementing and evaluating the approach and outcomes of development for a populace that has put them there and looks up to them for all round sustainable growth.

Vaijayanti Khare is known for her dynamic engagements in the corporate, academic, social and development fields in Kathmandu over the past decade. Her writings are a reflection of her hands-on work, insights, studies, success and challenges.

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