Aid and the private sector: a love story

Erinch IndonesiaOxfam private sector adviser Erinch Sahan (right) summarizes a critical new review of the growing interlinkages between aid and the private sector

Donors have a new love: business. And it will end poverty. Aid chiefs across the world have concluded that if we need growth to end poverty and the private sector drives growth, isn’t aid most effective where it focuses on the private sector?

Well, no. At least not usually. And a new report from Canada sheds light on why. The Canadian Council for International Co-operation and the think-tank the North South Institute have assessed the policies of donors towards promoting growth and the private sector. They break down (very adeptly) what the OECD donors are doing, how they’re thinking about the private sector and where they are falling short. It’s not only a sorely needed assessment of the rise and rise of private sector-focused aid, it also reminds us that aid is increasingly promoting a very specific economic model (thy name is neo-liberal capitalism) with some questionable assumptions that should attract serious scrutiny. You can read the report here but here are some highlights, along with a few thoughts from me. Just feed the growth machine Donors are focused on plain old growth. They don’t have a meaningful approach to improving the distribution or pro-poor impacts and too often merely pay lip-service to issues to do with the quality of growth. They’re not linking possible interventions; such as support to government capacity to protect labour rights, effectively collect taxes and redistribute the benefits of growth; with their private sector programmes. In addressing gender, too often they simply focus on getting women into markets, ignoring the social and political drivers of gender inequality. And direct support to the poorest and most marginalised is falling out of favour. [caption id="attachment_13655" align="alignleft" width="275" caption="OJ or kool-aid?"]OJ or kool-aid?[/caption] While the donors may differ on their rhetoric (some are good at sprinkling in buzz words like “inclusive” and “sustainable” when discussing growth), their private sector work ends up looking eerily similar. French and Belgian aid goes furthest in prioritising equality and accompanying growth with social services. However, for most donors, private sector programmes are effectively stand-alone growth feeders. The report reminds us that sustained growth in many developing countries (particularly in Africa) has failed to put a dent in unemployment. Growth driven by extractives is one such example that’s cited. So just feeding the growth machine doesn’t automatically mean the poor will benefit. Can aid really drive growth? The report finds that donors focus on interventions at the macro (e.g. business enabling environment and international CSR support) and meso (e.g. PPPs and financing investments) levels. However, it’s the micro-level programmes (e.g. training women farmers) that “have a much larger redistributive impact for poor and marginalized populations”. But can aid money really be a (meaningful) driver of growth? Why not focus on helping the most marginalised, rather than obsess over catalysing broader economic growth? Win-win-win-win… always Public-private partnerships (PPPs) are the new black. For OECD DAC members, PPP spending has risen from US$234m in 2007 to US$903m in 2010. Donor strategies suggest they represent wins for everyone: recipient governments, business, donors and NGOs. But donors seem to ignore the complexity of interests and agendas among those involved in PPPs. The pitfalls and inefficiencies of PPPs are scarcely mentioned and the politics of the PPP negotiating process is swept under the rug. This, I suspect, comes from an ideological underpinning to private sector strategies, which holds that business interests are aligned with development interests. Donors need to be reminded that this is only sometimes the case. Crony capitalism? Donors are also looking to include their national firms in their private sector strategies. For example, Australia’s Mining for Developmentphilippineprotest-300pxprogramme (AU$127m) partners with Australia’s mining giants on a range of projects in developing countries. Denmark’s Business Partnerships programme and the UK’s Food Industry Retail Challenge Fund are only open to national firms. This all seems dangerously like a veiled attempt to subsidise the foreign investment and CSR strategies of national companies – as long as some development story can come about. And isn’t this neo-tied-aid?  In the report’s own words “Donors sometimes favour their own commercial interests to the detriment of developing countries’ domestic policies for development.” Without more transparency around decision-making and a clear results framework for private sector partnerships (the report finds this is sorely lacking), we are left to interpret decisions and priorities as cynically as we’d like (I bags the cynical view). The report makes a plethora of sensible recommendations, including the need to support democratic ownership of the growth agenda and ensure additionality in private sector development programmes (ie; that an investment, CSR approach or any job-creation wouldn’t have happened even without the programme). But what comes flying off the page is the need to question fundamental assumptions about growth and aid. Some questions that I’m left with are:
  • What type of growth should donors be promoting?
  • Can aid really drive growth?
  • Are aid bureaucrats equipped to do business with business (e.g. through partnerships and PPPs)?
  • Why doesn’t aid focus on building the rights and power of the most marginalised?
What do you think?]]>

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9 Responses to “Aid and the private sector: a love story”
  1. Great to have an admission from you that Oxfam et al are promoting, benefiting from and protecting the neo-liberal status quo. The next step for Oxfam is to absorb this fact and discuss the implications internally and publically.
    Now you’ve stood up and accepted it, maybe I’ll take a leaf out of your book and get down to alcoholics anonymous!

  2. Some thoughts on your fourth question “Why doesn’t aid focus on building the rights and power of the most marginalised?”
    I think that there are four reasons,
    1. It is not (perceived as) the function of aid to build rights : call me naive but I feel that shifting power equations are best done when the efforts and resources are home-grown. That way there is no danger that the government will take a stand that this is being pushed by vested foreign interests. Happens a lot in countries like India the most recent case being demonstrations against a nuclear power plant.
    2. Risk to themselves and others: when aid agencies start working on power & voice issues, they send out a challenge to the current power holders, often governments. This puts them and the people they work with at risk, especially if their work is effective (if there is no risk in governance work, it just means that nobody is really taking you seriously). Appetite for risks are often variable and the more risk averse back off.
    3. Humanitarian imperative : Governments in autocratic countries hold the power to block civil society and even aid agencies if they feel they are getting too ornery. Continuing to put pressure on governments puts the ability of aid to reach the poor in jeopardy.
    4. Economics is primus : I think bilateral and multilateral aid often values economics over human rights and voice. There are hundreds of examples around the world and indeed you have alluded to some in this post.

  3. Sue

    Great article. I’d say Makarand has nicely answered the four questions quite succinctly.
    If aid organizations are looking to private sector companies that adhere to the view that their primary responsibility is to increase the wealth of shareholders, then you probably should expect that somehow the form of that aid will still be tied to growth and increased profits for the company, and is not likely to seriously challenge the status quo–including existing social and economic injustices. However, if you try partnering with certified B (Benefit) Corporations which are expected to consider the interests of all stakeholders, have a purpose beyond just making a profit, and are expected to meet certain standards regarding fair wages and work conditions, you might just see some aid that supports real change.

  4. Marc Levin

    Though I wish it were not so, I believe Makarand’s points are correct. I would say, though, that if corporations made it clear to developing country governments that their private investments would be dependent on measurable progress toward labor and other human rights, it might have an impact that NGOs cannot have, and without the backlash that can come from NGO advocacy. And the way to induce corporations take such stands is grassroots and stockholder pressure within developed countries, as well as legislative advocacy that has prompted reforms like the conflict mineral supply chain reporting systems required by provisions of Dodd-Frank Wall Street Reform and Consumer Protection Act in U.S.

  5. Julio Espinoza

    Its simple, the problem is not GROWTH, that is what the world bank has fooled us to do: measure development trough economical growth.
    Every year in the developing world we announce with great publicity how much we have grown in economy. At the same time in most of these countries the development indicators (access to health, to education, infraestructure, percapita income, etc) go down. Now we are encouraging and supporting in the international cooperation world, the same model that has made richer the rich and poorer the poor. COME ON!!! are we really that naive??

  6. Matti Kohonen

    While doing doctoral fieldwork in Ghana in 2005, that I defended last year, I had a first hand experience with private sector aid, already then pushed by DANIDA (Danish government aid) and the World Bank’s InfoDev programme funded by Japanese aid.
    DANIDA funded a business plan competition, held at the World Bank Development Marketplace, while InfoDev funded an ICT inducator at an Internet centre called BusyInternet, one of my case studies. The competition gave an award of 1000 USD to the best business plans in several categories, one of the IT start-ups I was following won the competition and they were able to purchase materials, and inputs into their business as a result, and gain notoriety which could attract much needed equity investment into their business. What they would have needed from the capital markets was in the order of 20,000 USD equity investment from a “busines angel” or venture fund. Venture Funds however do not invest in such small companies, but rather from the half a million upwards. Bank loans had a 24% interest rate, and required a house or a car as collateral.
    Microcredit wasn’t available for this segment of companies, as they capped around 10,000 USD, and often still had a 30% interest rate. This gap between the half a million and the 10,000 is called the “missing middle” which is only bridged when the economy formalises further, and when banks start accepting work contracts, equity and cash flow as collateral for a loan. As inflation is tackled, the interest rates will also go down. Until then, companies will continue to depend on kinship and family-based financing, the core of business finance in most developing nations. The Danida grant didn’t solve the underlying problem of lack of liquidity of a capital markets in this category.
    Aid funded enterprises will be a drop in the ocean, and will find a hard time scaling up after the initial push if the economy and society around them doesn’t have the basic infrastructure that supports the growth. They may provide easy “success stories” but their impact will remain low, so an audit of private sector aid might be a useful exercise in aid quality.
    The lesson is that donors should still focus on supporting developing nations in providing universal health care and free education, resilience from natural disasters, social protection (transfers to the poorest, and pensions systems) that reduce inequalities that really hamper the possibility for meritocratic society ever developing based on equal opportunities. Good market governance should also include market regulation, anti-trust laws, supporting tax administrations, clamping tax evasion and avoidance, establishing clear property rights.
    Call it “market building” where we build functioning markets that enable participation, just like we talk of “state building” in building good governance for citizen participation in politics.

  7. Mohga Kamal-Yanni

    Great piece. Egypt is a case to the point. We had good economic growth and small budget deficit yet the growth and prosperity stayed in the hands of the few. That is why people revolted in January 2011 and demanded bread, freedom, social justice and human dignity.
    Yet the IMF and EU are still after giving Egypt loans to cut budget deficit and “stimulate growth”. Growth that never reaches poor people! Even so called middle class people are no falling into poverty.
    Will the EU learn the lessons?

  8. Oliver Griffith

    There is no question that governments continue to be essential for development. They provide critical services for their populations, such as health care, education, infrastructure, and social safety nets. They also create the enabling environment for the private sector by ensuring property rights and contract enforcement, security, and macro-economic stability, as well as the proper regulatory framework. Governments’ role is to provide leadership for economic development and to ensure that it is shared by all segments of society. Grants, multilateral and bilateral finance, and technical assistance can help those countries that do not have adequate resources or expertise in this critical task. But governments can’t do the job alone—they are only part of the recipe for development and poverty reduction.
    The private sector is and must be a source of economic growth and opportunity that will allow people to improve their lives. While the public sector can create a sound basis for development and a good environment for investment, the private sector will generate the vast majority of jobs, help improve public services, and ultimately provide most of the tax revenues that the public sector needs.
    And let’s not forget that the private sector does not depend on aid funding. Most DFIs got an initial capital grant from their governments but then have to generate their own funds by getting investment loans repaid or making a profit on equity investments. They have to make profits in order to be able to reinvest. Besides, the idea is to fund projects that can stand on their own, which means they have to be profitable.