Wednesday, April 23, 2014
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The Changing Development Order

DUBAI – The Millennium Development Goals established a successful framework for the world to address fundamental social issues such as poverty, health, hunger, and education. As discussions commence on the shape and scope of the global development agenda that will succeed the MDGs, which expire in 2015, it would be helpful to consider the role of the private sector and rethink the international community’s overall approach to development.

Economic development is the best way – indeed, the only way – to achieve sustainable poverty reduction. It creates a virtuous circle. Growth creates jobs, and jobs reduce poverty.

The private sector has a key role to play. Private-sector capital flows now dwarf traditional public-sector aid flows. For example, of the $200 billion in total US resources dedicated to development in 2010, 87% came from private flows. By contrast, in the 1960’s, official overseas development assistance accounted for 70% of capital flows into developing countries.

A similar picture prevails globally. Domestic resource mobilization, remittances from expatriate workers, private debt and equity flows, and philanthropic contributions exceed official international aid by a wide margin. Private flows are no longer the tail, but the dog that wags the development agenda.

Nonetheless, much of the development-policy community remains stuck in the distant past. For example, policymakers insist on the importance of “public-private partnerships” and argue that the private sector needs “to learn to work with the public sector.”

But today’s reality would be better described as “private-philanthropic-public partnerships” (expressed in that order to reflect each component’s relative importance), or “P-4.” We need to persuade public institutions to focus on how to work better with their private counterparts, not vice versa, because the public and private sectors have a shared interest in accelerating economic development and ensuring that everyone benefits from globalization.

This is not meant to diminish the important role played by the public sector, which alone can create the conditions – the rule of law, sound macroeconomic policies, and good regulatory regimes – needed for the private sector to flourish. For example, they catalyze the development of supportive property and customs regimes, including the establishment of credit bureaus and laws to protect creditors’ rights – all necessary prerequisites to channel financing flows.

Possibly the biggest prize in aligning private- and public-sector development efforts lies in the relatively unexplored area of blended finance. We have barely scratched the surface in integrating the efforts of development finance institutions (DFIs) with private and philanthropic initiatives, which could make the whole greater than the sum of its parts.

A World Economic Forum study estimates that, when aligned, an annual increase of only $36 billion in public-sector investment in climate change could be leveraged to 16 times that amount by mobilizing $570 billion of private capital. In fact, to improve alignment and reflect the new P-4 order, government agencies and DFIs should be encouraged to establish explicit targets for leveraging private capital. Particularly in an age of lean governments and public austerity, success in meeting such targets should become a key performance indicator.

What should the private sector do better? While there are many examples of responsible companies that want to “do well by doing good,” sustainability and development goals are not always integrated into businesses’ core agenda. Total shareholder return (TSR) and corporate social responsibility (CSR) often seem completely divorced from each other.

The thinking, mostly implicit, is that maximizing TSR by polluting the environment is acceptable as long as some compensating contributions are made to CSR initiatives – the corporate equivalent of bathing in the Ganges to wash away one’s sins. We need a new standard that requires companies to report not just their financial metrics, but also their performance on social, developmental, and environmental issues. For maximum impact, and in order to restore public trust in corporations, the standards must be global, clear, and consistent.

The other reality of the post-MDG world is the multi-directionality of development flows. Traditionally, development flows were unidirectional, going from the wealthy North to the impoverished South. But the world order has changed. Emerging markets and developing countries now account for 50% of global GDP and 75% of global growth, and demographics will further accentuate the shift in the center of economic gravity.

“Southern” countries such as Brazil, China, and India, to name only a few, are enhancing their contributions to overseas development. Domestic resources and diaspora remittances are increasingly funding development. As countries become less reliant on traditional sources of financing, they are less likely to follow foreign diktats blindly.

Indeed, people in developing countries are increasingly demanding a stronger voice in determining what is good for them. The North’s old “we know what is good for you” approach, however well-informed or well-intentioned, will no longer work. A more inclusive approach that reflects local conditions and preferences is essential. The P-4 approach reflects the new global realities and seeks to leverage the best qualities of the private, philanthropic, and public sectors.

Read more from our "Visionary Voices" series

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  1. CommentedKrishnan Unni

    Economic development in the manner described by the writer - essentially unhindered mercantile capitalism - flies in the face of evidence over the past few years. No doubt the "middle classes" have had it great, but it leaves a very large proportion of people outside its ambit, and the opportunities remain overwhelmingly for the selected few. And few private enterprises have the resources and the patience to invest in heavy infrastructure of the type that developing countries need. Case in point is China - the greatest poverty reduction experiment in history. Otherwise, capitalism needs to be implemented at the lowest level - where credit flows easily to small ideas and small entrepreneurs, and that means taking risks with finance, along with an emphasis on correct incentives. Am I asking for too much? Perhaps. If there is one thing the recession has taught us, it is that there is nothing like financial independence. I am all for capitalism, so long as everyone gets an equal shot at it.

  2. CommentedStamatis Kavvadias

    "Poverty reduction" is the claim, but the idea is to accept the private sector upper hand that recently has brought the world on the verge of financial collapse, and accept it as the world's future planning, along with the belief on perpetual growth! Not a word on sustainability.

    These ideas are dead. We need stronger public sectors and more transparency. Money must stop being 97% credit. We need, at least, half the money supply to be interest-free, so that sovereigns stay out of the global race for competitiveness.

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