The Millennium Development Goals (MDGs) 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 US$200 billion in total US resources dedicated to development in 2010, 87 percent came from private flows. By contrast, in the 1960s, official overseas development assistance accounted for 70 percent 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.”
However, 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 US$36 billion in public-sector investment in climate change could be leveraged to 16 times that amount by mobilizing US$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.