Bilal, S. 2012. Thematic Focus: Private Sector for Development. GREAT Insights, Volume 1, Issue 8. October 2012. Maastricht: ECDPM.
Private sector activity matters for growth as well as its quality, sustainability and inclusiveness. This is no news; but it is at last widely recognized by the international development community, as reflected in the Busan partnership, G20 statements or the European Agenda for Change, among others.
This comes at no surprise in the current context. The financial and economic crises have taken their toll, and with tighter budgets, most donors are faced with the challenge of doing more for development with less aid. The increasing flow of (development) finances, notably from emerging economies such as China, in SouthSouth relations has also contributed to shifting the attention beyond traditional aid instruments and modalities. In parallel, efforts to improve aid effectiveness have triggered a broader impetus on development effectiveness, with a need to foster favourable domestic conditions and an international environment conducive to balanced, sustainable, inclusive and equitable growth as a source of development and poverty alleviation. Hence the need to build on private sector potential, promoting synergy between public and private initiatives and financing that meet development objectives.
Several donors and international finance institutions have a significant track record in engaging with private sector. Yet, more effort should be done to capitalise on these experiences, better assess their development impact and share some of the insights gained for development objectives. This should also build on private sector perspectives on engaging on development, as well as developing countries’ own assessment and priorities.
A first step is to recognize the diversity of experiences and approaches linking the private sector, which is by no mean a homogenous entity, and development. It is also useful to distinguish between private sector development, focused on building the private sector capacity and business environment, and private sector for development, which addresses its contribution to development objectives.
In addition, special attention must be given to various forms of private financing, which combined with or simply better coordinated with public action, can stimulate development. This is commonly referred to as innovative financing for development. In reality, it is hardly innovative in financial terms, but can be so in the framework of development cooperation. In this context, public finance is often used for its leveraging effect or as a way to mitigate risk.
In order to best capitalise on the potential synergy between public and private actions for development, it is important to properly assess the respective incentives of the parties concerned, identifying common objectives while recognising when interest diverge, and the trade offs thereof. Public engagement with the private sector must reconcile such tensions to pursue balanced and sustainable development. Efforts should thus also be made to better understand the drivers and bottlenecks to an increasing role of the private sector as a partner in development, including in terms of the environment needed for a fruitful engagement and the potential of innovative development (financing) models and instruments.
This means addressing questions such as: (i) Is there any reason to fear a stronger focus on private sector for development? (ii) How to strike a balance between investment in social sectors and in economic sectors? (iii) What really constrains business environment reforms, and how to best promote an enabling environment that can stimulate private investments? (iv) Does working with the private sector give donors more “policy leverage” in this? (v) How can a combination of various forms and modalities of finance have greater effects? (vi) How can loans and investments be best used to leverage scarce public grant resources and catalyse additional private resources?
It is with such considerations in mind that ECDPM has joined forces with BUSINESSEUROPE, the EIB, AFD and KfW to organise a high-level panel at the European Development Days on 16 October in Brussels to address “How Can We Maximise Inclusive Growth and Development? The Pros and Cons of Private Sector Engagement and Blending Instruments”, whose initial reflections are comprised in this issue of GREAT Insights. ECDPM is committed to further promoting such efforts.
San Bilal is Head of Economic Governance Programme and Policy Officer Trade & Economic Governance at ECDPM
This article was published in Great Insights Volume 1, Issue 8 (October 2012)