Opinion column: How to proceed with private sector development?


For decades there has been broad consensus among successive Dutch governments as well as bilateral and multilateral donors that private sector development is essential for poverty reduction through creating jobs and increasing incomes. The main focus was on local, native SMEs rather than multinational companies who were largely considered to be ineligible for support from aid funds, (although many NGO’s have found ways to work with them anyway).

Opinion column by André Dellevoet, MSc/MA

Private sector development encompasses a broad field of activity ranging from the macro level such as international trade and investment policy and business climate through the meso level (value chains, product and business, rural development, etc.) to the micro level of the company itself. The latter should include matters such as corporate governance, leadership and management, financial management, personnel policy, purchasing policy, marketing, etc.

A few decades later, we have to conclude that the hoped-for impact of private sector development still falls far short of expectations. While the globalization of supply chains and the massive increase in trade and investment flows have actually led hundreds of millions of people to be lifted out of poverty, especially in Asia, the recent crisis surrounding COVID-19 shows how vulnerable that progress has been. It is feared that more or less the same numbers of people will fall back below the poverty line.

Actually, this shouldn't surprise us. At the macro level, even though we have seen improvements in macroeconomic policy and political stability since the 1990s, deep constraints remained; corruption and bureaucracy persisted, weak competitive position and inaccessibility of export markets, lack of utilities and infrastructure, limited access to capital and limited availability of qualified labor stopped businesses. Internal weaknesses turned out to be persistent as well; corporate governance, financial management, procurement policy, personnel policy, quality assurance, innovation and marketing remained at a low level, resulting in a loss of money, market opportunities and growth. Notable in Africa is the lack of local champions such as Dangote or Bidco. Multinational, mostly Western and Asian companies, still dominate. Finally, our own private sector development effort was also not very effective. The numerous conditions attached to the aid ranged from gender and vulnerable groups to climate change and the promotion of LGBT equality in conflict areas; noble goals without a doubt, but little to do with what it takes to start a successful commercial business. As a USAID colleague whispered to me; "We turned businesses into NGOs". Policies were not about the company itself as the engine of growth and jobs, in accordance with the aforementioned policy principles, but rather about the company as a means to achieve the UN's millennium or sustainable development goals. It is therefore no coincidence that private sector development has largely ended up with NGOs and charities, rather than local financiers and specialist service providers, as is common in Western countries. Regardless of whether this supply of aid therefore meets the demand of the local business community, it is striking that only a small part of the (too often non-indigenous) business community has access to the aid and that the aid is very fragmented in all kinds of clubs, funds and initiatives and is too much focused on short-term results (how many farmers in the value chain benefit from it). It is high time for a reform of the sector.

Another approach
What is needed is a new approach, not at the complex and unfeasible macro level, see the decline of the WTO, nor the small-scale, disjointed micro level that is poorly aligned with the needs and realities of local business, but at the meso-level, where scale and impact can be achieved. Partnerships are central to this, because only together significant progress can be made. The advantages are obvious; everyone benefits from pooling resources, knowledge and skills. The partnership with Elon Musk has saved NASA billions. Together you are also stronger against an often unwilling and sometimes hostile government. In turn, the government needs the financial strength and innovation of business, for example to combat crises such as COVID 19 or the insect pests that recur every year.

However, successful partnerships don't come about by themselves. They have to follow certain rules of the game, such as:

  • Cooperation between like-minded partners who have the same strategic, long-term goals and who reinforce each other;
  • Confidence-building measures such as transparency and accountability;
  • Everyone contributes as much as possible, no “free riders”;
  • Facilitation by a respected intermediary who continues to drive collaboration and monitor progress;
  • “Ownership” is actually in the hands of the local partners who determine the agenda;

MSM's Triple Helix approach fits perfectly in this form of partnerships. Under a Triple Helix platform, government, research institutions and the business community work together to stimulate the development of a specific sector. At one time it is through applied research into new technologies and at another time through advocacy for certain government measures. The agenda may differ per partnership.

If cooperation under the platform proceeds smoothly and leads to long-term, close cooperation between partners and the pooling of people and financial resources, a more institutional approach may become possible. Several multilateral institutions, such as the World Bank and the African Development Bank, have advocated the formation of industrial clusters, with partners also working in physical proximity to each other, especially if the cluster falls under its own regulatory and supervisory framework as under Export Processing Zones (EPZ’s). This also increases the likelihood of a somewhat more equal relationship between the government and the private partners, because legal certainty and legal equality are better guaranteed.

I believe that such a new approach, based on mutual respect, dialogue and long-term cooperation, also offers good opportunities to address difficult issues such as corruption, tax evasion, violation of environmental rules, and the maintenance of good working conditions. In any case, they offer a better perspective for long lasting impact than continuing to rely on short-term conditionality, donor dependency and weak, local ownership.