Is the Private Sector the Solution to the Overseas Aid Crisis?

For the first time in 15 years, the net volume of international development aid as a percentage of global GDP has dropped. In this context of economic and financial crisis there has been significant cuts in development aid allotments. The possibility of fulfilling international commitments to address major world problems is shrinking, while the needs of poor people are consistently growing.

In view of this situation, donor governments and bilateral and multilateral aid organizations have made a move to increase the role of the private sector. This is expressed in major international cooperation forums such as the Fourth High Level Forum on Aid Effectiveness (HLF4) that took place in Busan, South Korea, last year. However, this does not mean giving donations to the companies that are involved in cooperation; it means taking on board their contributions in know-how, adapted technology, innovation and capacity for action, as well as their ability to mobilize additional resources. 

The need for evidence based policy on private sector engagement

However, although more and more traditional donors are making room for cooperation, few are able to define what their action framework should be and how it should take shape. This is particularly worrisome because it allows for activities that deviate from the goal of achieving the greatest possible impact on poverty reduction. In other words, there is a risk that profits and public relations will replace the original aim of poverty reduction. We also run the risk geographical and sectoral concentration in the most profitable areas, ignoring those that are excluded and have the most difficult contexts. It is therefore critical to create systems that will measure the impact of the private sector in advance and will give a solid evaluation of the results. In this way, we will be able to draw conclusions on which areas the private sector should play a leading role in, those in which it should be a partner and those in which it is not an effective actor.

Old wine in new bottles? 

The pressure to stimulate economic growth, both in developing and advanced countries, means that donors and governments are more sensitive to two goals: creating an environment of opportunity in order to generate economic activity, and finding alternatives to public funds to have a significant impact on poverty reduction.

This is a debate that resurfaces from time to time. It is also far away from reality. Over 60% of development aid funds, especially multilateral funds, are channeled through the private sector. Business is already present in development cooperation, managing and executing projects. What is it that this new phase should really expect of companies’ role in cooperation?

We are familiar with examples of public support by private sector donors that is biased toward the promotion of investments and exports from donor countries. The abusive use of financial intermediaries and new financial actors and instruments, which considerably reduce operation transparency and limit responsibility, is also worrying. The same can be said of innovative capital investment mechanisms currently under scrutiny because of the global economic crisis. The use of these financial instruments must be subject to strict international regulation, very precise ex-ante evaluations of impact and a commitment not to use territories known as tax havens as a base for operations.

Beyond CSR: a new business model 

Companies’ essential impact on poverty will improve when they incorporate a responsible development model for their activities. At present the private sector, comprising mainly large corporations, is often responsible for negative outcomes in social, environmental and economic areas.

The Business of Business is Business. A company’s prime responsibility is to maximize dividends for its shareholders. Corporate growth and development plans are structured in such a way that the impact of their operations is taken into account only if it contributes to the goal of profitmaking. This creates a reductionist and short-term vision. It’s true that without economic activity there is no possibility of economic growth, and that the private sector is responsible for 9 out of every 10 jobs in the world. But economic growth for its own sake is not sufficient to guarantee the reduction of poverty or inequality. A responsible company, as a real pillar of a future growth model, must incorporate a review of its impact throughout the whole supply and value chain as part of its base strategy and core business.

If these basic measures are not introduced, we run the risk of straying from what is most important. The point is to succeed in making real improvements in people’s lives, and a real reduction of poverty and inequality – not to focus on the actors. 

For the role of business in development cooperation to be effective, the goal of poverty reduction must be internalized. Companies have to adopt a complete responsibility framework for all of
their actions, not only those that are linked to specific projects (CSR cannot be considered true social responsibility). They must link their interventions as much as possible to their business model, while framing them within a global vision. We are direct witnesses to the fact that companies can change the way they act and become trustworthy and effective partners in the promotion of development initiatives. When this is the case, collaboration between public actors, civil society organizations and companies can be beneficial to broader development objectives. 

Donors, whether bilateral or multilateral, cannot shift public funds to finance private commercial operations. But above all, when a company is included as a participant in cooperation policy, aid efficiency criteria must be applied. The private sector has a lot to offer cooperation, but it is not “the solution”. It will not cover the gaps left by some states that are reducing their aid, and we should not entrust our international aid system to private industry. 

José María Vera Executive is Director at Oxfam Spain.

This article was published in Great Insights Volume 1, Issue 8 (October 2012)