The private sector and development – working together as partners

A healthy, vibrant and competitive private sector is a key to growth and reducing poverty. But how can we best engage the private sector as a development partner to create jobs, income opportunities for the poor, and to leverage additional funding for sustainable and inclusive growth?

The private sector can also be a driving force in making growth inclusive, not only by generating productive and decent job opportunities, but also by investing in innovation and business models that target the needs of the poor.

Established in 1959, Inter-American Development Bank is the largest source of development financing for Latin America and the Caribbean. The bank has an evolving reform agenda that seeks to increase its development impact in the region. IDB supports efforts by Latin America and the Caribbean countries to reduce poverty and inequality. It aims to bring about Sustainable, climate-friendly development.

In addition to loans, IDB provides grants, technical assistance and carries out research. Its shareholders are 48 member countries, including 26 Latin American and Caribbean borrowing members, who have majority ownership of the IDB. The bank had USD 10.9 billion in approved lending and grants in 2011 and has about 2 000 employees.

In the run-up to the 2012 European Development Days, which will be held in Brussels 16-17 October of this year, we have interviewed Bernardo Guillamon, manager of the IDB’s Office of Outreach and Partnerships, which is in charge of promoting partnerships between public and private sector organisations and the bank.

It is becoming increasingly recognised that for development to be effective and sustainable, it is necessary to engage the private sector as a development partner. Why is this so important?

At the Inter-American Development Bank we understand that long-term development requires the implementation of prudent, disciplined public policies. But governments cannot accomplish everything on their own. For development to take root and provide lasting results, we need the broad participation of the public and private sector, working together as partners.

The private sector in Latin America and the Caribbean has changed its way of doing business over the past two decades. It is less dependent on the state and operates within a framework of global competitiveness. It understands the importance of seeking more effective ways of reaching the base-of-the-pyramid market, to provide access to affordable goods and services to low-income consumers. Many companies are incorporating the concepts of sustainability and social responsibility into their core business. By doing so they are expanding the scope and reach of their social programs, not only providing needed resources for economic development, but also transferring knowledge and operational capabilities.

These types of private sector engagements can complement traditional public sector interventions in innovative ways. The combination can be highly effective in delivering sustainable and articulated solutions to many development challenges faced by this region and other regions.

What would you consider are the foundations or fundamentals needed for the private sector to thrive in a given territory and how can the private sector development tools of donors and governments help strengthen these foundations where they are considered weak, e.g. in some developing and least developed countries?

Over the past 15 years, countries throughout Latin America and the Caribbean have seen improvements in their economic and social indicators. From a long-term perspective, however, growth in the region has lagged behind that of both developed countries and other emerging economies.

Contrary to popular belief, low levels of investment are not necessarily responsible for this weak performance. Low productivity is a better explanation for our region’s relatively low income in comparison to incomes in developed economies, and the sluggishness of economic growth compared to other emerging economies.

Low productivity in the region has many causes. High transportation and logistics costs, informality in business and labour, limited access to credit, discriminatory tax regimes, and lack of innovation are at the root of the region’s slow productivity growth. These factors create a double barrier to productivity growth, since they not only prevent productive enterprises from growing in size, but also hinder less productive ones from becoming more productive.

The barriers to productivity growth are relatively easy to identify. Designing and implementing a coherent policy mix that would boost a country’s productive potential is much more complex and involves immediately applying corrective measures and adopting long-term strategies. The latter is not easy because it involves the elimination of privileges and the introduction of new approaches.

At the IDB, we believe that the good news is that the bottleneck is not necessarily the lack of resources but rather the will to apply effective policies and to reform institutions based on successful experiences in other parts of the world. 

At the same time, it is necessary to continue to deepen the region’s financial markets, since access to credit is still limited. The fact that Latin America and the Caribbean emerged from the global financial crisis virtually unscathed is an incentive for lenders to increase their activity and target their resources toward sectors and companies that can increase their efficiency.

The challenge for states’ involvement is to better align private incentives with public interest, without taxing or subsidising private risk taking. What concretely do you think should donors and governments do and, equally important, not do, to foster a thriving private sector?

Efforts must be made to make economies more competitive and to remove obstacles to increased productivity. These efforts require public-private collaboration. The public sector controls many of the variables that impede or stimulate growth and investment. However, the private sector provides the information regarding which of these constraints are the most significant at the national, sectorial and regional levels.

The most competitive countries gather input from the private sector and build capabilities in the public sector through institutions such as competitiveness councils. These help ensure that public-private interaction generates quality information for policy decisions, while providing sufficient transparency to prevent the process from being co-opted by the interests of sectors or of individual firms. This makes it possible to eliminate ineffective regulations and bureaucratic roadblocks, and helps to create business promotion programmes to provide companies the public goods they need to invest and grow.

In Latin America and the Caribbean, there are already national and subnational institutions fulfilling this mission, though there are only a few and they are recently formed. The IDB has been promoting the creation of these institutions. These institutions have increased the levels of trust between public and private actors in the region and have learned that a pro-competitiveness consensus is not a ‘zero-sum’ game, but rather a ‘win-win’ affair.

Republished with permission; read the full interview. Can local businesses help fight global poverty? Weigh in via Debating Europe, an official partner of the European Development Days.