January 11, 2013

Just how are donors engaging with the private sector, and what does this mean for development?

Just over a year ago, the private sector was crowned the new silver bullet for development.

In the years and months preceding Busan’s Fourth High Level Forum on Aid Effectiveness (HLF-4), members of the OECD’s Development Assistance Committee (OECD-DAC)—the forum through which donor countries coordinate their aid efforts—had renewed their interest in economic growth and the private sector as driving forces behind development.

The culmination of this focus came at HLF-4, where bilateral donors envisaged a number of potential roles for the private sector to play: as a funder and innovative source of finance for shared development goals and challenges; as an implementing partner; as a source of public and private income generation and job creation; and as a key constituency to engage in the creation of national development strategies that support an enabling environment for the private sector and, in turn, growth.

Despite this emerging fascination, donor policies for promoting economic growth and the private sector have received very little comparative analysis.

So a year ago, in collaboration with Shannon Kindornay from The North-South Institute, we began a process to address this gap by mapping and assessing bilateral donor strategies on the private sector and economic growth. The objective was to identify emerging themes in donor policies by comparing and contrasting different elements of their strategies.

The final report, “Investing in the Business of Development – Bilateral donor approaches to engaging the private sector” – whose official launch is next week - captures a range of findings relative to the visions and assumptions of donors’ strategies; where the state, private sector actors, and other development actors fit into these visions; and how donors take account in their strategies of development and financial additionality, international aid and development commitments, and cross-cutting issues such as sustainability, gender, and human rights, and principles relating to aid effectiveness.

Each issue might command a blog of its own – Shannon’s provides a good overview of some of the donor’s assumptions and the implications of this.

This blog focuses on an element of our research findings that I think helped clarify my own thinking around (and perhaps adds some value by giving shape to) the current debates around aid, development and the private sector.

For me, to date, the debates have been confusing because the private sector means very different things to very different people. But it has also become confusing because the ways donors are engaging with the private sector are very wide-ranging, yet both proponents and critics of this approach tend to bundle any type of engagement with the private sector into one big pool, missing the different layers of engagement and its implications for different development actors.

What the research has done is create a sort of “typology” in terms of this private sector engagement.

Firstly, it clearly and consistently distinguishes between three types of private sector (national [donor], foreign [multinational], and domestic [recipient country]). Perhaps not broad ranging enough for some, but a start.

Secondly, it organizes donor engagement into two distinct tracks:  promoting private sector development and partnering with the private sector to achieve broader development outcomes.

The promotion angle is the more traditional one: creating the right legal and regulatory environment for the private sector (as much national and foreign as domestic) to flourish and helping markets work better. The thinking is that a thriving private sector contributes to growth, which in turn contributes to poverty reduction.

The partner approach is more recent one that has emerged to help make effective use of declining aid resources, leverage alternative sources of development financing, and identify innovative private sector-managed solutions to development challenges, including the provision of goods and services to poorer populations (bottom of the pyramid approaches, for example).

These approaches are not mutually exclusive.

But joint international statements by donor countries and new funding arrangements being developed at the donor level indicate that there is an increasing emphasis on this partnership approach.

To further distill the promotion and partnership approach, and building on previous NSI research, this report identifies three different levels in which donors are doing this: at the Macro level (by creating an enabling environment for business), at the Meso level (making markets work) and at the Micro level (investing in businesses and people).

And at each of these levels, donors are using a range of different tools and modalities for engaging different private sectors – national, foreign and domestic.

So what does this mean for development, poverty reduction and inequality? And what needs to be done to ensure that whatever it means, it does more for poverty than less?

I may have to save that for another day (and another 800 words).

Or you could beat me to the punch and read the full report (all 92 pages; 52 if you want to skip endnotes and annexes!), draw your own conclusions in your own blog (let us know- freillyking[a]ccic.ca) - or cheat and just read the Coles Notes

This blog was written by Fraser Reilly-King, Policy Analyst (Aid), CCIC. The views expressed are his own, and do not necessarily represent the views of CCIC or its members.

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