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The role of the private sector in development

Amidst the gloom of 2011 it might not be fashionable, but it is important, to be reminded that there has never been a better time to be alive The power of commerce and technology to transform lives has clearly been demonstrated over recent decades and more than 5 billion of the world’s 6.5 bn people are now living in countries that are either already affluent or are developing rapidly in that direction.  With the prospect of years of painful restructuring of our economies and expectations in the North and galloping growth in most of the South, it is not fanciful to imagine a world with converging standards of living in what was once the ‘developed’ and ‘developing’ world. We should not be surprised that India today has rather similar socio-economic conditions to those existing in the United States just 80 years ago.

This in no way underplays the significance of the 1.4 bn people who earn less than the international poverty line of US$1.25 dollars a day – neither does it seek to ignore the scandal that nearly one billion people went to bed hungry last night. Organisations like the Overseas Development Institute have the reduction of poverty at the heart of its mission. The point is, though, that we are now living in a world where less than 20% of the population faces extreme poverty – which is half the share in 1990, so it is important to recognise this historic achievement. The causes of this massive reduction in poverty are many but, surprisingly, most of the heavy lifting has been done by countries that receive relatively little development aid. Looking at countries like China, India and Brazil, it is now fairly clear that a pattern of sustained rapid economic growth that has benefitted the bulk of the population (either directly through the creation of very large numbers of jobs or indirectly through rising tax revenues financing massive social protection payments to poor people) has done the trick.

The development sector has generally been rather slow to recognise the power of the private sector to transform the lives of poor people. However, on 6 January 2011, there was a welcome step forward with the launch of DFID’s private sector department. This new department should be seen as official recognition that the development project involves rather more than a global social service department plus a bit of small business support. Harnessing the power of the private sector to reduce poverty is not an ideological aspiration, it is an empirically-demonstrable fact –  ODI has recently strengthened its own private sector programme in recognition of this reality.

The question is how can donors, governments and the corporate sector itself can further enhance the private sector’s contribution to development?

There are two established viewpoints on this, occupying either end of the spectrum. First, that private sector development is inherently developmental and any attempt to intervene in the market to, for instance, improve development impact is misguided (a view represented by commentators such as Ann Berstein). On the flip side, some others in the development community still believe that the private sector produces results which are exploitative and anti-poor. For the record, work by ODI’s private sector programme suggests that both these ideological positions are flawed. Whilst it is critical to appreciate the positive impact of private sector development it is also important to recognise that elitist governments, vested interests and other market and state failures can frustrate the ability of the market to spread the benefits of growth.

Analysing the emerging structure of the DFID department, looking for clues as to the direction of Government thinking, is revealing. There are sections on new business models and ethical trade and public private partnerships (as well as more conventional-sounding sections on investment). There is nothing wrong with working on these topics, and we at ODI have spent several years undertaking research on similar themes. It is also clear that fair trade and corporate social responsibility initiatives have positively changed the lives of many people in the South. However, it is important that we get our story straight from the off-set. The structure of much of the DFID department may inadvertently lend support to the view that the private sector is part of the development problem rather than part of the solution. According to this perspective, only if mainstream business practices change to become more ‘ethical’ and ‘fair’, can the private sector benefit the poor.

This view is remarkably widespread in the development sector and is problematic. Without downplaying the importance of business ethics, the suggestion that the huge steps forward in global poverty reduction have been achieved through ethical trade and new business models is simply not credible. Analysis by ODI suggests that mainstream business can make a much larger contribution to development than many suppose. Similarly, more ‘ethical’ trade and responsible business models often do benefit poor people, but sometimes they do not. The poor tend to gain from the development of competitive and efficient markets and – when they don’t – we know what to do to help the vulnerable benefit from market access.

It is great news that DFID has launched its Private Sector Department. Let’s not allow its effectiveness to be blunted by external observers who would rather base their ideas on yesterdays’ ideologies, than the more uplifting reality, to inform strategies to defeat poverty.