Want to Make Aid More Effective? Bring in the Private Sector

Friday, September 2, 2011

The question of aid effectiveness has moved to the centre of development debates. If donors want to make their aid more effective, then they need to engage strategically with the private sector.

We know that development of the private sector is probably the most powerful tool in lifting people out of poverty. As a strategy paper for the Dutch foreign ministry puts it, “the private sector … is at the heart of the development process. Driven by the quest for profit, they invest in new markets and new facilities that strengthen the foundation of the economy.”

Of the countries that have been most successful in emerging from poverty in the past five decades, it is the private sector that has driven the process. For example, a study, carried out by Unctad, the Indian government and the UK’s Department for International Development (DfID) found that increases in exports from India between 2003-04 and 2006-07 led to the creation of 26m jobs and to $55bn in additional income. In China too, a recent study found that the private sector not only contributed to economic growth, but also helped the country to cope with the societal impacts of the decline in state industry.

We are also beginning better to understand the mechanisms through which specific industries impact on poverty reduction and development. Take tourism as an example: an Overseas Development Institute-World Bank review identifies three mechanisms. The first covers the direct effects of tourism – the earnings of those working in the sector, at hotels and in excursion companies. Second are the indirect effects as tourism draws inputs from other segments of the economy such as food, transport and furnishings. Third, tourism creates dynamic effects, such as the business climate for small enterprise development, patterns of growth in the host economy, and the infrastructure of the destination.

As the example of tourism illustrates, value chains of international investors are extremely powerful as a tool for broad-based development. According to the Dutch NGO the Centre for Research on Multinational Corporations (Somo), the value chains of international investors “may positively contribute to development in a number of ways … including economic (economic growth and productivity), social (poverty reduction, employment creation and human rights) and environmental (pollution and environmental destruction) components”. As the CEO of Anglo American recently noted: “The amount that we spend each year in procurement from emerging market economies is comparable to the aid budgets of the UK, France or Germany. It’s a huge sum of money and a massive development opportunity.”

Source: Guardian.co.uk (link opens in a new window)