Working with the Private Sector for a Stronger Link between Growth and Poverty Alleviation
In every market-based system the private sector is the main engine that powers economic growth. But can the private sector also contribute to poverty reduction? Yes, say many economists, assuming that growth, by pushing up incomes, will eventually bring about a rise in incomes among the poor. The fact is, however, that this trickle-down effect is not always automatic, and may set in only in the long run. At the Commission, we believe that to have an immediate effect on poverty reduction, private sector-led growth has to be inclusive.
This is why we have made support for inclusive and sustainable growth a key priority in EU external cooperation that encompasses a people-centred vision of development in which everyone is able to participate in, and benefit from wealth and job creation, while preserving the natural environment on which the livelihoods of present and future generations depend.
Many of the varied factors that help make growth inclusive and sustainable depend on the state and the quality of its institutions and policies. Growth is more likely to benefit the poor in societies where governments have established equal access to basic services, an impartial legal and judicial system and an appropriate social protection system. Yet the private sector, as engine of economic growth, has a major role of its own to play in determining whether the growth it creates is inclusive and hence contributes to poverty reduction.
It is precisely a stronger role for the private sector in achieving inclusive and sustainable growth in developing countries that is behind the Commission’s new private sector development strategy. Adopted as a Commission Communication on 13 May 2014(1) and given broad support by EU Member States in the Foreign Affairs Council a week later, the strategy proposes 12 actions to address the role of the private sector in development on three fronts.
First, we have set out actions to offer support in areas such as domestic regulatory environments, business development services and access to finance that further private sector development objectives in partner countries. We want to promote economic opportunities for the poor, which is why in all these areas we will mainly focus our support on segments of the economy where most of the poor are active, namely on micro and small enterprises and those operating in the informal sector.
A second set of actions identifies opportunities for making private sector development objectives part of support strategies for sectors where the private sector is a main actor and has particular potential to contribute to inclusive and sustainable growth. Such sectors include sustainable agriculture, where the majority of poor people in developing countries are employed; sustainable energy, bringing electricity and efficient lighting solutions to the poor; physical and digital infrastructure, using information and communication technologies to achieve financial inclusion of the poor and connect rural farmers to markets; and green sectors, whose contribution to building a green and inclusive economy is essential for the 70% of the world's poor who live in rural areas and whose livelihoods depend directly on biodiversity and ecosystem services.
The Communication proposes a third raft of actions to act as a catalyst to get local, European and international businesses engaged in development as part of their core business strategies. By investing responsibly in developing countries, or engaging in sustainable trade, the private sector can have a significant and positive impact on the lives of poor people. Moreover, businesses can contribute directly to inclusive growth if they adopt inclusive business models that include the poor in economic processes. On the demand side this will involve innovative, accessible and affordable solutions to improve their economic choices; on the supply side it will involve empowering them economically as producers, distributors or workers. Here the EU can facilitate the private sector's own engagement for development. For instance, it can share the risks stemming from investments that benefit the poor but would otherwise not receive sufficient capital. It can help build an ecosystem of local support institutions for inclusive businesses. And it can facilitate dialogue, knowledge-sharing and partnerships with NGOs, whose local knowledge is often very valuable in addressing the needs of the poor.
The multitude of forms of private sector engagement for development, and the variety of private sector actors that require differentiated approaches of engagement, have made relations between development agencies and the private sector a lot more complex than in the past. To ensure clear direction and a focus on poverty reduction amidst this complexity, the Commission proposes a set of guiding principles in the new Communication for the design and implementation of public support for private sector development and public-private collaboration in development cooperation. Notably, support actions should place a strong emphasis on results and should have a measurable development impact, with help in meeting development goals assessed in full transparency. Support actions should provide clear added value; they should not crowd out the private sector, replace other private financing or distort the market. On the contrary, they should catalyse market development by crowding in other private sector actors for the replication and scaling-up of development results. Partnerships with the private sector should strive for cost-effectiveness, shared interest and mutual accountability for results, with the risks, costs and rewards shared fairly. Social, environmental and fiscal standards should be upheld at all times. Actions should focus on job creation, inclusiveness and poverty reduction. They should take account of the fact that private sector activity can take many forms and will impact on economic development in various ways. They should also be able to deal with different local contexts and fragile situations. And they should observe policy coherence in areas affecting the private sector in partner countries.
The European Union has established this comprehensive set of principles with a view to ensuring that the partnerships it undertakes with the private sector follow one overarching aim: giving the private sector the right conditions and support to enable it to engage in meaningful activity that helps foster inclusive and sustainable growth for poverty reduction and sustainable development in partner countries.
Andris Piebalgs is currently serving as European Commissioner for Development at the European Commission.
This article was published in GREAT Insights Volume 3, Issue 6 (June 2014).