Principles guiding Private Sector Development support

The most important principles guiding PSD approaches are the following:²⁰ o Policy dialogue

“PSD is about the interplay between the state as a formulator of the ‘rules of the game’, the

‘players in the private sector’, and also of civil society.”²¹

Strategies for PSD, whether general or country-specific, whether from a developing country or donor institution, and their implementation, are designed through a process of policy dialogue that includes the public and the private sector along with civil society, both at the national and international levels. This means that PSD programmes are ideally based on a deep analysis of the strengths, weaknesses, opportunities and dynamics of the local private sector, rather than on “one size fits all” approaches whereby more or less standardised inputs and approaches are introduced (Schulpen/Gibbon 2002b: 13). This highlights the importance of an effective relationship between the state and the private sector to identify and shape appropriate solutions to address market and government failures. Through the PRSP processes, multi-stakeholder dialogue or public-private dialogue has been widely institutionalised: PSD should be mainstreamed into national development and poverty reduction strategies, defining clear objectives and targets for the development of the private sector, market access and functioning, as well as specific changes to business regulations (OECD 2004: 55). The interaction with market players, both domestically in the recipient or partner countries and internationally on a global scale, should ideally cover the whole spectrum of actors, including those who are commonly underrepresented and/or marginalised such as the poor, women, smallholder farmers and the informal sector. Through concerted public-private efforts, the aim is to improve the quality of governance, giving the private sector and civil society the opportunity to provide inputs, comment on, review and oversee reforms, while promoting greater levels of transparency and accountability (DCED 2008: 11; UNIDO/GTZ 2008: 40, 43).

o Ownership and commitment

Equitable and broad-based participation is key at the level of policy formulation, but also at the implementation and monitoring/evaluation level. It is key to ensure that PSD programmes respond to the needs and priorities of developing countries. Strategic decisions on where to lead and how to shape the economy in a country need to be taken by the respective Government.

Ownership and commitment by local governments and the private sector are important to ensure long-term sustainability. It is only through these mechanisms that government will

20 These principles have emerged through international policy discussions and agreements in recent years.

21 SIDA 2004: 4.

25 establish credibility and be willing to sustain the necessary reforms over a longer period of time; and it is serious reforms that create incentives for individuals and enterprises to perform (Klein/Hadjimichael 2003: 160-1). Donors should take on the role of unbiased brokers that bring together different stakeholders relevant PSD.

o Poverty-orientation

The focus of all PSD programmes is on contributing to the achievement of the first MDG (halving the proportion of people living on less than one dollar a day until 2015), although the involvement of the private sector in achieving the other MDGs is also key.²²

Efforts are geared towards enhancing access and equitable participation of all stakeholders, particularly poor and marginalised groups, in economic growth. The new consensus requires pro-poor growth to be at the centre of support strategies or plans, bringing together economic and governance reform, as well as interventions from a livelihoods perspective, aimed at reducing risk and vulnerability (OECD 2004: 63).

As mentioned under the section on the impact of PSD, the poor are meant to be actively engaged in and directly benefit from the activities that generate economic growth, contributing to their employment, income and productivity, reducing their vulnerability and risk. Some donors go as far as establishing that they will specifically target those markets where the poor are directly involved through their PSD interventions (SIDA, for example, defines a focus on agriculture and the informal economy, see SIDA 2004). Others stress the fact that market outcomes are or need to be pro-poor, rather than considering certain sizes or types of enterprises (and support to these) per se as pro-poor (see, for example, OECD 2004).

In this context, the term “inclusive market development”²³ is used (see, for example, DfID 2008 and UNDP 2008). Some PSD strategies include support to redistribution mechanisms, whereby the resources generated through economic growth should be invested in areas meaningfully affecting the poor, especially in human resource development.

Altenburg/Drachenfels identify the explicit pro-poor reasoning as a key characteristic of the new consensus on PSD programmes: exponents of what they call the “New Minimalist Approach” argue that deregulation and secure property rights are not only beneficial for public welfare, but are especially beneficial for the poor (Altenburg/Drachenfels 2006: 396). A recent policy guideline put forward by the OECD (see OECD 2007b) is one example for the explicit focus on pro-poor growth. The Donor Committee for Enterprise Development (DCED) has stressed in a recent publication of common guidelines that a conducive business environment affects both the formal and informal economies and is one of the pre-requisites for economic growth and poverty reduction (see DCED 2008).

22 With the more directly relevant ones being MDG 3 (gender equality and empowerment of women), MDG 7 (environmental sustainability) and MDG 8 (global partnership for development). However, if the private sector is understood as “a way of doing things”, market development principles and the involvement of private sector actors become relevant for the achievement of all MDGs.

23 “Inclusive business models include the poor on the demand side as clients and customers, and on the supply side as employees, producers and business owners at various points in the value chain.” (UNDP 2008: 2).

26 These discussions can be related to the contrast between pro-growth and pro-poor growth strategies and the resulting focus on either trickle-down effects or direct support (see Downing et al. 2006 and Müller 2008 for a summary on the relationship between PSD and poverty reduction), as well as on the lack of consensus about whether PSD interventions should focus on enterprises owned and managed by poor people (see Downing et al. 2006 and DCED 2008 for an overview of these contested issues) when pursuing the goal of poverty reduction or be more general in nature.

o Interventions in a market setting and using a market-based approach

The aim is to promote PSD which is economically efficient and enhances economic welfare (OECD 1995: 14). Sound PSD is, first and foremost, a function of a sound policy, including the necessary institutional underpinnings (Klein/Hadjimichael 2003: 155). Markets are not a way to replace the state; rather, they require an effective state to function at their best (Klein/Hadjimichael 2003: 168). Interventions, therefore, are aimed at correcting both government and market failures and require, once more, an effective relationship between the public and private sectors.

The key principle is not to cause any distortion of markets through PSD interventions. Another key characteristic of the new consensus on PSD, according to Altenburg/Drachenfels, is the consistent and partly empirically backed criticism of traditional government-driven and subsidy-based support to the private sector, mainly consisting of transfers of hardware and finance (Altenburg/Drachenfels 2006: 397-8). A shift from a supply-driven approach to a more demand-driven approach can be observed both in policy discussions as well as at the level of implementation.²⁴ Catalytic and systems-building approaches are at the centre of PSD strategies. The aim is to change incentives within markets to deliver pro-poor outcomes rather than providing direct support to enterprises (OECD 2004: 60). This is based on the acknowledgement that the capacity of the local private sector has often been underestimated, just as the signalling function and problem-solving capacity of markets.

No distortion of markets is one aspect, but the other maybe more obvious one relates to an inherent business or commercial orientation, meaning that the interventions and ventures supported have to be economically viable to be sustainable.

A consequence of the principle of market-orientation is the channelling of support through intermediary structures, so-called “facilitators”, that can be both individuals and institutions.²⁵

24 See Miehlbradt/McVay 2003, 2004 and 2005, as well as Wältring 2006, for a discussion of the shift in donor interventions, as well as the market development approach itself.

25 Also due to the increasing pressure to find more cost-effective approaches and increase outreach, as well as ensure sustainability, donors now intervene indirectly in the market and use intermediaries or facilitators to channel their support, which are normally development-oriented institutions. Some facilitation services may develop commercial potential and be spun off, in which case institutions providing these services will be regarded as service providers rather than facilitators in a market development sense (DCED 2001: 8). See Miehlbradt/McVay 2003 for a discussion of the different roles of facilitators and providers. It is to be noted that also in relation to the state or governments, the term “facilitator” is being used, hinting at the shift from being mere service providers and regulators to also being facilitators and coordinators of PSD and development in general, providing an enabling environment and responding to the country’s needs.

27 Also consistent with the principle of market-orientation and the temporary nature of subsidies, all interventions should have a clear exit strategy defined from the very beginning (see DCED 2001, as well as EC 2003a as examples).

o Capacity development and strengthening

Broad-based growth implies learning processes taking place within society, which capacitate growing parts of the population in dealing with structural changes and which reduce the knowledge gap between marginalised groups and market leaders (Altenburg 2000a: 2).

Key to interventions in PSD is capacity building, development and strengthening of individuals as well as institutions, in pursuance of a knowledge-based approach. This includes issues such as education, vocational and skills training, capacity building, information gathering and dissemination, counselling and guidance, technical assistance, exposure and exchange of experiences. The overall goal of capacity development and strengthening is the empowerment of individuals and institutions in order to enable them to better take on their roles in the economy and deal with the modernisation and transformation processes linked to the development of societies and countries.²⁶ In this respect, creating spaces to share lessons learnt from successes and failures, promote best practices, establish discussion and consultative fora, as well as multi-stakeholder knowledge networks are key (see, for example CIDA 2003: 13-4). Capacity development and strengthening of individuals and institutions is also key in order to strengthen their role as potential facilitators of various processes related to PSD.

o Environmental sustainability

The productive sector, both public and private, especially the industrial sector, is always a major source of waste and pollution. Promoting incentives for the productive sector to operate in environmentally-friendly ways is a cross-cutting concern in many PSD strategies.

This includes the development of appropriate legal and administrative frameworks to protect the environment, as well as strengthening effective implementation and enforcement of these regulations (OECD 1995: 36-7).

o Gender and HIV/AIDS

Gender and HIV/AIDS are essential dimensions of PSD.

The respective roles of women and men in economic activities tend to vary according to cultural, religious and other institutions, as well as power structures. As a result, PSD and economic growth have different outcomes for men and women, which need to be considered in policy making, implementation and monitoring.

26 Such a paradigm for development was outlined by Joseph Stiglitz under the headline of “Development as a Transformation of Society” (see Estrup 2009: 12-14). Under this logic, it makes sense for PSD interventions to “pick the change agents” rather than “pick the winners” (Müller 2008: 29) and invest in their capacity strengthening and development.

28 HIV/AIDS is a major concern for most developing countries, affecting great parts of the population and, therefore, the overall productive capacity of these countries. HIV/AIDS should therefore be integrated into PSD approaches, as a cross-cutting issue, just as gender.

o Aid effectiveness: coherence and coordination

In pursuit of increased aid effectiveness²⁷, collaboration among (bilateral and multilateral) donor institutions in pursuit of PSD initiatives, while respecting the comparative advantages of each institution, is key. The objectives of improved coherence and donor coordination are avoidance of duplication of efforts, greater complementarity and continuity of the interventions. A major challenge in the implementation of the Paris Declaration lies in the ideological differences among donors and the resulting lack of consensus on how to intervene in PSD. Concerted efforts should also be expended to improve the tracking of performance and results achieved through PSD interventions. Sharing lessons learned and best practices will further ensure more effective and efficient aid (OECD 1995: 39-40).

However, also internal (in)coherence is an issue that needs to be addressed by most donor institutions (Schulpen/Gibbon 2002b: 9). PSD needs to be seen as a cross-cutting issue which should guide much of the work donors do and should be mainstreamed into all departments (OECD 2004: 63-4).

As mentioned above, PSD interventions are meant to be market-based, but the Paris Declaration is mainly related to the work with Governments and public institutions. This can be seen as a contradiction, but surely pre-supposes that Government has a key role to play in PSD and that there are Government policies, strategies and procedures to align to. The obligation to implement the Paris Declaration raises the question of how support for PSD can be implemented most effectively, either through public sector funded and executed interventions or through some alternative modalities including private sector stakeholders (see Estrup 2009, p. 29-35, for more details on this on-going debate).

27In 2005, more than one hundred donors and developing countries signed the so-called Paris Declaration on Aid Effectiveness. The key principles of the Paris Declaration are: ownership, alignment, harmonisation, management for results and mutual accountability (see OECD 2005a). These agreed reforms on the way development co-operation is undertaken are meant to help achieve the MDGs by 2015. See, for instance, the website www.oecd.org/dac/effectiveness for more information on the Paris Declaration. Several high-level meetings have been held since to agree on implementation modalities and track progress, the latest being the Third High-Level Forum on Aid Effectiveness, which took place in Accra in September 2008.

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