OECD Orientations for Development Co-operation in Support of Private Sector Development

Introduction

These orientations suggest broad policy outlines and practical donor strategies for promoting the private sector in developing countries. They take account of the evolution of thinking in this field and of current "best practice" in related assistance efforts. Many aspects of private sector development however, are new to the development community and thus present special challenges. Accordingly these orientations are considered by Members of the DAC to constitute a "work in progress". It is expected that as knowledge and experience deepens, they will be reviewed and revised as appropriate.

Executive Summary

A. Key policy orientations

Economic development strategies adopted by the majority of developing countries following the Second World War focused on the central role of the state in planning and managing economic development, in allocating resources and in producing goods and services for public and private consumption. With time, however, it is increasingly evident that greater efficiency, productivity and economic dynamism can be achieved through market forces, competition and private initiative.

Since the mid-1980s, the widespread adoption of an economic development paradigm based on policies to strengthen market forces, increase competition and refocus the role of the state has heightened the importance of private sector development. Many developing countries are undertaking structural reforms aimed at encouraging private enterprise to take root and flourish.

These efforts are focused on:

• macroeconomic stability (fiscal and monetary reform) and creating incentives for efficient production (trade, exchange rate and price reform);
• promoting deregulation and competition; and
• improving the legal, judiciary and regulatory environment.

New efforts to improve the ability of the public sector to provide essential public goods, such as administrative and physical infrastructure and widespread access to health, education and training, are also part of the economic reform agenda which are of great importance to private sector development.

While these reform efforts have to ''earn" their credibility in each developing country, it is important that their extent and significance be acknowledged and publicized by DAC Members so that positive images of the business opportunities in the reforming countries emerge as quickly as possible
The development impact of the Private sector.

Private sector development promotes efficient economic growth and development and is a source of wealth, dynamism, competitiveness and knowledge. Beyond its economic merits, however lie compelling social and political attributes that enhance the contribution private sector development can make more generally to sustainable development, the overriding goal of all development assistance efforts.

Jobs and incomes created by private enterprises lead to a more equitable diffusion of the benefits of growth lo more people. In the case of microenterprises these factors are further enhanced by virtue of their particularly direct impact on poverty alleviation and on the integration of women and other marginalised segmnents of society into economic life

PSD also engages people more actively in the productive and decision-making processes that affect their lives, furthering donor goals of participatory development and good governance. A growing private sector creates new stakeholders in the economy advancing the development of a more pluralistic civil society that can lead to more accountable political systems and rising labour standards

Finally, the combination of greater competition, market forces and profit motivations stimulates better use of both human and material resources (thus reducing resource depletion), and creates the tax base and potential for market-based policy instruments for tackling social and environmental challenges. Taken in their entirety, the economic, social and political benefits of PSD suggest that it can be an important vehicle through which donors can help developing countries to establish socially-just and more environmentally sound market-oriented economies based on democratic principles.

The importance of an effective public sector.

The public sector provides for a secure and stable environment for business operations by formulating and implementing appropriate policies governing economic, social and political life. Government efforts to establish legal systems and enforce the rule of law are requisite for markets to function well and for business confidence. The state also has the important task of ensuring that markets work efficiently and correcting for market failure. The functioning of "safety nets'' for those permanently or temporarily unsuccessful in the competitive system and where necessary, the creation of safety net systems. is a public policy concern. Finally, the public sector can take strategic decisions regarding development in accordance with broader economic and political realities and a long term horizon.

Definition and scope of PSD

"Private sector" is conceived by the donor community as a basic organising principle for economic activity where pnvate ownership is an important factor, where markets and competition drive production and where private Initiative and risk-taking set activities in motion. The private sector principle can be applied in all economic activities - agriculture. industry and services (including the delivery of public services ).

Donor motivations for supporting private sector development are based on promoting economic efficiency and social welfare. Donors agree that pnvate sector development is fundamentally about people: releasing and harnessing their productive potential and satisfying their human needs artd desires; and creating pluralistic societies which provide both human freedom and human security.

There is a wide consensus among donors that the more prominent role now accorded to the private sector does not detract from the central role played by the public sector: in fact, by releasing the state from the burden of producing goods and services that can be produced more efficiently by private enterprises, there is now greater scope for the emergence ot a more responsive, more effective public sector. The ability of recipient governments to make progress in these directions is central to the success of` efforts to develop the private sector.

Recipient Countries Tasks and Responsabilities

Recipient governments need to establish, therefore, through policies and administrative structures and procedures, a "cultural" disposition that facilitates the growth of the private sector. This "reorientation" of policies, attitudes and expectations can be approached on three levels. -

• At the macro level, it means adopting effective and sustainable policies that give credibility to the government and to the economy. Fiscal stability, in parallel with the development of efficient financial markets supplying a variety of services, will foster more diverse and sustainable patterns of external finance and a greater volume of resource inflows. Rebalancing the roles of the public and the private sectors by reducing the considerable budgetary and administrative burdens imposed on the public sector through privatisation of parastatals is required in many countries if these macro conditions are to be met. This will also help to create the ''fiscal space'' needed for the expansion of key social investment expenditures in health, education. housing etc.
• At a meso level, it means adopting policies that stimulate entrepreneurship, initlatlve, and risk-taking. Governments have to focus special attention on measures to overcome resistance by elites, labour, protected sectors and government bureaucracy to structural change and reform.
• At a micro levels incentives and promotional measures should replace controls and prohibitions. and supportive attitudes and facilitation skills should be developed within the public sector.

The donor response to the challenges of Private sector development

The challenges of Private sector development.

Private sector development creates new challenges and Commitments for the donor community. Donor efforts to promote the private sector will necessitate changes to the way the aid effort is typically conceived and conducted These changes are due in particular to two factors. First, PSD has to take place on a massive scale throughout the economy, and consequently donors have to organise themselves and their actions to leverage scarce aid resources to achieve this end. Second, aid efforts must work in harmony with market forces to create conditions that will trigger private initiative. New approaches to development assistance that address these factors will change the way donors organise themselves to carry out this work and the scope and method of designing and implementing related assistance efforts. When planning aid programmes and projects in general, donors will need to assess systematically whether the effect and/or implementation of a given aid operation will help or hinder private sector development. Private sector development also calls for concerted efforts among donors to adopt closely co-ordinated approaches to public enterprise support, subsidies, investment incentives and end-user interest rates: this creates new imperatives for effective donor co-operation.

Donor actions.

Donors have been strengthening their policies and programmes supporting private sector development:

• on a macro level this entails encouraging, through policy dialogue, appropriate economic policies (such as low inflation, deregulation, fiscal and monetary stability, and rational factor prices) and structural change (through policy dialogue and technical co-operation in areas such as competition and trade policies and the creation of a well-functioning financial system).
• on a meso level this involves donor efforts to assist in improving the institutional environment that frames business decisions: fostering predictability and stability in the business operating environment; promoting the rule of law and its enforcement; reducing the scope for corruption; and establishing institutions through which the public and the private sectors can engage in dialogue and feedback
• on a micro level it means donor support for such facilitative activities as business training and consulting services, micro- and small-scale enterprise development, privatisation, public enterprise reform and foreign direct investment.

B. Operational approaches to policies and programmes: a donor checklist

Building on "lessons learned"

The "foundations" of donor support. In a general way, donor private sector support should build upon basic approaches to development assistance as elaborated in the 1992 Manual of DAC Principles for Effective Aid. In particular, programmes and policies should incorporate basic development assistance objectives that stress strengthening indigenous capacities; engaging as many people as possible directly in development activities; fostering self-determination and self-reliance; building initiatives from the bottom up; mainstreaming women and marginalised segments of society in political and economic activities; reducing aid dependency; and structuring assistance in ways that ensure recipient ''ownership" of the development process. New ways of conducting the aid process. Private sector development involves diserse activities, ranging from supporting grassroots initiatives for microenterprise development to implementing technically demanding and highly complex projects furthering privatization and financial sector reform. At the same time, the magnitude of the task of promoting private enterprise in the developing world calls for pro-active and coordinated donor efforts operating on a variety of fronts and at all stages of the aid cycle from preparation to evaluation, including feedback. Together, these factors call for new ways of designing development assistance programmed delivering resources, and organising donor agencies in order to carry out this work. The following fundamental orientations guiding overall donor approaches to private sector development are distilled from the collective experience of the donor community.

Donors agree:

• - to promote agency-wide awareness of how private sector development can be incorporated across the full range of aid agency activities;
• - to structure assistance efforts in ways that will build up indigenous systems that support entrepreneurs and facilitate resource flows throughout the economy;
• - to base country-level private sector development strategies on an accurate and timely diagnostic survey - carrîed out either singly or jointly with other donors - of private sector constraints and needs;
• - to identify key gaps or bottlenecks where donor Interventions can have catalytic impact, setting in train similar forces spontaneously generated in situ;
• - while recognizing the innovative function of pilot projects, to nevertheless focus increasingly on ways to scale up assistance efforts from a local to a national level by drawing on existing institutional networks and financial systems,
• - to channel assistance where feasible through self-help groups and, in that respect, help individuals organise themselves into groups through which they can collaborate with one another for mutual benefit, solicit public assistance, and influence public policies;
• - to rely on local financial systems for intermediating financial resources to enterprises where they are solvent and viable; to strengthen weaker local financial systems so that ultimately they can intermediate donor resources efficiently; to structure credit operations such that interest rates to end-users are positive in real terms and provide for cost recovery by efficient financial intermediaries; and to focus on extending effective systems for delivering credit to groups underserved by existing markets;
• - to bear on mind that much can be done with limited capital if funds are leveraged (i.e. revolving funds, guarantees) and are targeted at measures or initiatives that address the causes of market failure;
• - to ensure that direct lending to individual enterprises does not compromise the objective of developing indigenous domestic financial intermediation systems;
• - to foster the creation and strengthening of business linkages and enterprise networks - for companies of all sizes - within and among developing countries, including on a regional basis. and between industrialized and developing countries;
• - to explore opportunities created by open trade and insvestment policies to stimulate more diverse and competitive industrles;
• - to provide assistance which is sustainable, meaning assistance that will neither contribute to the degradation of the natural resource base nor result in donor dependency;
• - to design and carry out assistance programmes and projects in ways that blend with local customs, social mores and cultural dispositions;
• - to "think global, act local'' by readying developing country enterprises for the challenges of globalization and by creating networks for the exchange of experience and lateral learning at the regional and global levels between institutions and authorities;
• - to avoid direct private sector development assistance where a hostile policy environment renders such assistance ineffective;
• and as regards microenterprise development:
• - to provide resources to end-users on a " wholesale" (i.e through intermediaries) not "retail" ( i.e directly) basis, and to adopt monitoring and control measures that maintain an acceptable balance between decentralisation and control;
• - to respond to local initiatives and provide resources to satisfy needs as articulated by beneficiaries and in amounts that can be readily and efficiently absorbed.