rev cpsd en - united nations development …...nding poverty, the aspiration of the millennium...

UNLEASHING E N T R E P R E N E U R S H I P

M A K I N G B U S I N E S S W O R K F O R T H E P O O R

Commission on thePrivate Se c t or&

Deve l o p m e n t

R E P O R T T O T H E S E C R E T A RY - G E N E R A L O F T H E U N I T E D N A T I O N S

UNLEASHING ENTREPRENEURSHIP

M A K I N G B U S I N E S S W O R K F O R T H E P O O R

Commission on thePrivate Sector&

Development

R E P O R T TO T H E S E C R E TA RY - G E N E R A L O F T H E U N I T E D N AT I O N S

1 March 2004

The analysis and policy recommendations of thisReport do not necessarily reflect the views of theUnited Nations Development Programme, itsExecutive Board or the United Nations MemberStates. The Report is an independent publication byUNDP and reflects the views of the members of theCommission on the Private Sector and Development.

Copyright © 2004 United Nations Development ProgrammeOne United Nations Plaza, New York, NY 10017, USA

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form by any means, electronic,mechanical, photocopying or otherwise, without prior permission of UNDP.

COMMISSION MEMBERSC O - C H A I R S

The Right Honourable Paul MartinPrime Minister, Canada

Ernesto ZedilloDirector, Yale University Center for the Study of Globalization

Former President, Mexico

M E M B E R S

E X - O F F I C I O M E M B E R S

Maurice Strong (Canada)Special Adviser to the Commission

Mark Malloch Brown (United Kingdom)Administrator, United Nations Development Programme

A LT E R N AT E S

Debra Dunn for Carleton Fiorina (United States)Senior Vice President of Corporate Affairs, Hewlett-Packard Company

Michael Froman for Robert Rubin (United States)President and CEO, CitiInsurance

C O M M I S S I O N S E C R E TA R I AT

Executive Director: Nissim Ezekiel

Core Team: Jan Krutzinna, Naheed Nenshi, Yann Risz and Sahba Sobhani

Eduardo Aninat (Chile)Former Deputy Managing Director,

International Monetary Fund

Jorge Castañeda (Mexico)Former Minister of Foreign Affairs, Mexico

Distinguished Professor of Politics & Latin American Studies, New York University

Luisa Diogo (Mozambique)Minister of Planning and Finance,Mozambique

Carleton Fiorina (United States)President and CEO, Hewlett-Packard Company

Rajat Gupta (India)Senior Partner Worldwide,

McKinsey & Company

Anne Lauvergeon (France)Chairman of the Executive Board, Areva Group

President and CEO, Cogema

Jannik Lindbaek (Norway)Chairman, Statoil ASA

Peter McPherson (United States)President, Michigan State University

Alan Patricof (United States)Vice-Chairman and Founder, Apax Partners

Kwame Pianim (Ghana)CEO, New World Investments

C.K. Prahalad (United States) Harvey C. Fruehauf Professor of BusinessAdministration, University of MichiganBusiness School

Robert Rubin (United States)Director and Chairman,Executive Committee, CitigroupFormer Secretary of the Treasury, United States

Miko Rwayitare (South Africa)President and Executive Chairman,Telecel InternationalOwner Mont Rochelle Winery

Juan Somavia (Chile)Director-General,International Labour Organization

Hernando de Soto (Peru)President, Institute for Liberty and Democracy, Peru

nding poverty, the aspiration of the MillenniumDevelopment Goals, is the overriding developmentalobjective of the 21st century. Despite great progressin the past 50 years, 1.2 billion people—one-fifth of

the people on Earth—live on less than US $1 a day, without access to manyof the social services basic to a decent human life. Their plight requires a globalresponse making full use of all the financial, intellectual and organizationalresources that we can muster.

It is against this urgent background that Secretary-General Kofi Annanasked us to convene the Commission on the Private Sector and Developmentto answer two questions. How can the potential of the private sector andentrepreneurship be unleashed in developing countries? And how can theexisting private sector be engaged in meeting that challenge? This report isour responses to these questions.

The report offers recommendations on how the major actors—governments,public development institutions, the private sector and civil society organizations—can modify their actions and approaches to significantly enhance the abilityof the private sector to advance the development process. The objective of

FOREWORD

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poverty alleviation leads us to focuson developing businesses that createdomestic employment and wealth—by unleashing the capacity of local entrepreneurs.

We set an ambitious time limit forour work, which has been completedin a little more than half a year sinceour first meeting in June 2003. Ourintention was not to carry out basicresearch. Much work on the subjectis already under way, and majordevelopment agencies, private foundations and academic institutionsare already focusing their energieson the private sector’s contributionsto development. Instead, our approachhas been to understand and assimilatethe work already carried out by allparts of the development coalition,including business, civil society andlabour organizations, and to integratethat thinking in the framework presented here.

The Commission’s work has beenheavily influenced by the voices ofentrepreneurs, expressed throughtheir actions and through theirresponses to wide-ranging surveyslaunched to understand what mostaffects their ability to be productiveand to grow. It is the capacity, driveand innovation of entrepreneursthat increase the impact of a broadly constituted private sector.Entrepreneurship encompasses theactions of small, informal, village-

based individuals as much as it doesthat of the managers and innovatorsin multinational corporations andlarge local companies. It is their voicesthat we have heard the loudest.

The Commission has also attempted to highlight a broadrange of good practices that showhow the capabilities of the privatesector can best be harnessed for thecause of development and povertyalleviation. The cases include successful approaches that originatewith the traditional developmentplayers, such as the multilateraldevelopment institutions and bilateral aid agencies. But moreoften they include lesser known butinnovative approaches implementedby the private sector—both bycompanies and civil society organizations. Those approachesrely on market mechanisms andprivate sector incentives and thuslend themselves much more to thereplicability and scalability that we believe needed. One of our keyobservations is the lack of knowledgeabout best practices and the greatneed for more sustained researchand analysis of what works andwhat doesn’t.

We concluded at the outset that it would not be enough for thisCommission to produce a traditionalreport voicing opinions and urgingothers to take action. Instead, we

believe that it is critical to developa set of pilot actions and initiativesthat would test the main observationsand conclusions of our work—so that their relevance to the realworld of development could bedemonstrated on the ground. That is why the report ends with anillustrative portfolio of actions thatwill be developed in greater detailover the next few months—actionsthat could be implemented on apilot basis shortly thereafter. Someof them could be driven by the UNsystem, and some by other partnersand stakeholders.

These initiatives are far fromenough. We put them out to all ofyou as indicative of the types ofactions that we believe can andshould be replicated for the widestpossible impact. Nor do we believethat each of them is a perfect model.Country differences require modifyingthe initiatives—as well as some ofour overall recommendations—tofit particular circumstances. Ourideas and conclusions are presentedas directional, to elicit reaction andconstructive dialogue. The intent isto catalyze a renewed coalition ofthe major stakeholders—focusedmore clearly on the challenges outlined here. Such a coalition isessential to unleashing the capacityof the private sector, to achievingthe Millennium DevelopmentGoals and to alleviating poverty.

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Paul Martin Ernesto ZedilloCo-Chair Co-Chair

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he Commission’s work would not have been possible without the input and assistance of many individuals and organizations. We are deeply grateful to all those listed here.

A SPECIAL THANKS…

To McKinsey & Company, who provided input and counsel to the Commissionand its Secretariat throughout the project. The team of Maria Blair, MichaelMonson and Mark Templeton was led by Tilman Ehrbeck, Diana Farrell,Jeremy Oppenheim and Les Silverman.

To Jennifer Barsky, Prabal Chakrabarti and Irene Philippi who also providedvital inputs to the work of the Secretariat.

READERS AND EXPERTS

Our work has been informed by many who have gone before, and a numberof them generously gave of their time and expertise to help shape our thinking.These include: Adrian Hodges, International Business Leaders Forum;

ACKNOWLEDGEMENTS

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Lalita Gupte, Mahdav Kalyan and K. V. Kamath, ICICI Bank;Nandan Nilekani and Sanjay Purohit,Infosys Ltd.; Percy S. Mistry,Oxford International Group;Richard Frank, Bob Graffam, JulioLastres and Alexander Schwedelheim,Darby Overseas Investments Ltd;Michael Barth, NetherlandsDevelopment Finance Company;Nancy Bearg, Enterprise Works;Gary Bond, Noreen Doyle andMichael McCullough, the EuropeanBank for Reconstruction andDevelopment; Cameron Rennie,the World Business Council forSustainable Development; EnriqueFerraro, Jim Kaddaras and MariaOtero, Accion; Jide Zeitlin,Goldman Sachs; Masood Ahmed,David Stanton and Adrian Wood,the U.K. Department forInternational Development;Professors Michael Chu, CalestousJuma, Tarun Khanna, GeorgeLodge, Michael E. Porter, IqbalQuadir and Deborah Spar, HarvardUniversity; Michael Fairbanks,On the Frontier; Craig Wilson,DeltaPearl; Elli Kaplan; BenjaminKrutzinna; Neysan Rassekh; AlexShakow; George Ivanov; EleonoreKopera, Business HumanitarianForum; Barbara Samuels, SamuelsAssociates; Donald Snodgrass,Development Alternatives, Inc.;Elizabeth Littlefield, CGAP;

Bill Kramer, Water Research Institute;Hugh Locke, Locke Associates;Bill Draper, DraperRichards;Joaquim Boborquez; Maria CattauiLivanos and William Stibravy,the International Chamber ofCommerce; Robert Litan, RobertChernow, The Ewing MarionKauffman Foundation; ProfessorsJohn McMillan and Paul Milgrom,Stanford University; ChristopherWoodruff, University of California,San Diego; Professor JonathanMorduch, New York University;Jeb Brugman and Craig Cohon,GlobalLegacy; Bob Fitch,Enterplan; Daniel Zelikow,JP Morgan; Kenny Pegram andRay Smilor, the Foundation forEnterprise Development; SunilSinha, Emerging Market Economics;Roland Dominicé and Jean-Philippede Schrevel, BlueOrchard;Professor Roger Leeds, JohnsHopkins University; Professor Ted London, the Base of thePyramid Learning Laboratory atthe University of North Carolina;John Richardson and SevdalinaRukanova, the European FoundationsCentre; Kenneth Borghese, John E. Wasielewski, the United StatesAgency for InternationalDevelopment; S. Aftab Ahmed,Sabine Durier, Mariann Kurtz,Guy Pfeffermann, Harold Rosen,Thomas Schipani, Bernard Sheahanand Udayan Wagle, the InternationalFinance Corporation; Gerard Byam,Cesare Calari, Gerard Caprio,

Arvind Gupta, Jemal-ud-dinKassum, Michael Klein, KhalidMirza, Francois Nankobogo, NeilRoger, Marilou Uy and DileepWagle, the World Bank; Gerald T.West, the Multilateral InvestmentGuarantee Agency; JonathanFiechter and Prakash Loungani,the International Monetary Fund;Karen Decker and Arvind Mathur,the Asian Development Bank;Nancy Boswell, TransparencyInternational; Antonio Vives, theInter-American DevelopmentBank; and Ric Cameron andArthur Saper, the CanadianInternational Development Agency.

CONSULTATIONS

The Commission Secretariat conducted four formal consultationswith international labour represen-tatives; European foundations,academics, and Canadian civil society organizations. Our thanksto the hosts of these consultations,including the International LabourOrganization and the EuropeanFoundations Centre, as well as toparticipants of these consultations,who included: Bob Kyloh, workers’relations branch, the InternationalLabour Organization; Raul Requena,Union Network International;Wendy Caird, Public ServicesInternational; Carla Coletti, theInternational Metalworkers’Federation; Esther Busser, theInternational Confederation of Free Trade Unions; Sándor Köles,the Carpathian Foundation;

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Matthieu Vanhove, Cera Holding;William White, the CharlesStewart Mott Foundation; DarioDisegni, Compagnia di San Paolo;Charles Buchanan, the Luso-American Foundation; MichaelBrophy, Help for All Trust; LucTayart de Borms, the King BaudouinFoundation; Michel BourgesMaunaury, the Madariaga EuropeanFoundation; Raymond Georis and Alexandre Kirchberger, theNetwork of European Foundationsfor Innovative Cooperation; InekeDerkzen, the Rabobank Foundation;John Mroz, the EastWest Institute;Charles Maynes, the EurasiaFoundation; John Wyn Owen,the Nuffield Trust; David Dollar,the World Bank; Michael Klein,the World Bank Group; RaymondFisman, Columbia University;Florencio Lopez-de-Silanes, YaleUniversity; Nazeer Aziz Ladhani,the Aga Khan Foundation; GerryBarr, the Canadian Council forInternational Co-operation;John Watson of Cooperative forAssistance and Relief Everywhere(CARE) Canada; Patricia McCullagh,Ric Cameron and Arthur Saper,the Canadian InternationalDevelopment Agency; MichelChaurette, the Canadian Centre for International Studies andCooperation; Pam Foster, theHalifax Initiative; Molly Kane,Inter Pares; Robert Letendre, theCanadian Catholic Organizationfor Development and Peace;Mark Fried and Rieky Stuart,OXFAM Canada; Roy Culpeper, the

North-South Institute; and KathyVandergrift, World Vision Canada.

UNITED NATIONS

Many within the extended UNfamily gave generously of their timeand expertise, including MichaelHenriques and Stephen Pursey at theInternational Labour Organization;Wilfried Luetkenhorst and his teamat the United Nations IndustrialDevelopment Organization;Georg Kell and his team, GlobalCompact; and Antti Piispanen,Lorraine Ruffing, Karl Sauvant andthe team at the United NationsConference on Trade andDevelopment. Our thanks also to John McArthur and his team of the Millennium Project; and colleagues in the United NationsDevelopment Programme (UNDP):Zéphirin Diabré, AssociateAdministrator; Bruce Jenks of theBureau of Resources and StrategicPartnerships, who provided the over-all UNDP guidance to the project;Sanjay Gandhi, Connie Gratil,Sirkka Korpela and CasperSonesson, also of the Bureau ofResources and Strategic Partner-ships; Kalman Mizsei of the Bureaufor Europe and CIS; ShojiNishimoto of the Bureau forDevelopment Policy; Hafiz Pashaof the Bureau for Asia and thePacific; the staff of the Office ofthe Administrator, particularly

Gilbert Houngbo, Lauren Canning,Alan J. Lee and Mark Suzman;Djibril Diallo, Victor Arango,Carmen Higa, Hyacinth Morganand William Orme in theCommunications Office of theAdministrator; Christina Barrineau,Normand Lauzon and Peter Kooiof the United Nations CapitalDevelopment Fund; and BibiAmina Khan and Golda Kruss who provided assistance to theCommission Secretariat.

EDITING, DESIGNAND PRODUCTION

Last but not least, we thank whole-heartedly those who have helped uswith the editing, production andtranslation, working under verytight deadlines: Bruce Ross-Larsonand Meta de Coquereaumont,Elizabeth McCrocklin, ThomasRoncoli and Christopher Trott ofCommunications Development,Inc.; Julia Dudnik-Ptasznik ofColonial Communications; MichelCoclet; Edward Ranney Carta of EurOz Technologies; ThomasBarbush and the team at MooreWallace-Hoechstetter Printing;Kaika Clubwala of A.K. OfficeSupplies and Elizabeth Scott Andrews,Naeem Arastu, Sokhna Diouf,Françoise Gerber, RajeswaryIruthayanathan, Maureen Lynchand Jeremy Owens of UNDP.

A C K N O W L E D G E M E N T S v

TABLE OF CONTENTSC O M M I S S I O N M E M B E R S

F O R E W O R D i

A C K N O W L E D G E M E N T S i i i

H I G H L I G H T S 1

C H A P T E R 1 . W H Y T H E P R I VAT E S E C T O RI S S O I M P O R TA N T I N A L L E V I AT I N G P O V E R T Y 5

Deep poverty remains intractable 6

The private sector is important for the poor—and often is the poor 7

Who are all the entrepreneurs? 8

A focus on the domestic private sector 9

C H A P T E R 2 . C O N S T R A I N T S O N T H E P R I VAT E S E C T O R I N D E V E L O P I N G C O U N T R I E S 1 1

Widespread informality for microenterprises 1 2

Few competitive small and medium size enterprises 1 3

Lack of competitive pressure on large companies 1 4

Foundations for entrepreneurship—not yet in place 1 4

Three pillars of entrepreneurship—too often missing 1 7

C H A P T E R 3 . U N L E A S H I N G T H E P O T E N T I A L O F T H E P R I VAT E S E C T O R 2 1

Building the foundations 2 3

Erecting the pillars 2 4

C H A P T E R 4 . E N G A G I N G T H E P R I VAT E S E C T O R I N D E V E L O P M E N T 2 9

Serving markets at the bottom of the pyramid 3 0

Forming ecosystems and building networks 3 0

Fostering public-private partnerships for sustainable development 3 3

Improving corporate governance 3 4

Advancing responsible business practices and corporate social responsibility standards 3 4

C H A P T E R 5 . R E C O M M E N D E D A C T I O N S 3 7

Actions in the public sphere: create an enabling environment 3 8

Actions in the public-private sphere: partner and innovate 4 0

Actions in the private sphere: mobilize capabilities and resources 4 1

Looking forward 4 2

B I B L I O G R A P H I C N O T E 4 3

B I B L I O G R A P H Y 4 5

B O X E S

Box 1.1 The Millennium Development Goals 7

Box 3.1 Costa Rica’s private sector—unleashed 2 7

Box 4.1 Resources under the radar screen for private sector development 3 0

Box 4.2 Showing what’s possible at the bottom of the pyramid 3 2

F I G U R E S

Figure 1.1 More investment—more growth 7

Figure 1.2 Four billion people at the bottom of the pyramid 8

Figure 2.1 Informality thrives in poorer countries 1 2

Figure 2.2 Small and medium enterprises become more importantand informality less important as countries become wealthier 1 3

Figure 2.3 Foundations for the private sector and pillars of entrepreneurship 1 5

Figure 2.4 Enterprises in low income countries face many more burdens when registering 1 7

Figure 3.1 Strengthening the effectiveness of traditionalprivate sector development activities 2 2

Figure 4.1 Private sector contributions to private sector development 3 0

Figure 5.1 Actions in the three focus areas 3 8

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he Commission believes that any approach to privatesector development—and the policy and action recommendations that accompany it—should begrounded in the realization that the savings, investment

and innovation that lead to development are undertaken largely by privateindividuals, corporations and communities.

The private sector can alleviate poverty by contributing to economicgrowth, job creation and poor people’s incomes. It can also empower poorpeople by providing a broad range of products and services at lower prices.

Small and medium enterprises can be engines of job creation—seedbeds for innovation and entrepreneurship. But in many poor countries, small andmedium enterprises are marginal in the domestic ecosystem. Many operateoutside the formal legal system, contributing to widespread informality andlow productivity. They lack access to financing and long-term capital, thebase that companies are built on.

The Commission believes that the primary responsibility for achievinggrowth and equitable development lies with developing countries. This

HIGHLIGHTS

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responsibility includes creating theconditions that make it possible to secure the needed financialresources for investment.

Those conditions—the state ofgovernance, macroeconomic andmicroeconomic policies, publicfinances, the financial system andother basic elements of a country’seconomic environment—are largelydetermined by the actions ofdomestic policymakers. Their challenge is to capitalize on advancesin macroeconomic stability anddemocracy and to launch reformsthat bring about further changes ininstitutional frameworks to unleashand foster the private sector.

Most of the recommended actionsinvolve more than one of the actors working together. Wheregovernments are implementing policy change, it is often with thedirect support and involvement ofmultilateral development institutions.Where the private sector is taking amore active stance on sustainabledevelopment, it is often with civilsociety raising the profile of thisissue. Where governments areimplementing regulatory reform,it may be in direct consultationwith representatives of the privatesector. The individual actions identified here should be seen inthe framework of this broadercooperation—needed even more to reduce poverty.

Our interest lies in three areas:

1. In the public sphere, promotingthe reform of laws, regulationsand other barriers to growth.

2. In the public-private sphere,facilitating cooperation andpartnerships between public andprivate players to enhance accessto such key factors as financing,skills and basic services.

3. In the private sphere,encouraging the development of business models that can bescaled up and copied and thatare commercially sustainable.

ACTIONS IN THE PUBLIC SPHERE:CREATE AN ENABLING ENVIRONMENT

Creating an enabling environmentinvolves steps to reduce the share ofthe informal sector in an economy,through reform of the overallenabling environment for the formal economy.

For developing country governmentsReform regulations and strengthenthe rule of law. Developing countrygovernments have to make a strongand unambiguous policy commit-ment to sustainable private sectordevelopment—and combine thatwith a genuine commitment toreform the regulatory environmentby eliminating artificial and policy-induced constraints to strong economic growth.

Formalize the economy.Developing country governmentsneed to focus on creating the conditions to reduce informalityand change the composition of theprivate sector ecosystem over time.

Engage the private sector in the policy process. Governmentsneed to create a real partnership

with representatives of the domesticprivate sector to implement changesand ensure that the voice of the privatesector includes small and mediumenterprises and microenterprises.

For developed country governments Foster a conducive internationalmacroeconomic environment andtrade regime. Increasing the flow ofdevelopment aid and reforming theglobal trading system to provide faireconomic opportunities to producersfrom developing countries areessential for promoting rapid growthin domestic private investment.

Redirect the operational strategies of multilateral and bilateral development institutionsand agencies. In encouraging sustainable private sector develop-ment developed countries need toensure that the collective actions of these agencies are better coordinated—to improve their efficiency and to reduce the pressureson the administrative capacity ofdeveloping country governments.

Untie aid. Changes in the administrative rules controlling tied funds would permit moreeffective use and delivery of technical assistance to stimulateprivate sector development.

For multilateral development institutions Apply the Monterrey recommen-dation of specialization and partnership to private sectordevelopment activities. The extent of overlapping activities iscounterproductive and needs to be urgently addressed.

Address informality in developingcountries. Some pioneering workis underway to map the structure ofthe informal sector, and a global

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effort to expand the coverage of this work is likely to yield significant benefits.

ACTIONS IN THE PUBLIC-PRIVATESPHERE: PARTNER AND INNOVATE

The Commission believes that allstakeholders need to make concertedefforts in finance, skills and public-private partnerships for the deliveryof basic services.

Facilitate access to broader financing options. We envisioncontinuing development of domesticfinancial markets coupled withskill-building for regulators andprivate financial institutions.

Assist skill and knowledge development. Skill-building activities could range from programs for top public and private leadership to trainingmicroentrepreneurs to joint effortswith public authorities and unionsto improve workforce skills.

Make possible sustainable deliveryof basic services, particularly energyand water. The Commission seesthe need to develop innovativemodels for partnerships of governmental service providers,multinational companies and local companies.

ACTIONS IN THE PRIVATE SPHERE:MOBILIZE CAPABILITIESAND RESOURCES

The Commission believes that theprivate sector, particularly largelocal companies and multinationalcorporations, must realize that it can contribute to accelerated economic development and topoverty alleviation.

For the private sectorChannel private initiative into development efforts. Webelieve that the private sector hastremendous potential to contributeto development through its knowledge, expertise, resources and relationships.

Develop linkages with multinational and large domesticcompanies to nurture smallercompanies. Linkages between different types of firms in developing countries provide aneffective channel for local companiesto gain access to markets, financing,skills and know-how.

Pursue business opportunities in bottom-of-pyramid markets.Recognizing the needs of bottom-of-the-pyramid markets (the 4 billionpeople who are earning less than$1,500 a year) and creating innovativesolutions to meet these needs areother vital actions required fromthe private sector, both domesticand international.

Set standards. The private sector needs to make a genuinecommitment to sustainable development—with a sharp focus on corporate governance and transparency.

For civil society and labour organizationsThe Commission believes that civilsociety and labour organizationshave to continue as criticalobservers of the development agenda—and as facilitators andsupporters of innovative approachesfor meeting the MillenniumDevelopment Goals and improvingthe quality of life for poor people.

Increase accountability in the system. This is a core part of thework of civil society organizations,as is their leadership in pushingforward the concept of sustainabledevelopment. This work should be strengthened.

Develop new partnerships andrelationships to achieve commonobjectives. Civil society organizationsare closest to the base of the pyramid.They also are often proxies forexperimenting with new technologiesfor solving problems.

LOOKING FORWARD

To promote progress, the Commissionrecommends that the United Nationssponsor the tracking of private sector development. An annualprogress report would maintain theprominence of the Commission’soverall recommendations and ensurethe commitment to addressing themany issues identified here.

The Commission is assembling a first set of actionable initiatives to facilitate transformations in individual countries and to providethe tools for governments and the private sector to supplementavailable resources and begin rapidlyimplementing a programme ofchange. These first actions areintended to stimulate a collaborativeresponse from potential partnerswho read this report. Our messageto all of you is: join us.

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his report is about walking into the poorest villageon market day and seeing entrepreneurs at work.It is about realizing that the poor entrepreneur is as important a part of the private sector as the

multinational corporation. It is about acknowledging that the private sectoris already central to the lives of the poor and has the power to make thoselives better. It is about using the managerial, organizational and technologicalinnovation that resides in the private sector to improve the lives of the poor.It is about unleashing the power of local entrepreneurs to reduce poverty intheir communities and nations.

The Millennium Development Goals, ambitious in scale and scope, can beachieved only through committed application of best knowledge and practice.The problem is huge, with a fifth of the planet’s people living on less than$1 a day. But some encouraging examples show how private enterprise canalleviate poverty. Consider garment exports in Bangladesh, information

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WHY THE PRIVATE SECTOR IS SO IMPORTANT IN ALLEVIATING POVERTY

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technology in Costa Rica and cutflowers in Kenya—new industriescreating jobs, boosting incomes,lifting hopes. And consider the following successes, ranging frommodern multinationals to domesticentrepreneurs, demonstrating the potential of private return to boost development.

� Cemex, the Mexican cementfirm, has become one of theworld’s leading producers andinnovators in the industry,employing thousands.

� Casas Bahia in Brazil has developed a unique businessmodel providing efficient retailservices aimed at poorer customers.

� Infosys, an Indian informationtechnology services firm, grewfrom less than $10 million insales in the early 1990s to becomea leading global player withalmost $800 million in salestoday. Along the way, it has alsobeen setting international standardsfor corporate governance andcreating a new partnership fordevelopment with local and central government.

� ICICI Bank, also in India, isapplying technology and a comprehensive approach to thefull range of its client base—particularly in rural markets andto small and medium enterprisesand microentrepreneurs.

� In Cambodia hundreds of smallprivate providers offer servicesranging from battery rechargingto fully metered electricity provision for entire communities.These providers now serve anestimated 115,000 customers—

more than one-third of electricitycustomers nationwide.

� Fierce competition between private locally owned mobilephone companies in Somalia hasdriven costs on internationalphone calls to less than $1 aminute, about a sixth that inmany other African countries.This, in a country where there is no official banking or postalsystem and where many do not have regular running wateror electricity.

� In Guatemala the Confederationof Agricultural Cooperativesformed a joint venture with aCanadian firm. The enterprisenow exports vegetables worthmore than $3 million a year to Canada, providing steadyincome for 100 indigenouswomen and supporting morethan 1,000 farmers.

� In Mozambique a farmer boughtan oilseed press on credit. Nowas the owner of four presses, hehas organized nine other pressoperators into a small cooperativeassociation, bargaining with localbanks and customers as a group.

� In India small-scale soybeanfarmers use a village Internetkiosk to check spot prices fortheir products on the ChicagoBoard of Trade’s website,bypassing local intermediariesand getting better prices.

These examples are not just successstories—they are stories about thesuccesses of the domestic privatesector. They are what this report isabout. But moving from example to broad achievement requiresthinking freshly about development,unconstrained by ideology, unhingedfrom tired debate.

DEEP POVERTYREMAINS INTRACTABLE

Despite great progress in somecountries and regions, deep povertyremains a stubborn and intractableproblem across much of the world.Substantial gains in some countrieshave been accompanied by deeplosses in others, and far too manypeople still earn less than $1 a day,suffer from hunger and lack accessto water, sanitation and energy.The latest Human DevelopmentReport of the United NationsDevelopment Programme reportsthat the proportion of people inextreme poverty fell to 23.2% in1999 from 29.6% in 1990. But thenumber of people living on $1 aday slipped only to 1.17 billion from1.29 billion a decade earlier. Moreover,if the dramatic improvement inChina’s poverty indicators is excluded,the number of people living inabsolute poverty actually increased.

In recent years poverty alleviationhas moved to the centre of the globaldialogue as the primary overridingobjective of development—not aderived outcome. The MillenniumDeclaration was an unprecedentedexpression of solidarity and determi-nation to rid the world of poverty,committing countries, rich andpoor, to eradicate poverty, promotehuman dignity and equality andachieve peace and environmentalsustainability. It led to agreementon the Millennium DevelopmentGoals (box 1.1).

Yet progress is more than possible—and it occurs with regularity under theright conditions. Economic growthhas lifted hundreds of millions ofpeople out of subsistence agricultureinto manufacturing and serviceemployment, increasing wealth and reducing poverty. Witness the


dramatic improvement in the livingstandards in East Asian countries,including Indonesia, The Republic ofKorea, Malaysia and Thailand, andthe sizable reduction in the numberof people in poverty in China.

The impact of economic growth,overall, on poverty depends on arange of factors that influence thenature of this growth, but the empiricalevidence is compelling. In East Asiaand the Pacific, the region with thestrongest growth in the 1990s,annual per capita GDP growth of

6.4% resulted in a 15% decline inthe rate of poverty (using the $2 aday criterion), and in South Asia3.3% annual growth led to an 8.4%decline. In contrast, the slow growthof 1.6% in Latin America and theCaribbean and 1.0% in the MiddleEast and North Africa caused amarginal deterioration in povertyrates. More dramatically, negativegrowth rates increased poverty ratesby 1.6% in Sub-Saharan Africa and13.5% in Europe and Central Asia.

The message is clear: sustained economic growth reduces poverty.The link is equally clear betweeneconomic growth and strong privateinvestment. A study of 50 developingcountries from 1970 to 1998 examinedthe relationship between privateand public investment and growthand incomes. Countries with highergrowth featured higher privateinvestment (figure 1.1).

But for output growth to contributeto poverty alleviation, it must translateinto incomes of the poor. For wagelabourers and salaried workers, the

quantity of employment and therate of pay are crucial. For the self-employed, productivity and returnsare important, influenced by technology, inputs and prices.Employment is thus the key linkbetween output growth and poverty alleviation.

THE PRIVATE SECTORIS IMPORTANT FORTHE POOR—ANDOFTEN IS THE POOR

The private sector is central to thelives of the poor. First, all poor people are consumers. Across theworld the story is the same—poorconsumers pay more than rich consumers for basic services. InMumbai, slum-dwellers in Dharavipay 1.2 times more for rice, 10 timesmore for medicine and 3.5 timesmore for water than do middle classpeople living at the other end ofthe city on Bhulabhai Desai Road.

C H A P T E R 1 : W H Y T H E P R I VAT E S E C T O R I S S O I M P O R TA N T I N A L L E V I AT I N G P O V E R T Y 7

1. Eradicate extreme poverty andhunger: reduce by half the proportionof people living on less than $1 a day;reduce by half the proportion of peoplewho suffer from hunger.

2. Achieve universal primary education:ensure that all boys and girls completea full course of primary schooling.

3. Promote gender equality andempower women: eliminate genderdisparity in primary and secondaryeducation by 2005, and at all levels ofeducation by 2015.

4. Reduce child mortality: reduce bytwo-thirds the mortality rate for childrenunder five.

5. Improve maternal health: reduce by three-quarters the maternal mortality ratio.

6. Combat HIV/AIDS, malaria and otherdiseases: halt and begin to reverse thespread of HIV/AIDS; halt and begin toreverse the incidence of malaria andother major diseases.

7. Ensure environmental sustainability:integrate the principles of sustainabledevelopment into country policies and programmes; reverse the loss ofenvironmental resources; reduce byhalf the proportion of people withoutsustainable access to safe drinking waterand basic sanitation; achieve significantimprovement in the lives of at least100 million slum dwellers by 2020.

8. Develop a global partnership for development.

B O X 1 . 1 T H E M I L L E N N I U MD E V E L O P M E N T G O A L S

F I G U R E 1 . 1 M O R E I N V E S T M E N T — M O R E G R O W T H

16

14

12

10

8

6

4

2

0< 3% 3–5% > 5%

Growth rates, 1970–98

� Private � Public

Inve

stm

ent

as p

erce

nt

of

GD

P,1

97

0–9

8

Source: Bouton and Sumilinski (2000)

Fully 4 billion people in the world—those who earn less than $1,500 ayear—make up the “bottom of thepyramid” markets (figure 1.2).

The quality of goods that poor people purchase—whether food,water or financial services—isalmost always substandard. Often,an informal private sector fills thegaps with goods of higher pricesand varying quality. It serves animportant need, for informaleconomies sustain the majority ofpoor families in many countries.Yet the advantages of economies of scale and scope are missing from the lives of people at the bottom of the pyramid. Some ofthe barriers are poor marketing and poor distribution.

The private sector is already meeting the needs of poor peoplein places governments do not reach.In some countries, for example,the government has little impact onthe poor. In the slums there are nohealth services, no public educationand no infrastructure. This storyrepeats itself across the developingworld. In many cases, where servicesexist, they are provided by privatesources. Anywhere from 15% to 90% of primary education is provided in private schools. Some63% of health care expenditures inthe poorest countries are private,almost twice the 33% in highincome countries that belong to the Organisation for EconomicCo-operation and Development.

With the right attention and regulatory requirements, privatelyprovided services can help meet the needs of poor people. Recent

data on the distribution of newwater connections by income quintile from three countries inLatin America show that 25–30%of the network expansion was targeted at the lowest fifth of the income profile.

Put simply, an innovative privatesector can find ways to deliver low-cost (even sophisticated) goods and services to demandingconsumers across all income ranges.It can sell to the urban distressedarea as well as the poor rural villageor town. It can develop distributionlinks to the consumer in the villageand so be better able to harnessknowledge about the actual needsof this segment of the market.It can keep costs low through outsourcing, for greater flexibility.

The private sector can thus alleviatepoverty by:

� Contributing to economic growth.� Empowering poor people by

providing them with services andconsumer products, increasingchoices and reducing prices.

The first creates employment and income growth. The secondimproves the quality of life for thepoor. And the greater interactionbetween those at the base of thepyramid and the private sector createsopportunities for direct involvementin the market economy.

WHO ARE ALL THEENTREPRENEURS?

The Commission takes an expansiveview of the private sector. Largecompanies are a vital part of theprivate economy, but the poor arean equally important part. They areoften entrepreneurs themselves—frequently of necessity, operatinginformally, trapped in subscaleenterprises. We endorse the viewthat market-oriented businessecosystems comprise many forms of private enterprise coexisting in a symbiotic relationship. Theecosystem generally includes multinational corporations, largedomestic companies, cooperatives,small and medium enterprises andmicroenterprises, with formal andinformal players. It thus encompasses


F I G U R E 1 . 2 F O U R B I L L I O N P E O P L E AT T H E B O T T O M O F T H E P Y R A M I D

> $20,000

$1,500–20,000

< $1,500

Tier 1

Tiers 2–3

Tier 4

75–100

1,500–1,750

4,000

Purchasing power parity in dollars

Population in millions

Source: Prahalad and Hammond (2002)

the farmer in the field as much asthe multinational company.

Agriculture is of particular interestbecause 75% of the people living on less than $1 a day are in ruralareas, with livelihoods dependenton mostly subsistence production.In Africa agriculture supports more than 70% of the population,contributing an average of 30% of GDP. Providing inputs to theagricultural sector and the valueadded processing and marketing of agricultural goods are importantparts of private sector development.The critical importance of agriculturein alleviating poverty reinforces the need for urgent progress oneliminating subsidies for producersin developed markets, and on trade reform.

In many developing countries,women constitute the majority ofmicroentrepreneurs in the informaleconomy and a significant percentageof the formal sector. Many of themare illiterate and live in poor ruralcommunities. And setting up their own enterprises—generallymicroenterprises—is usually theonly possibility for them to beemployed and earn an income on their own. In Latin America and the Caribbean between 25%and 35% of formal sector micro-enterprises and small and mediumenterprises are owned and operatedby women. In the Philippines womenown 44% of the microenterprises,more than 80% in rural areas.In Zimbabwe women run themajority of microenterprises andsmall enterprises (67%), whileenterprises run by men tend to provide proportionally more of the household income and havemore employees.

Entrepreneurship exists in largecompanies, where individual

executives take the initiative toinnovate and expand the business.This report highlights manyinstances of large companies thathave targeted bottom-of-the-pyramidmarkets and developed productsand processes to serve the poorprofitably or to operate sustainablyin very challenging environments.Entrepreneurship by individualengineers and executives is often at the root of such moves by bigcorporations, which can have a majorpositive impact on development.

Entrepreneurship also drives manycivil society organizations, and itexists in government and publicadministrations. Individuals in theseorganizations have the drive toinnovate and pursue opportunitieswith the passion and dedication ofan entrepreneur, albeit with little if any pecuniary reward.

Entrepreneurship flourishes perhaps most in small and mediumfirms with significant potential togrow and innovate. This dynamicsegment is typically the hotbed ofentrepreneurship and innovation.It can drive economic growth,create jobs and foster competition,innovation and productivity.

A FOCUS ON THE DOMESTIC PRIVATE SECTOR

We focus here on the domestic private sector—for three main reasons. First, domestic resourcesare much larger than actual orpotential external resources.Domestic private investment averaged 10–12% of GDP in the1990s, compared with 7% fordomestic public investment and2–5% for foreign direct investment(FDI). Second, when informalresources are examined, such as

the potential value of land, thedomestic assets that can be tappedare significantly larger than thecumulative FDI or private portfolioflows. Third, unleashing the domesticresources in an economy—bothfinancial and entrepreneurial—islikely to create a more stable andsustainable pattern of growth.

Estimates of the informal assets indeveloping countries range as highas $9.4 trillion, many multiples ofcumulative portfolio flows or ofFDI flows to developing countriesover the past 15 years. These comparisons are illustrative only,comparing flows and stocks of assets.

Converting informal assets intofinancial resources will require abroad programme of reform thatwill enable these assets to be usedas collateral in the banking system.But keep in mind the size of theseassets. Recent work in Egypt, forexample, concludes that the countryhas a large and vibrant extra-legaleconomy that employs over 8 million people (about 40% of theworkforce) and has assets of almost$250 billion, 30 times the marketvalue of all companies registered on the Cairo Stock Exchange.

This focus on the domestic private sector does not diminish the importance of FDI. Beyond thefinancial resources that FDI brings,its infusion of a corporate culturecan change the way business isdone, bring managerial know-howand best practices, provide access to international markets, transfertechnology and innovation, introducecompetitive pressures in previouslyclosed markets and be the principaldriver for the growth of local business.In these situations, FDI can improvethe overall investment climate.

C H A P T E R 1 : W H Y T H E P R I VAT E S E C T O R I S S O I M P O R TA N T I N A L L E V I AT I N G P O V E R T Y 9

eveloping countries have remarkable energyand assets, and all segments of the private sectorhave demonstrated the ability to respond whenempowered. But the Commission finds that three

major structural challenges confront the private sector in all developingcountries, to varying degrees.

� Microenterprises and many small and medium enterprises operate informally.� Many small and medium enterprises have barriers to growth.� A lack of competitive pressure shields larger firms from market forces

and the need to innovate and become more productive.

C H A P T E R 2

CONSTRAINTS ON THE PRIVATE SECTOR INDEVELOPING COUNTRIES

D


Pho

to:

UN

DP

Cu

ba

WIDESPREAD INFORMALITY FORMICROENTERPRISES

Microentrepreneurship is a commonform of employment in manydeveloping countries (figure 2.1).Almost all microenterprises operateoutside the formal legal system,contributing to widespread informality.

Informality provides some benefitsin some circumstances. It can act asa form of employment substitutionfor labourers who have difficultyfinding jobs. For example, urbandwellers in Thailand who lost theirjobs during the economic crisis ofthe late 1990s supported themselvesby turning to informal street-vendingopportunities. In societies that limitthe economic role of women, home-based enterprises provide womenwith opportunities to earn money.If the formal rules, enforcementsystems and cultural conditions in acountry are so restrictive that mostentrepreneurs cannot use their talents, the economy may benefit if they operate informally.

Difficulties in getting finance alsotrap developing country entrepreneursin subscale operations. Entrepreneursand enterprises that operate informallycannot borrow at a reasonable costbecause they do not have legal statusor title to the land they occupy.Frequently, the only option foraccess to capital is through illegalmoneylenders who charge highrates and who may be able to lendonly small sums relative to theneeds of a growing enterprise.

The access of businesses that operate informally to the formallegal system and its benefits arelimited. In general, the formal legalsystem should enforce contracts andprotect property rights more fairlythan informal enforcement systems do.Predictable rules and dispute resolution mechanisms are essentialfor entrepreneurs to engage in thelong-term arrangements that enablethem to innovate, to scale up and to diffuse their knowledge and benefits. Side payments to officialsthat increase predictability in anuncertain world reduce income that

could otherwise be invested in makingoperations more productive.

Cruel and arbitrary informalenforcement systems limit the abilityof entrepreneurs to be productive as well. Local debtor prisons andmafia-like punishments can hurt an entrepreneur’s full access to crucial human inputs. According toHernando de Soto, a third of debtorswho obtained credit informally inEgypt spent some time in privatejails because they did not pay backwhat they owed.

Entrepreneurs who operate formallyare hurt by the implicit subsidiesthat informal enterprises receivethrough uneven enforcement andby poor mechanisms for protectingproperty and contracts, both of whichdistort competition. Both aspectscreate an uneven playing field andreduce formal entrepreneurs’ accessto inputs and markets, discouragingentrepreneurs who operate formallyfrom making investments toincrease productivity.

Informal firms can charge lessbecause they avoid paying taxes orcomplying with other regulations.More productive formal firms havedifficulty capturing market sharefrom informal firms because theformal firms pay taxes and othercontributions, which increases theircosts significantly. More productivefirms are less able to drive the lesscompetitive informal firms out of business. So, poor enforcementpermits the informal firms to continue to exist, holding back theproductive firms from reachingmaximum scale. Yet, given the significant productivity advantageheld by formal firms, the inabilityto compete may reflect an unwill-ingness to serve some parts of the market rather than the costadvantages offered by informality.


F I G U R E 2 . 1 I N F O R M A L I T Y T H R I V E S I N P O O R E R C O U N T R I E S

Portugal

Chile

Mexico

Thailand, Turkey, Brazil

India, Indonesia,Pakistan, Philippines

Sub-Saharan Africa

Estimated share of nonagricultural workforce that is informal

30

38

40

50

70

80

Source: World Bank and International Labour Organization

Moreover, worker rights and protections in the informal sectorstand up poorly to those in the formal sector. And consumers—able to purchase only goods ofinappropriate quality and safetystandards—do not have access to thegreater choice and lower prices intruly competitive consumer markets.

There are many constraints onentering the formal sector. The over-arching issue is one of costs versusbenefits for the individual entrepreneurwho has to choose between formaland informal operations.

In most developing countries it iscostly to be formal. Formal playersare often overtaxed (a vicious circle,since they are overtaxed because afew formal companies carry most of the tax weight). Registering abusiness can be a long and expensiveproposition (in Angola it takes 146days and more than 8 times the percapita income). Regulations andgovernment requirements are complex—and compliance costshigh. The opportunities for briberyincrease with the complexity of regulations, exposing smaller playerswho lack the legal resources todefend themselves.

Entrepreneurs also see little benefitin going formal. While formal businesses in developed countriescan raise capital by mortgaging theirassets, this is often not possible inmany developing countries wheremortgage laws are weak and banksprove reluctant to finance smallplayers. In theory, being formalwould facilitate selling beyond geographic boundaries, but poorlocal infrastructure and customsabuse limit the opportunities.And bankruptcy laws, which protect formal players in developedcountries, are often ineffective in

developing countries, exposing formal entrepreneurs to even morerisks (due to more visibility) than if they remained informal.

FEW COMPETITIVESMALL AND MEDIUMENTERPRISES

Small and medium enterprises tendto be engines of job creation—seedbeds for innovation and entrepreneurship. By providing new entry and competition, theycan boost efficiency and growth and lead to economic development.

Indeed, recent research indicatesthat economic growth in poorcountries is accompanied by a more than proportional growth inthe share of the formal small andmedium enterprise sector. In lowincome countries the share of formalsmall and medium enterprises inemployment is about 30% and inGDP about 17%, while in highincome countries the shares areabout 60% and 50%. Indeed, richercountries see far less informal andmuch more small and mediumenterprise activity (figure 2.2).

The reality in many poor countries,especially in Sub-Saharan Africa,is that the small and mediumenterprise sector is relatively marginal in the domestic ecosystem.Why are small and medium enterprises not able to “graduate”to the ranks of larger companies?

For this evolution to be possible,it is essential that a reasonably level playing field and supportinginstitutional structures existbetween (often larger) incumbentsand (often smaller) new entrants.

Rules that constrain market entry andexpansion have a chilling effect onsmall and medium enterprises at theexpense of established larger firms.Small and medium enterprisesoften could compete effectively inniche markets, but the advantagesthat accrue to established largeplayers fend off competition fromthe small and medium enterprisesector. Without the reasonablecompliance costs that exist only in afairer system of competition, smalland medium enterprises cannotgrow and become more productive.Ineffective or arbitrary tax laws,onerous business regulations andother restrictions penalize them.

C H A P T E R 2 : C O N S T R A I N T S O N T H E P R I VAT E S E C T O R I N D E V E L O P I N G C O U N T R I E S 13

Lowincome

countries

Middleincome

countries

Highincome

countries

� Informal activity� Small and medium enterprise activity� Remaining activity

Source: Ayyagari, Beck, and Demirguc-Kunt (2003)

Percentage of GDP

F I G U R E 2 . 2 S M A L L A N D M E D I U ME N T E R P R I S E S B E CO M E M O R EI M P O R TA N T A N D I N F O R M A L I T YL E S S I M P O R TA N T A S CO U N T R I E SB E CO M E W E A LT H I E R

47

16

37

31

39

30

13

51

36

Widespread informality and thelack of skills also affect the abilityof entrepreneurs to scale up a business. While often animated by innovative ideas or addressinguntapped markets, small and medium enterprises suffer fromlower total factor productivity,by using older technologies oremploying inferior workforce practices. The cost of business services is often more than smalland medium enterprises can pay,or is not in tune with their needs.Lower export sales from small and medium enterprises come in large part from lack of access to knowledge about foreign standards of quality.

Perhaps most important, small andmedium enterprises lack access tofinancing and long-term capital,the base that companies are builton. High risks associated with small and medium enterprises,whether real or perceived, exist inthe absence of financial instrumentsthat manage and diversify the risk.Banks also face high costs or cannot acquire information thatthey can trust, even when small and medium enterprises are credit-worthy. These factors raise interestrates and reduce lending volumes,setting up price and quantity barriers to small and medium enterprise growth. Small and medium enterprises have to resort to financingfrom networks of family or friends,from retained earnings, or fromshort-term credit from other smallbuyers or suppliers, rather thanfrom larger institutions providingdedicated long-term financingvehicles for specific purposes.

LACK OF COMPETITIVE PRESSURE ON LARGECOMPANIES

Large companies form the hub ofnetworks and clusters and, by thevirtue of their size and range ofbusiness activities, provide the sparkfor the private sector ecosystem.But in many developing countrieslarge incumbent companies can alsostifle entrepreneurial energy andinitiative. Too often, they can takeadvantage of weak institutionalenvironments to raise anticompetitivebarriers and protect their dominantposition. While local informal markets can often function withoutmuch regulation, more mature andcomplex markets need appropriateregulations to function effectively.

A dynamic financial sector, in whichnew entrants and incumbents canget finance under competitive terms,is also important for creating competitive pressures in the market.But companies with a protectedposition in these markets oftenhave strong incentives to use theirlobbying power to slow governmentprogress in improving the institutionalinfrastructure for markets.

Such practices directly hurt poorpeople, through higher prices and lower quality products. Poorpeople benefited from the openingof competitive markets in India in the early 1990s. Until then the population was effectively subsidizinga large part of the private sector,which was selling low quality products at high prices—made possible by controls on entry bydomestic competitors and severequotas and high tariffs on imports.Such anticompetitive policies areoften perpetuated by an unlikely

alliance between large protectedincumbents and poor people,who fear a loss of jobs in competitive markets.

Corruption combined with weakand arbitrary legal enforcementbuttresses incumbent firms at the expense of potentially morecompetitive ones. Specifically,incumbents might receive subsidies,special licenses or other privilegesthat preserve their position anddampen the incentive to innovateand reduce prices. Such firms mayrespond to perverse incentives tostrip assets or dole out contracts touncompetitive suppliers even whenmore efficient providers exist. Thepoor domestic macro environmentencourages wasteful rent-seeking andretards the growth of competitivefirms based on productivity.

These firms might also indirectlystarve competitors from receivingcapital by contributing to an environment that keeps financeunderdeveloped. Large firms thus command the lion’s share ofresources in an underdevelopedfinancial system.

FOUNDATIONS FORENTREPRENEURSHIP—NOT YET IN PLACE

Building a sound private sectorrequires a strong foundation in the global and domestic macroenvironments, physical and socialinfrastructure and rule of law (figure 2.3).

Global macro environmentThe foundations for growth in the private sector start with a well-functioning global macro businessenvironment involving a dynamicglobal economy that provides markets, as well as adequate trade


rules that enable competitive accessto market opportunities. The openexchange of goods, capital andinformation—and the transfer oftechnology and ideas—stimulatesprivate sector development. Thisoccurs through several mechanisms:open markets, good-quality foreigninvestment, effective development aidand efficient transfers of technologyand knowledge. It requires suchreforms as dismantling the agri-cultural subsidies and other formsof protection that so evidentlyimpede export-oriented private sector development in the ruralareas of developing countries.

There is broad agreement that openmarkets have supported economicgrowth. The advantages, while well catalogued, merit repeating.An open trade policy fosters productivity growth by opening the private sector to competition.Free trade helps countries allocatetheir resources towards their mostproductive areas of comparativeadvantage. Cheaper imports raisethe domestic standard of living and allow for the use of lower costinputs as the private sector producesfor domestic or foreign customers.Such a regime provides open marketaccess through lower tariff andnontariff barriers.

Domestic macro environmentThe central elements of a strongdomestic macro environment forbusiness include peace and politicalstability, good governance with policypredictability, transparency andaccountability, and sound macro-economic policies. For businesses,internal or external conflict increasescost and uncertainty, deterring bothdomestic and foreign investment.Worse, conflict forestalls privatesector development, because it oftenleads to the tragic destruction of

human capital, the misallocation ofscarce public funds, the devastation ofland, the seizure of natural resourcesand the elimination of market access.

Physical and social infrastructureA country’s physical and socialinfrastructure includes roads, power,ports, water and telecommunicationsas well as basic education and health.Building up these basic services hasa dual benefit: improving the livesof poor people directly and enablingthe growth of businesses.

Technical inefficiencies in roads,railways, power and water alonecaused an estimated $55 billion ayear in losses in the early 1990s—an amount equal to 1% of the GDP of developing countries or twice the annual budget forfinancing infrastructure in thedeveloping world. These losses fall on firms large and small—and onindividuals, especially the poorest.

Low quality roads can shut smallproducers off from regional markets—and encumber large producers withshortages of critical inputs.

Well-maintained infrastructureimproves commerce by speedingthe transport of goods and rawmaterials, sustaining energy-intensive production and makinginformation readily accessible and communication timely. Poorphysical infrastructure often precludes business activity.

Ensuring connectivity throughtelecommunications and informationtechnology has become particularlyimportant in recent years, helpingto overcome some of the barriers ofinadequate physical infrastructure.Efficient access to information isclearly a vital part of the basic infra-structure need of modern economies.


Pillars of entrepreneurship

Foundations forthe private sector

Level playing

field

Access tofinancing

Access toskills and

knowledge

Rule of law

Physical and social infrastructure

Domestic macro environment

Global macro environment

Private sector growth

F I G U R E 2 . 3 F O U N D AT I O N S F O R T H E P R I VAT E S E C T O RA N D P I L L A R S O F E N T R E P R E N E U R S H I P

Maintaining high quality physicalinfrastructure is largely, but notsolely, a matter of capital investment.Efficient contracting, open bidding,regulatory credibility and privateand public managerial capabilitycarry weight as well.

Studies demonstrating the socialand private returns from investmentsin education and health spotlighttheir efficacy. High levels of investment in human capital,especially in education and health,lay the groundwork for private sector growth. A healthy, educatedworkforce is a productive workforce.One need look only at countriesravaged by poor health or disease to see the deleterious effects of an underfinanced or inadequatehealth infrastructure on previouslyproductive economies. Private firmsprofit from investments in education,from primary to university, fromuniversal to targeted. Ensuring thatsuch education is appropriate for afuture workforce is a core task of a well-functioning education infrastructure. Educating womenhas particularly positive effects ontheir future earnings—and society’s.

Investments in health and educationinvolve both the public and privatesectors, and counter to conventionalbelief, many education and healthservices in developing countries aredelivered through private initiatives,including cooperatives and mutualhealth insurance organizations. Insome systems 70–80% of health careexpenditures are through privateactors. Often, but not always,private involvement is a response to government underinvestments.

Improving the social infrastructureand ensuring that those survivingon the lowest incomes have accessto affordable and high qualityhealth and education services is animportant foundation for privatesector development.

The rule of lawThe rule of law means that government decisions are madeaccording to a set of written laws andrules, to be followed by every citizen.The rules are applied consistently,administered by a professionalbureaucracy and adjudicated by afair and transparent judiciary that isadequately compensated. In nearlyall cases, courts provide reasons fortheir decisions based on the law,through some form of due process.Countries may subscribe to differentlegal systems arising from differentpolitical and social cultures, but thefair administration and enforcementof a just system of laws is a cardinalprinciple. Both elements matter—laws and their administration.

Laws form an intrinsic layer of the foundation for a robust privatesector. Without a transparent legalframework and a fair judicial andadministrative system, other effortsto foster private sector developmentcannot work as intended, and mayeven do harm. Home governmentsmust establish the “rules of the game”,a system that reduces transactioncosts by making them predictableand enforceable. Legal and admin-istrative systems influence whetherand how transactions take place.

The rule of law manifests itself inthe private sector with commerciallaws, customs laws and contractlaws, among others. Critically,the assignment and protection of

property rights circumscribe privatesector behaviour. Confusing andcontradictory legal systems makeformal business practices difficultand push businesses to become orremain informal. Poor legislationbuttresses oligarchic and corruptfirms against competitive forces,often at the expense of small and medium enterprises. Cosyrelationships between business and

regulator impair the developmentof open, free market competition.The poor are likely to be the firstvictims of lawlessness.

Even though a written set of lawsmay exist, the legal system in manydeveloping countries works informally.In the shift from informal to formalsystems, many countries have oldand new systems coexisting, often inconflict. The loser is often the moreformal new system, implemented ina shallow and ineffective manner.One estimate suggests that as manyas 80% of the legal issues facing thepoor are addressed through customaryor informal systems.

Corruption and confusion over theenforcement of rules are often toblame for high compliance costs.Bureaucratic red tape, backlogs,arbitrary decisionmaking and otheronerous requirements and inefficientpractices hamper private activity.Arbitrary or corrupt enforcementsubvert laws intended as benevolentprotections, including laws for workersafety, environmental protectionand consumer safety. And corruptpractices distort prices and markets,and hinder free and fair competition.

The World Bank estimates thatcorruption can reduce a country’sgrowth rate by 0.5 to 1.0 percentagepoints a year. TransparencyInternational’s CorruptionPerception Index could, with


very few exceptions, almost be ordered by income—poorercountries are almost universallyrated more corrupt, though there is plenty of recent evidence thatcorruption is not limited to lowerincome categories.

THREE PILLARS OFENTREPRENEURSHIP—TOO OFTEN MISSING

Even with strong macroeconomicand institutional foundations, threeadditional factors are indispensablefor entrepreneurship and the privatesector to flourish in an economy: alevel playing field, access to finance,and knowledge and skills.

A level playing field—with fair rules, fairly enforcedPerhaps most important in allowingentrepreneurship and the privatesector to blossom is a level playingfield for firms competing in thedomestic market. That can be created only by a system of rulesand enforcement mechanisms thatis fair, trustworthy and effective.Predictable rules ensure that entrepreneurs have open access to markets and can do businessefficiently. And basic trust in thesystem encourages entrepreneurshipand attracts talent (local, foreignand diaspora) to embark on entrepreneurial ventures.

Good rules are a critical element increating a level playing field, andeffective regulations are essential for the market economy. Rules, ifexcessively complex and incorrectlyapplied, can turn into significantbarriers for enterprises and hamperbusiness growth. This applies to rulesfor entry, operating, market and exit.

Entry rules. Excessive proceduralrequirements for business registration

and licensing procedures raise thecost of entry into the formal sectorand tilt the playing field in manydeveloping countries (figure 2.4).For example, the World Bank’s Costof Doing Business survey estimatesthat starting a business requires$5,531 in Angola (more than eighttimes the per capita income) andabout $28 in New Zealand (far lessthan 1% of the per capita income).Cumbersome entry regulations are directly correlated with lowerproductivity. When countries areranked by ease of starting a business,the top quartile of countries haslabour productivity of about $40per worker, almost twice that of thebottom quartile. Longer registrationprocesses are directly associatedwith higher levels of corruption.

Operating rules. Disclosurerequirements can have a positiveimpact at the industry and businessenvironment by giving consumersand investors the information they

need to make choices about theproducts they purchase and thecapital they allocate. Labour marketrules are critical to protectingemployees from exploitation. But a number of developing countrieshave excessively complex labourrules, more than wealthier countries.For laying off employees, companiesin middle and low income nationsface higher barriers on average thantheir counterparts in developedeconomies. The mechanisms forsocial dialogue to find ways of mitigating the effects of layoffs,and safety nets to protect the poorare often weak or non-existent in most developing countries.Moreover, rigid employment regulations are associated withhigher female unemployment.Note, however, that few of theserules are regularly enforced, makingthe case for simpler rules with


F I G U R E 2 . 4 E N T E R P R I S E S I N L O W I N C O M E C O U N T R I E S FA C E M A N Y M O R E B U R D E N S W H E N R E G I S T E R I N G

Number ofprocedures

Duration(days)

Note: Low and lower middle-income countries had GDP per capita (purchasing powerparity) of less than $2,976 in 2001, upper middle-income countries were between$2,976 and $9,205, and high income countries were above $9,205.

Source: World Bank (2003a)

Income

Low andlower middle

Upper middle

High

11

11

8

70

58

42

115

29

17

Cost (% of GNI per capita)

� Enterprises in low andlower middleincome countries facethe longestduration andthe highestcost (as a percent of GNIper capita).

better enforcement. Complex taxrules and structures also imposehigh costs that fall more on smalland medium enterprises than onlarge enterprises, which can affordtax experts.

Credit rules. Many countries lackrules for sharing credit information,which makes it virtually impossiblefor creditors to check how indebted apotential client already is. In addition,creditors have limited protection inthe case of default, significantlylessening their willingness to assumethe risks associated with small andmedium enterprise lending.

Tax rules. High tax rates and complex tax administration is a significant constraint for small andmedium enterprises and can leadthem to the informal sector if taxburdens become excessive.

A large informal economy canmean lower government revenuesand higher taxes for firms in theformal economy, creating moreincentives for informal operation.For example, in Brazil the informaleconomy grew as tax revenuesincreased from 24% of GDP in1991 to 29% in 1999.

Market rules. Barriers in the landmarket are high in many nations.For example, it takes about 168steps, involving 53 public and privateagencies and 13–25 years to acquire“informal” land and receive legaltitle to it in the Philippines. Thisarduous process discourages peoplefrom formally purchasing land,making it impossible to use land as collateral for getting credit, oneof the main sources of capital indeveloped countries.

Product market barriers also stifle growth. Subsidies and tradebarriers in the developed world are the biggest culprits. But manydeveloping countries also raise barriers to entry—say, by forbiddingsmall companies to distribute electricity in rural areas, even when state monopolies do not serve those areas.

Restrictions on pricing can alsocloud the business environment.For example, many governmentscharge excessively high prices forfixed-line domestic and internationaltelecommunications services. Themonopolies that operate in theseconditions are highly profitable as aresult, but their capital and labourproductivity are low. The highprices provide few incentives fortelecommunications players to usetheir resources more effectively.

Exit rules. Inadequate bankruptcyrules and protections can createadditional hurdles for financingenterprises. Countries with betterinsolvency regulations tend to havemore and cheaper lending.

Poor enforcement by formal institutions permits enterprises to avoid some or all of these rules,advantaging some of them overothers. Breakdowns in formal institutions occur when officials do not have the skill or will to carry out their oversight functions.Government officials may not havethe will to enforce the laws becausethe institutions they work for donot provide the right incentives.The institutions may not rewardofficials for applying the law fairlyand equally, and the organizationsmay lack transparency and may notsupervise officials sufficiently. Inaddition, government officials may

not have the skills and resourcesthey need to enforce the laws.They often require additional training or tools.

Access to financingWhile foreign direct investment has had an essential role in thedevelopment process, it is impossiblefor a country to progress withoutdomestic investment based ondomestic savings. This requiresdomestic financial institutions that can efficiently manage risk and allocate capital to productiveinvestments. Many developingcountries have had weak, state-dominated financial sectors unableto act as a catalyst for development.But where genuine reform has beenimplemented, the benefits havebeen quick and evident, even if creating and restructuring an efficient domestic financial sector is a long task.

Large companies are well served by existing banking systems, andthere has been good progress inmicrofinance over the last 10 years—with 41 million poor people servedin more than 65 countries. But theprogress on small and mediumenterprise financing has been slowat best. It is not only about moneyneeded, though. Small and mediumenterprises are risky ventures. Theyrequire risk capital, but the sourcesof such capital are difficult to tap.So small and medium enterprisesgenerally have to turn to classic debtfinancing. This can be difficult forthem, because few entrepreneurs indeveloping countries can leverageassets as collateral the way they do indeveloped countries. Why? Mainlybecause of informal property rightsand the lack of mortgage markets.Collateral requirements act as ascreen that selects wealthy borrowersand crowds out many entrepreneurswith high growth potential.


Most emerging markets finance upto 90% of their investments locally,although for Sub-Saharan Africathe figure is closer to 65% (and most productive enterprisesgenerate revenue in local currency,so the reliance on local financing is sustainable). Private credit as apercentage of GDP rises from 12% in low income countries to 25% in lower middle-incomecountries, 30% in upper middle-income countries and 85% in high income countries.

A web of factors is at work, morethan just the lack of capital.

� Rules and their enforcement areoften at the core. Most countrieshave weak property rights,making the use of assets as collateral difficult. Even whenproperty rights are well defined,the enforcement of mortgagecontracts is often impossible,for both political and judicialreasons. In addition, bankruptcylaws are typically lacking,increasing the risk to creditorsand further deterring them from investing in small andmedium enterprises.

� Poor financial institutions are also a problem. Domesticfinancial institutions can operatein oligopolistic or monopolisticconditions, with limited share-holder pressure to enter new andmore difficult markets, such aslending to small and mediumenterprises. Added to the lack of incentives is the public borrowing that crowds out private borrowing.

� Even when financial institutionshave the will, they often lack the skills for small and mediumenterprise lending. Banks are

accustomed to full-blown riskassessments working with largeclients—too costly for small and medium enterprises.At the other end of the spectrummicrofinance institutions lend withvery limited analysis, relying mostlyon social networks for repayment.This does not work well for thelarger amounts that small andmedium enterprises require.

� A lack of reliable credit informationalso hampers the growth ofsmall and medium enterpriselending—usually because thereare no credit information agenciesand disclosure requirements areweak or not enforced.

� Investors lack exit opportunities.Capital markets are absent orhighly illiquid in many poorcountries, making public offeringsimpossible. Private offerings can work, but most markets arefar from liquid, with very fewtransaction opportunities.

� Entrepreneurs often lack the skilland the will for receiving riskcapital. On skill, managementtalent is limited. On will,private equity investors reportthe reluctance of small andmedium enterprises to opentheir books to outsiders in environments where parallelaccounting is widespread.

Access to skills and knowledgeTechnological innovations and theshift towards knowledge-basedeconomies make human capitalinvestment a prerequisite for sustained economic growth andcentral to the start-up, growth and productivity of firms. Humancapital can determine the potentialfor a firm’s growth and survival.

It contributes directly to a firm’sproductivity by enabling the adoption of innovative technologiesand processes. A firm’s competitiveadvantage comes from its entrepreneurial capabilities;its management and technicalknow-how, including labour-management relations; and theskills, education and adaptability of its employees.

The level of education matters,and the skills of employees need tobe continually upgraded throughon-the-job training to increase thefirm’s productivity and its ability toabsorb new technologies. In CostaRica, Mauritius and Singapore theprivate sector has benefited from avirtuous cycle with formal educationreinforced by on-the-job learningand training. Costa Rica has themost software exports per capita in Latin America, making it a technological hub in the region,thanks to its investments in bothbasic education (producing one of the highest literacy rates) andtechnical education.

Many developing countries sufferfrom low levels of human capitalinvestment, aggravated by the outward migration of highly skilledprofessionals. The cumulative“brain drain” since 1990 has beenestimated at 15% for CentralAmerica, 6% for Africa, 5% forAsia and 3% for South America.The International Organization for Migration estimates that some300,000 professionals from theAfrican continent live and workin Europe and North America.


By some estimates up to a third of R&D professionals from the developing world reside inOECD countries.

This persistent brain drain deprivesdeveloping countries of the know-howof thousands of their most talentedpeople. It reduces the stock ofhuman capital at home, erodes thedomestic tax base and shrinks theeducated middle class, a stabilizingfactor in most societies.

The migration of talented risk-seeking entrepreneurs from thedeveloping world seeking opportu-nities in more entrepreneuriallyminded societies spotlights theobstacles to starting and scaling upbusinesses in their native countries.The underlying cause is a disablingsocial environment that limits boththe number of potential entrepreneursand the degree to which they canunfold their potential.

� � �

This diagnosis of the structure of the private sector and the constraints to its rapid growthapplies in differing degrees across awide range of developing countries.The balance among the differentfactors varies with income,institutional development and the composition of the private sector. Addressing the constraints to unleash the potential of the private sector will require programmes tailored to the needs of individual countries, but theunderlying approaches will bebroadly similar. We turn to them now.


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he Commission acknowledges that the constraintson developing a sustainable private sector are widelyknown—and generally accepted. So are the key elements of policies for addressing them. The big

challenge is moving from an understanding of the broad constraints to putting together specific, country packages. Now the focus must shift fromdetermining “what” the constraints are to “how” they are to be lifted and“who” is to lift them. Here we examine the policies and administrative stepsthat can alleviate these constraints and help create the capacity needed togovern transactions, capacity that is vital to the development of the privatesector and to the efficient functioning of a market economy.

The Commission has emphasized that the private sector is important to thepoor in many ways. If the benefits of reform are clearly articulated and theresults of reform are quickly evident, constructive approaches to private sectordevelopment can translate into greater political support. And the momentumand consensus for change that this creates can provide the springboard for a comprehensive programme of reform and change.

C H A P T E R 3

UNLEASHING THE POTENTIALOF THE PRIVATE SECTOR


I

Some broad lessons of experience:

� Successful policy reforms havegenerally been those in whichconcerned governments and policymakers have made strongand voluntary commitments to change.

� Reforms linked to conditionalityrarely succeed when implementinggovernments are not committedto them.

� Significant changes often occurwhen countries are faced withmajor economic crisis (India in1991, East Asia in the late 1990s),and the response to these changescan be rapid. Of course, it is betternot to wait for a crisis to reform.

� Changes can also follow major shifts in basic economicphilosophy (China, Vietnamand Eastern Europe).

� New governments that replaceprevious regimes with a history

of poor governance (Kenya,Nigeria in the past few years)can often use the impetus ofchange to implement reforms.

� Changes almost always include new roles for the localprivate sector and civil societyorganizations, including employerand worker organizations.

� Technology is the agent for muchof the needed change, and newtechnology enables change to beimplemented much faster thanmight generally be expected.

Support to private sector development—both global andnational—can involve economicresearch, macro and sector policyadvice, technical assistance anddirect financial support to specificprivate sector projects. Barring the latter, the bulk of these interventions involve governmentsand public institutions directingtheir support to governments andpublic institutions in developingcountries (figure 3.1).

The main public players in thisfield are the World Bank Group(including the InternationalFinance Corporation and theMultilateral Investment GuaranteeAgency) and the InternationalMonetary Fund. The regionaldevelopment banks, including theAsian Development Bank, theAfrican Development Bank, theEuropean Bank for Reconstructionand Development and the Inter-American Development Bank, arealso focused on helping to createthe enabling environment for entrepreneurial development intheir respective regions. Importantroles are also being played by the Organisation for EconomicCo-operation and Development in research and policy, and by themajor UN specialized organizationssuch as the United Nations IndustrialDevelopment Organization, theUnited Nations Conference onTrade and Development, theInternational Labour Organizationand the United Nations DevelopmentProgramme. Bilateral agencies andinstitutions (such as the UnitedStates Agency for InternationalDevelopment, the U.K. Departmentfor International Development, theCanadian International DevelopmentAgency and the NetherlandsDevelopment Finance Company)are also focused on important elements of the task, includingenhancing access to capital andsupporting the development ofmicro entrepreneurs and small and medium enterprises.

The Commission believes that any approach to private sectordevelopment—and the policy and action recommendations thataccompany it—needs to be groundedin the realization that the savings,investment and innovation that


F I G U R E 3 . 1 S T R E N G T H E N I N G T H E E F F E C T I V E N E S S O F T R A D I T I O N A L P R I VAT E S E C T O R D E V E L O P M E N T A C T I V I T I E S

Driven by privatesector players� Companies� Civil society

organizations� Foundations

Driven by publicsector players� Local

governments� Donor

governments� Development

agencies

Targeted at public sector players

� Setting broader standards(industry norms,sustainability,corporate governance)

� Lobbying for policy changes� Promoting participatory

processes through social dialogue

� Policy reform� Policy advice� Funding and delivering

technical assistance forpublic sector reforms

� Financial transfers (aid, loans)

Targeted at private sector players

� Business linkages and partnerships

� Investment, including foreign direct investment

� Mentorship for entrepreneurs

� Public-private partnerships,for example, for basic service delivery

� Public-private consultative bodies

� Privatization or contracting� Investment promotion� Direct business

development services� Direct financing

lead to development are undertakenprimarily by private individuals,corporations and communities.Governments should thus act as facilitators of private sectordevelopment and avoid actions that impede it. Governments andintergovernmental agencies canfacilitate private sector developmentonly by fostering properly functioningcompetitive markets.

� Providing conducive operatingand investment environments in which all private enterprise(domestic, foreign, politicallyconnected or otherwise) canflourish without fear or favour.This involves an overall socialcontext that is politically stableand predictable, with appropriateprocompetition rules and effective enforcement and soundmacroeconomic fundamentals,including a fiscal policy conduciveto the development of the formalprivate sector and adequate to thefinancing of the required humanand physical infrastructure.

� Establishing properly functioninglegal and judicial systems forprotecting property rights and resolving contractual disputes—systems seen to operate credibly and efficientlywhen judged by international(not national) standards.

� Facilitating the movement ofprivate capital of all kinds, notjust foreign direct investment,through the progressive devel-opment of national capital markets and their links toregional and global capital markets. Liberalization of financial capital flows requiresgreat prudence, however.A sound financial system with good regulations and

enforcement is required beforeproceeding to full liberalization.

� Influencing national, regionaland global risk perceptionsfavourably through better information dissemination inreal time (rather than simplythrough promotional marketingof investment opportunities)and encouraging governmentbehaviour that excites and supports rather than turns offinvestors, whether domestic or foreign.

� Targeting subsidies and taxincentives where clearly neededto address market imperfections,and moving away from broaderreliance on measures that maybe politically attractive in theshort run but are generallycounterproductive for sound private sector development inthe long run.

� Providing or enabling the privateprovision of essential infrastructure(power, water, communications,transport) through public-privatepartnerships, innovative regulatorymodels and other means to ensurethat private enterprises are notput at a competitive disadvantage.

BUILDING THE FOUNDATIONS

Chapter 2 discussed the global anddomestic macro environment andthe availability of physical andsocial infrastructure. We focus hereon more specific actions relating tofostering the rule of law and creatinga level playing field for entrepreneurs.We also address the broad principlesthat need to be applied to improveaccess to financing and the availabilityof skills and knowledge. Effective

implementation of these policiescan help private entrepreneurs enterinto transactions with confidencethat the contractual underpinningsof these transactions can be enforced.In any economy, a strong capacity to govern transactions is needed to unleash domesticentrepreneurial energy.

Strengthening the rule of lawFor private enterprises the rule oflaw provides the foundation for apredictable regulatory frameworkand capacity to govern transactionsbetween private parties. Ensuring therule of law is not only about havingor introducing the appropriate setof laws—it is about ensuring thatlaws can be enforced, fairly.

The overriding need is to ensureintegrity in public service, whichrequires governments to:

� Establish and use transparent,public, open, nonexclusionaryand objective procedures in public procurement contracts.

� Establish open, transparent,efficient and fair employmentsystems for public officials toensure efficiency and good service and avoid patronage,nepotism and favouritism.

� Provide education, training,supervision, incentive structuresand codes of conduct that breed and reward integrity and professionalism.

� Establish a system to avoid conflicts of interest and improperinfluence on officials and to provide mechanisms for officialsto report such misconduct without endangering their safety and professional status.

C H A P T E R 3 : U N L E A S H I N G T H E P O T E N T I A L O F T H E P R I VAT E S E C T O R 23

Related to ensuring integrity in publicservice is ensuring accountabilityand transparency in the actions of public officials. This requiresgovernments to:

� Build a broad base of support by running well publicized,participatory anticorruptioncampaigns addressing the publicand private sectors.

� Establish appropriate auditingprocedures for public adminis-tration and the public sector,and measures and systems toprovide timely public reporting on performance and decisionmaking.

� Ensure transparent proceduresfor public procurement, privatiza-tion, state projects, state licenses,state commissions, nationalbank loans, other governmentguaranteed loans, budget allocations and tax breaks. Theseprocedures should promote faircompetition and deter corruptactivity. They should also establishadequate simplified regulatoryenvironments by abolishingoverlapping, ambiguous or excessiveregulations that burden business.

� Promote systems for access to information about publicexpenditure.

� Strengthen antibribery actionsand promote integrity in business operations.

Enforcing property rightsThere is also evidence that governments do too little to protectproperty rights. The best-practicecountries build efficient courts andsupport laws and institutions thatdefine the rights of citizens andbusinesses to their property. Yet, theinstitutions that define and enforceproperty rights in many developing

countries—the court system, propertyregistries and law enforcementagencies—are often the least modern and least funded of allpublic institutions.

Business property rights can oftenbe protected by providing alternativechannels for resolving disputes withother businesses, customers, suppliersand government officials.

� Alternative dispute resolutionsystems provide a substitute for slow and expensive formalcourts in their ability to providepredictable legal protection forthe contracts and property ofsmall entrepreneurs. Argentinapiloted such a system, with 66% of 32,000 commercial casesresolved in an average of 2 months(not the typical 3–4 years).

� Automated assignment of cases,involving random computerizedassignment of individual cases tojudges, increases a judiciary’sefficiency and reduces corruption.In a Slovakian pilot case the timebetween the filing and the firsthearing fell from 73 days to 28,with the number of steps in caseprocessing reduced from 23 to 6.

� Specialized debt collectioncourts resolve claims fasterbecause those who preside overthem have more command overthe law and have responsibilityfor the entire debt collectionsystem, from seizure to auctioningof property, if necessary. InColombia a specialized debt collection court increased thenumber of cases filed from4,000 a year to 11,000 (1996–2000), with 75% of casesresolved in a year and the number of pending cases falling by 5,000.

ERECTING THE PILLARS

Chapter 2 also described the threepillars that are indispensable forentrepreneurship and the privatesector to flourish: a level playingfield, access to finance, and knowledge and skills.

Creating a level playing fieldCreating and defending a levelplaying field for companies requiresa system of rules and enforcementthat inspires trust and reasonablylimits the cost and burden onenterprises. In recent years this area has received more attentionfrom private and public players indevelopment. One focus has been onimproving legislation and regulation.In Vietnam a new enterprise lawhelped create a million new jobs.A level playing field also requiresstrengthening the institutions thatimplement and enforce regulations.The content of the solution seemsclear—overcoming the entrenchedbehaviour that led to poor regulationin the first place. Someone benefitsfrom every rule, and finding outhow to overcome resistance bythose who benefit is the first step in effective reform.

Simplifying regulations. Animportant element for a level playingfield is simplifying regulationsaffecting the entry, operation andexit of private enterprises. Theapproach to resolving these issues is simple, and the experience is well demonstrated—needed is thewill to implement change. Thebasic steps involve adopting bestpractices for business registration,for changes of ownership and closures and for the governance of transactions. Illustrative actionprogrammes include:


� Kiosks and one-stop shops that simplify business and titleregistration make registrationmore efficient, and the greatertransparency minimizes corruptionat all levels. In Tanzania theBusiness Registration andLicensing Agency reduced thetime to register a business from90 days to about 3. In Indiaelectronic title registration in the state of Andhra Pradeshreduced the process from 7–15days to a few hours.

� Single business permits enablegovernments to consolidate registering businesses so thatentrepreneurs need secure onlyone permit to own and operate a business, rather than differentones at each level of government.In Kenya the single businesspermit reduced the costs tosmall enterprises and increasedgovernment revenues by 30–40%.

� Unified tax authorities areresponsible for tax collection(including customs duties) andinspections for all levels of government. In Zambia such a system eliminated duplicateinspections and investigationswhile improving overall customerservice and compliance.

Many of these changes could greatly reduce informality in mosteconomies, particularly if accompaniedby country efforts to fully understandthe characteristics of informal firms.But informality is so pervasive thata special approach is needed.

Finding ways to increase the benefitsof formalization is one such approach.It can be accomplished in part byopening public contracts to informalplayers willing to formalize if theywin the contract, and improvingmarket access through organizing

trade fairs and creating links withinternational buyers. Affordablebusiness development services for boosting management skills,productivity and quality are ademonstrated way of supportingformal small and medium enterprises.

Much of this rests on increasingawareness of the costs of informality—and on shifting mindsets. Publicdialogue can be fostered throughpublic awareness campaigns. Andlobbying groups that represent smallbusinesses can be strengthened.

Creating competitive markets.Creating a competitive market andreducing the influence of incumbentsare critical ways to level the playingfield. Where incumbents havealready taken hold, three levers can open markets—technologicalinnovation, financial developmentand freer trade and capital flows.Technological change fosters competition and relaxes the pressurefor entry restrictions. By bringingin competitive pressure from outside,technology helps erode barriers toentry and creates a constituency for the further freeing of marketentry restrictions. A well developedfinancial market promotes competitionby making debt capital and equityfinancing available to firms withoutconnections or access to subsidies.Trade and capital flows also reduce the ability of incumbents toinfluence governance by creatingcompetition between domestic and foreign firms.

Competition creates winners andlosers, a source of great tensionbetween markets and democracy.Some of those employed in inefficient firms might bear thedownside of change, particularly

when social safety nets are not in place. So, opening markets to competition may best happen inphases, with full openness occurringafter a strong set of market institutionsis in place. A safety net focused onpeople, not firms, is needed to provide socio-economic security for those left behind.

To keep this process going despite these tensions, the costs of uncompetitive markets should be made transparent. The publicshould be able to understand whenit benefits from rules that keeppoliticians and incumbents incheck. A simple way to accomplishthis might be to demonstrate qualityand price differences between goodsin protected economies and that ofgoods in roughly comparable openeconomies. Another might be toshow the amounts of subsidies thatgo to protected firms.

Reforming taxes—simplicity,clarity, stability. Creating a positiveand enabling business environmentfor small and medium businessrequires a tax policy that respondsto business needs, encourages newbusinesses to start and helps existingbusinesses to expand. Governmentsneed to develop tax policies in partnership with small and mediumbusinesses, simplifying the rules appliedto these businesses, reducing theburden of compliance and promotingtransparency and stability.

Governments also need formalmechanisms for regular briefingsand consultations to ensure thatsmall business representatives arekept up to date on changes in taxcodes and can give their views


on proposals. To help small andmedium businesses comply withthe rules and ensure common interpretations across the country,tax officials need to be trained on the substance of tax rules and procedures.

Reforming finance and access to capitalCreating efficient domestic financialmarkets and increasing the access of domestic businesses to credit havebeen major goals of the multilateraldevelopment banks and bilateraldevelopment agencies. Their activitiesare mainly geared towards fixingthe business environment andstrengthening financial institutions.

The big issue with today’s interventions, working throughmany intermediaries of varyingeffectiveness, is that they are notalways demand driven. Successfulmodels have taken a multiple-stakeholder approach to developingfunctioning markets. Consider theIFC’s efforts to develop the leasingsector across countries—a modelalso applicable to micro-financeand housing finance. The modelinvolves a coalition of market players including governments andregulators, international leasingcompanies, local financial institutionsand experts in the legal, regulatoryand tax aspects of leasing.

Governments should play a key role in creating and building long-term and sustainable financial institutions and infrastructure,strengthening the banking system to make it competitive.In the process, governments must ensure that public financial

assistance programmes complementrather than compete with privatefinancing that could be available on commercial terms.

Policymakers should concentrate on reducing barriers to access tofinance, recognizing that access is generally more important thanthe cost of financing. They shouldrecognize that subsidized creditprogrammes are unsustainable andunnecessary and that reducingtransaction costs and increasinginnovation and productivity amongfinancial service providers are moreimportant. They should also reformfinancial market rules and buildenforcement capabilities, introducingnew legal structures and removingobstructive caps and ceilings. Legalconditions and well-functioningimplementation systems need to beestablished to address bankruptcy,registration and collateral and theregulations for leasing. Such measurescan have benefits far more importantthan targeted credit programmes.

Strengthening the range and operational capabilities of financialinstitutions will better serve theneeds of smaller businesses. Subjectto appropriate regulation, nonbankfinancial institutions should becomemore prevalent. New financialproducts and liquidity vehicleswould allow them to better servesmall and medium enterprises withtailored insurance, lending and savings products.

In some cases public finance mightbridge the gaps in financing. Butgovernments must ensure that public programmes complementrather than compete with privatefinancing that could be available oncommercial terms. Efforts should

focus on using the existing bankingand financial system to directresources rather than creating dedicated state agencies, whichhave demonstrated for too longtheir inability to channel fundsthemselves. A Small BusinessAdministration type of approachhas been successful in the UnitedStates and may be useful as a model.The goal is to bring about a financialsystem that can catalyze growth forsmall and medium enterprises andallay the nonbusiness risk thatentrepreneurs can do without.

Entrepreneurs should have the riskmanagement tools that large privatefirms do. These tools include a rangeof savings and insurance products aswell as more sophisticated productsthat minimize foreign exchange orinflation risks, for example. Butnetworks and partnerships maymatter even more. Funds may comefrom diasporas, nascent venturecapitalists, equity funds or other typesof firms or groups of individuals,commonly referred as “angels” whohave made progress in the systemand are willing to help others.Access to these funds can embedthe entrepreneur in professionalnetworks that use common standardsfor evaluating new firms. To theextent that access to these networksis formalized through institutions,even entrepreneurs who are poor canreceive financing and manage risk.

The long-term goal should be tohave private financial institutionssupporting small and mediumenterprises—and to encouragewell-functioning capital markets.This will require putting into placeand developing credit bureaus andother mechanisms to provide creditreferences—an effective way ofstrengthening financial systems.


Developing human skills and knowledgeMore investment is needed in localbusiness-related skills, includingforeign languages, informationtechnology skills and basic finance,economics and project management.Public-private partnerships thatcombine more practical training onthe job with basic education could bethe basis for viable apprenticeshipmodels. Also effective are recentefforts to conduct more leadershiptraining by pre-eminent educationaland leadership institutions for topdecision makers from developingcountries. Of particular importanceis building local training capacityby “teaching the teachers”, the onlyway to meet the large demand forlocal (and developing country todeveloping country) training.

There are also opportunities toaccelerate skill-building and fosterentrepreneurship by using social tiesto the developing country’s privatesector. A country’s diaspora inadvanced economies is well suited tomentoring local entrepreneurs—orbecoming investors or entrepreneurs.Expatriates in developing countriesmay also have skills that could betapped for coaching and motivatinglocal entrepreneurs.

Additional steps for governments:

� Build entrepreneurial networksand associations for peer-to-peerlearning. Networks can create an entrepreneurial climate forcoaching, mentoring and learningand strengthen links betweencompanies. Networks supportindigenous and private systemsof learning, so that entrepreneurscan be encouraged to learn fromtheir peers.

� Tap the private sector’s potentialto deliver on-the-job training andapprenticeships as a vital part ofhuman capital development.

� Build an effective national system for training and skillsdevelopment involving employerand worker organizations as key stakeholders.

� Develop institutions of management learning, includingbusiness schools, to develop apool of local managerial talent.

� Conduct additional research onentrepreneurship in developingcountries to better understandthe interplay of entrepreneurial

characteristics and the businessenvironment.

� Develop government policies toencourage skilled emigrants toreturn home.

True involvement of relevant stakeholders in the process of changeis useful only if accompanied bycommitment from the top and confirmation of the belief thatchange is taking place. Particularlyin the beginning of such a process,early evidence of victories and realchange is vital to dispel the moodof scepticism and disbelief that


Costa Rica has attracted some leading information technology companies. Intel’s $0.5billion chip assembly and manufacturing plant now produces 25% of Intel’s global output and 40% of Costa Rica’s exports. This has made the country one of the top 30software exporters worldwide and the highest per capita information technologyexporter in Latin America. Between 1985 and 2002 Costa Rica's exports grew fivefold,from $1.1 billion to $5.1 billion. Foreign direct investment inflows grew more than tenfold, from $59 million in 1989 to $661 million in 2002.

Costa Rica has a 95.5% literacy rate, and 18.5% of the active labour force has completeduniversity, technical or parauniversity studies. Government policy has upgraded theeducational system by incorporating technical education and training in electronics,informatics and engineering. Costa Rica has 85 vocational high schools (educating morethan 85,000 students a year), 4 state universities and 46 private universities, includingone of Latin’s America’s best known business schools, INCAE. The government also setup a National Learning Institute, which offers technical training free of charge and hastrained more than 127,000 people.

The private sector took the lead in attracting investment and creating a pro-businessenvironment through an apolitical nonprofit organization, the Costa Rica Investmentand Development Organization (CINDE) in 1983, with funding from international donorsand strong support at the highest levels from the government. In the mid-1990s CINDEbegan to woo multinational corporations, and it played a key role in influencing Intel’sdecision to locate its first Latin American chip plant in Costa Rica, which was not origi-nally on Intel’s short list of countries. Intel was swayed by the open, business-friendlyenvironment, with a stable political system, respect for the rule of law, low corruptionand good infrastructure.

More than 30 multinational companies have relocated to Costa Rica, employing morethan 10,000 people in the electronics industry. Multinational corporations like Intel havealso directly contributed to the development of a skilled workforce through on-the-jobtraining and support for formal education institutions. And Intel’s presence has increasedawareness of career opportunities in engineering and other technical fields.

Source: UNDP (2001)

B O X 3 . 1 C O S TA R I C A’ S P R I VAT E S E C T O R — U N L E A S H E D

often accompanies governmentannouncements of change. Andparticularly where the changesinvolve administrative rules, theauthorities generally already havethe authority to implement newerapproaches and to do so rapidly.

Building explicitly on successfulmodels of change in other developingor neighbouring countries is likelyto be particularly useful in ensuringsupport because it is more likely to be seen as applicable to localconditions. Thus, tapping the intellectual and implementationcapacity of the domestic private sector will be particularly important where it is available,

to be supplemented by internationalor developing country to developingcountry learning.

Poor people have repeatedlydemonstrated the ability to usetechnology—so it should be a central element of any change programme, allowing the leap-frogging that is essential if progressis to be rapid. And working withcivil society organizations to auditand monitor impact and extract lessons will continue the process of coalition building and lay thegroundwork for future stages of reform.


ost efforts to address the constraints to sustainable private sector development originate in governments and public development institutions. But the Commission believes that

to reach the needed level of change, it is essential to go farther and think abouthow better to engage the private sector in addressing the development challenge.Many critical resources for private sector development are under the radar screenof development, since they are not carried out by traditional developmentplayers and do not occur under the explicit label of development (box 4.1).

Private actions and public-private partnerships fall into two categories.They are commercial transactions driven by market incentives, developed aspart of a corporation’s evolving business and commercial strategy, whichnonetheless have strong implications for development. Or they are specificallystructured as innovative efforts to apply private sector principles and approachesto developmental problems (figure 4.1). From a different perspective, theseinnovative private sector activities are either purely private-private interactionsor they fall more obviously into the area of public-private partnerships.

C H A P T E R 4

ENGAGING THE PRIVATE SECTOR IN DEVELOPMENT

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SERVING MARKETS AT THE BOTTOM OF THEECONOMIC PYRAMID

The vast emerging consumer market at the base of the pyramid—4 billion people with a per capita

income of less than $1,500—provides multinationals and largelocal companies with an attractivemarket for their goods and services (box 4.2; see page 32).India has 700 million people in rural markets. China has a billion.

As today’s advanced economiesbecome a shrinking part of theworld economy, the accompanyingshifts in spending could providesignificant opportunities for globalcompanies. Being invested andinvolved in the right markets—particularly the right emergingmarkets—may become a muchmore important strategic choice.Indeed, many companies are alreadyserving the world’s poor in waysthat generate strong revenues, leadto greater operating efficiencies anduncover new sources of innovation.For these companies—and for those following their lead—buildingbusinesses aimed at the bottom of the pyramid promises to providecompetitive advantages as the 21stcentury unfolds. At the same time,it provides critical links to the marketplace for consumers at the bottom of the pyramid.

FORMING ECOSYSTEMS ANDBUILDING NETWORKS

One of the most compelling ways tohelp firms succeed is by increasingthe power of the linkages and networks they are part of. Manybusiness ecosystems bypass weakregulatory environments by creatingprivate capacity for regulation andenforcement within the network.This capacity can reduce asymmetrieswithin networks and enhance theability to enforce contracts, thusbuilding trust in the system.

Networks can bring many benefits by:

� Enabling the transfer of skills,technology and quality.

� Ensuring that foreign directinvestment has positive spillover effects.

� Bringing companies into theformal sector.


Many private actors outside the traditional development community are addressingthe challenges of development:

Companies� Large corporations (both multinational and local) are leading private ecosystems

that develop and strengthen the capabilities of local small and medium enterprisesand microenterprises.

� Global financial institutions and emerging local financial institutions are developinginnovative approaches and technologies to improve access to credit for the poor and for small and medium enterprises.

� Individual companies, generally multinational corporations but also some large localones, are launching corporate social responsibility programmes to address specificdevelopment needs.

� Important local companies—alone or with domestic private sector associations—arebroadening their strategy and reach from strictly lobbying for actions beneficial tothe private sector to informing and influencing the development process.

Associations and foundations� International private sector associations, such as the Council on Sustainable Development,

International Chamber of Commerce, International Business Leaders Forum, WorldEconomic Forum, International Organization of Employers and others at the regionallevel, such as the West African Business Network and the Commonwealth BusinessForum, are focusing on various aspects of development. National business associations,such as the Confederation of Indian Industries and the Federation of MalaysianManufacturers, have played a key role in national economic planning.

� Private foundations are engaging in the broader development process, with a focuson accountability and results.

Academic institutions� Academic institutions (including management schools)—both in countries that are

members of the Organisation for Economic Co-operation and Development and insome developing countries—are focusing more on private sector development andbroader development issues.

� Leading business schools are working with African counterparts for the joint management training of local public officials and private sector leaders.

Networks of individuals� Individuals are playing or wishing to play a bigger role in resolving global issues by

contributing their know-how and services to various types of “developmental peacecorps” organizations (retired senior executives, business administration students,financial sector experts).

� Expatriate executives of multinational corporations are mentoring local entrepreneursor teaching business in schools where they are stationed.

� Diaspora members in North America and Europe are supporting entrepreneurs intheir homelands with remittances, informal financing of small businesses, and businessadvice and mentorship. They are the mirror image of the brain drain discussed inchapter 2 and represent the potential brain bank that could play a bigger role as the changes in country policies discussed in chapter 3 begin to take hold.

B O X 4 . 1 R E S O U R C E S U N D E R T H E R A D A R S C R E E N F O R P R I VAT E S E C T O R D E V E L O P M E N T

� Creating the capacity to govern transactions throughcommercial contracts.

� Opening markets and the supplyof inputs to smaller firms throughnetworks of larger partners.

� Improving the ability of smalland medium enterprises in suchnetworks to get financing oncommercial terms.

� Increasing the wages, employmentstandards and productivity oflocal companies.

� Increasing the choice and lowering the prices for poorconsumers by bringing a greatervariety of goods to market.

These networks—which caninclude vertical supply-chain relationships and horizontal clustering—also have enormouspotential. But so far their impacthas been limited, concentrated in afew developing countries, such asBrazil, China, India and Malaysia.In Sub-Saharan African countriesthere are few commercial transactionsbetween large multinationals andsmall local companies. A study of 5 foreign and 36 local companies in Kenya showed that none of themultinational affiliates engaged in local sourcing.

A good example of a businessecosystem at work is HindustanLever Ltd., a major producer ofpersonal care and food products inIndia. Its ecosystem includes 80manufacturing facilities, 150 smalland medium enterprise suppliersemploying up to 40,000 people,7,250 exclusive stockists, 12,000wholesalers and small retailers,300,000 shop owners and 150,000individual entrepreneurs in remotevillages who sell its products, anumber likely to grow to 1 millionon current expectations.

Working with women entrepreneurs,Hindustan Lever is leveraging theecosystem to target the potential ofmore than 200 million consumersin rural areas. These business womenlearn about products, prices andreturns and advise the customers intheir villages about the productsthey sell. Hindustan Lever has the potential to reach customers it could not effectively reach otherwisethrough normal distribution channels.This market-based ecosystem is ameans of informing the poor aboutthe benefits of transparency intransactions and the need to respectcontracts—be they explicit orimplicit with the company. Thisconnection with national and global business systems reducesreliance on local moneylenders and slumlords.

Another example is the $2 billiongarment export industry inBangladesh, based on the power

of spreading innovation. In view of the limits on Korean textile and garment exports to the UnitedStates, Daewoo started a joint venture with a local Bangladeshicompany to produce garments forexport and trained local employeesin the latest production techniques.Over time, however, as many as 115 of the first 130 Korean-trainedmanagers left with the knowledgeand networks they had acquired to set up their own companies.The industry has grown to morethan $2 billion in annual sales andaccounts for more than half thecountry’s exports.

Networks link entrepreneurs withpotential sources of financing,human skills, partners, suppliersand information. Through suchnetworks entrepreneurs share information and assessments of

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agencies

Targeted at public sector players

� Setting broader standards (industrynorms, sustainability,corporate governance)

� Lobbying for policy changes

� Promoting participatoryprocesses through social dialogue

� Policy reform� Policy advice� Funding and delivering

technical assistance forpublic sector reforms

� Financial transfers (aid, loans)

Targeted at private sector players

� Business linkages and partnerships

� Investment, including foreign direct investment

� Mentorship for entrepreneurs

� Public-private partnerships,for example, for basicservice delivery

� Public-private consultative bodies

� Privatization or contracting� Investment promotion� Direct business

development services� Direct financing

markets and technology and lessonsfrom their own experiences. Theycan also coalesce into groups to discuss issues of common interestand contribute more broadly to thecommunities they live in.

Informal entrepreneurial networks(often ethnic or religious in origin)predominate in developing countries.In the absence of clear legal enforce-ment of contractual obligations,these relationship-based networks—relying on trust, personal guarantees

and informal contract enforcement—facilitate cross-border trade andbusiness transactions and provide a source of financing. Best known is the extensive network of Chinese overseas entrepreneurswith predominantly family-ownedbusinesses, found among the 50million-strong Chinese diaspora.


B O X 4 . 2 S H O W I N G W H AT ’ S P O S S I B L E AT T H E B O T T O M O F T H E P Y R A M I D

In the financial sector ICICI Bank-India is offering innovative ways to deliver financialservices to the poor. It has developed two models:

� The direct-access–bank-led model promotes and nurtures self-helpgroups, to create a savings pool. Once a pool reaches a certainsize (few hundred U.S. dollars), ICICI will consider making loans of$5,000 with a distribution of $250 per individual. Group pressureis the best collateral, and repayment rates are 99.9%.

� In the indirect channel ICICI partners with microfinance institutionsdrawing on the advantages of each.The microfinance institutiondraws on its skills to contribute the social intermediation aspects,while the bank carries out the financial intermediation andbears the credit risk.This can effectively leverage the risk capitalthat already exists with banks and can be a potential solutionto the capital constraints of microfinance institutions. Thismodel reduces the cost of intermediation without affecting the quality of the portfolio.

The strategy has both made good business sense and had significant development impact. For example, the number of self-help groups has increased to over 10,000, allowing ICICI tosubstantially increase its market share in rural areas. Villagers have had a surge in financing opportunities. Interestingly, a studyconducted independently has shown a strong surge in self- confidenceof members in self-help groups.

In the retail sector Casas Bahia, the largest retailer in Brazil, focuses almost entirely onpoor consumers. It uses a carne, or passbook, system of financingthat allows poor customers to buy on credit. Casas Bahia uses aproprietary system that does credit checks and applies common-sense rules to determine whether to offer financing to thosewithout credit history.

Casas Bahia has 4.2 billion reais in revenues, 330 stores, 10 millioncustomers and 20,000 employees. Some 70% of its customers haveno formal or consistent income and are primarily maids, cooks,independent street vendors and construction workers whoseaverage monthly income is two times the minimum wage. Thepoor now have access to a much broader range of products andbenefit from better credit schemes than they previously had.

In the cement sectorCEMEX, Mexico’s largest and the world’s third largest cementcompany, created two key programmes to tap the large poorpopulation of Mexico, where 60% of the people survive on lessthan $5 a day.

� Patrimonio Hoy targets the low income, do-it-yourself home-builder segment of the population. It is set up like a microcreditscheme, with small lending groups, but the savings are used topurchase cement and other building materials.

� Construmex is an innovative way of tapping the diaspora community so that money sent home for construction can betransferred directly to the cement company without payingfinancial intermediaries. The service allows Mexicans living inthe United States to send their money and their orders directlyto cement distributors in Mexico, who then deliver cement tothe site of the person's future home or business.

CEMEX knew that a significant part of the $10 billion in remittancesto Mexico (about 10%) is used for construction of houses.

Patrimonio Hoy tripled the rate of cement consumed by its lowincome, do-it-yourself homebuilders. Construmex has reported$2.5 million in sales since it started in July 2001, mostly from emigrants in Los Angeles. With its U.S. sales potential estimated at $160 million a year, Construmex is planning to expand to other cities with large Mexican communities, including Chicagoand Houston. Both programmes provide the poor with more cost-effective opportunities to build their homes and improvetheir livelihoods.

In the cellular network sectorGrameenPhone is the largest cellular operator in Bangladesh. Vodacomis a South African subsidiary of Vodafone and thelargest operatorin South Africa. Both companies work with local entrepreneurswho acquire cellular phones and resell phone services within theirvillages. GrameenPhone combines this activity with microcreditfor entrepreneurs and focuses mostly on women.

GrameenPhone has built the largest cellular network in the country,with investments exceeding $300 million and a subscriber base ofmore than 1 million. Its rural programme is already available inmore than 35,000 villages, providing telephone access to morethan 50 million people, while helping to create microentrepreneurs.The key to the success of the village phone has been a cadre of entrepreneurs, 95% of them women, who benefit from theopportunity to run their own microentreprises.

Vodacom provides more than 23,000 cellular lines at more than4,400 locations throughout South Africa.The company has providedaffordable communication services to millions of South Africansand empowered thousands of previously disadvantaged individualswith income-generating opportunities and lasting business skills.These accounts generate Vodacom’s highest revenues.

Source: Prahalad (forthcoming)

It has played a key role in the economic transformation of China and emerged as a businessforce in Southeast Asia. OfficialChinese statistics reveal that overseasChinese entrepreneurs account for70% of China's foreign directinvestment—more than $50 billion recently.

The Indian diaspora has been lessinvolved in direct investment backhome than in making business connections between overseasinvestors and the local businesscommunity and in facilitating the faster development of private ecosystems.

With market development and theemergence of larger firms, informalties based on personal ties are supplanted by formal networkingorganizations, such as chambers ofcommerce, alumni associations andincubators. These formal networkingorganizations have long beensources of mutual support in thedeveloped world and are now providing the same in the developingworld, playing a vital role in:

� Organizing and poolingresources to create shared institutions and capabilities.

� Creating relationships and levels of trust that make themmore effective.

� Defining common standards.� Conducting or facilitating

collective action in procurement,information gathering and international marketing.

� Defining and communicatingcommon beliefs and attitudes.

� Providing mechanisms to develop a common economic or regional agenda.

Business associations, especiallytrade and industry organizations, arerepresenting the common interestsof their members by coordinatingactivities, establishing self-regulatorystandards, lobbying governmentsand providing direct services tomembers. Direct services includethe promotion of linkages, training,information dissemination and accessto markets. Business associationshave taken the lead in improvingthe competitiveness of their members by:

� Lowering the costs of information.� Establishing horizontal

coordination (quota allocation,capacity reduction) and vertical coordination (upstream-downstream).

� Setting standards and upgrading quality.

FOSTERING PUBLIC-PRIVATE PARTNERSHIPSFOR SUSTAINABLEDEVELOPMENT

Important benefits can be obtainedby fostering more effective public-private partnerships, particularly in the selective provision of suchservices as energy and water. Energyproduction and basic water supplyprojects can use the most effectiveownership structure necessary,including public ownership. Butfinal delivery to the rural customeror to the informal sector can oftenbe managed by smaller domesticcompanies. Decentralized powerproduction, through distributedenergy of various kinds, can also be contracted to the private sector

through agreements with the public sector grid. Solar power and small run-of-the-river hydroplants are examples.

Public-private partnerships are alsoeffective in implementing sustainabledevelopment objectives. Noteworthyhere are the United Nations’ GlobalCompact—a voluntary corporatecommitment to environmental, humanrights and labour standards—and theInternational Finance Corporation’sEquator Principles, an agreementby leading international financialinstitutions to observe global standards in environmental andsocial policies in all large projectsthey finance, regardless of whetherthese are jointly financed with public institutions that observe the same rigorous standards.

Similar public-private partnershipsin corporate governance and transparency are attempting toinfluence private sector behaviour.The “Publish What You Pay”campaign aims to help citizens ofresource-rich developing countrieshold their governments accountablefor how revenues from the oil, gasand mining industries are managedand distributed.

The campaign, backed by a worldwide coalition of more than170 nongovernmental and civilsociety organizations, was foundedby Global Witness, George Soros'sOpen Society Institute, CAFOD,Oxfam, Save the Children U.K. andTransparency International U.K.


The coalition calls for internationalregulation on the disclosure of net taxes, fees, royalties and otherpayments made by companies todeveloping country governments inall countries where they operate.

Because individual companiesmight be put at a disadvantage bydisclosing information others fail to reveal, expecting voluntary disclosure might not be a viableoption. Yet all companies and theinvestment community would benefit from a level playing field if regulators required disclosure.The importance of this approach is also reflected in the ExtractiveIndustries Transparency Initiativedeveloped by the U.K. governmentand recently endorsed by the World Bank.

In addition to setting standards forthe private sector, a small but growingnumber of companies are drivingstandards higher themselves—to bethe pacesetters for measuring otherprivate companies. These newertrends provide a valuable complementto the traditional approach of a regulated private sector and a regulating government agency.Infosys in India is not only pavingthe way in this field but also engaging directly with governments to influence the broader reform anddevelopmental agenda in its state ofoperations and in the country. Thiskind of role for the private sector isvital to the development effort.

IMPROVING CORPORATE GOVERNANCE

Corporate governance is a focalpoint in creating safeguards againstcorruption and mismanagement,limiting insider dealing and cronyismwhile promoting the values of a marketeconomy in a democratic society.The values include accountability,transparency and the rule of law—as well as fairness, responsibilityand ownership and protection forminority shareholders.

The benefits of committing to corporate governance mechanismsare less corruption, a healthier private sector, fairer markets andgreater institutional development—all supporting a growing economy.Separate from corporate governance,which at its heart is the protectionof shareholders rights, is the growing interest in corporate social responsibility. Companies arenot only pressured by government,which adopts corporate governanceregulations forcing codes of conduct on businesses, but also bypublic opinion galvanized by civilsociety and labour organizations.Self-regulating or voluntary codesof corporate behaviour prove thatcompanies are willing to be goodcorporate citizens.

It is important for the public andprivate sectors to work together todevelop a set of rules binding forall, establishing the ways companieshave to govern themselves. Businessassociations, such as chambers ofcommerce and industry groups, shouldtry encouraging their members to develop standards of corporate

governance to protect shareholdersand other constituents—and standardsof social responsibility to respond toexternal stakeholders. Private sectortask forces promoting corporategovernance and business associationsdeveloping codes of corporate governance for its members arepromising starting points.

ADVANCING RESPONSIBLE BUSINESSPRACTICES AND CORPORATE SOCIALRESPONSIBILITY STANDARDS

To some extent the mainstreamingof what is now commonly referredto as “the triple bottom line”—reconciling respect for the environment, social equity andfinancial profitability—is goodnews for business. The triple bottom line focuses corporationsnot just on the economic value theyadd, but also on the environmentaland social value they add—anddestroy. The term captures the values, issues and processes thatcompanies must address to minimizeany harm from their activities andto create economic, social and environmental value. This involvesbeing clear about the company’spurpose and taking into considerationthe needs of all the company’sstakeholders—shareholders,customers, employees, businesspartners, governments, local communities and the public.

The possibilities of such an alignment, between social and commercial interests, remain largely untapped. The majority of companies that have taken anenlightened approach to sustainabledevelopment have been pushed andpulled in that direction: pushed by


changing societal expectations andstakeholder demands, and pulledtowards emerging markets bygreater competition for marketshare in the mature markets of the developed world.

Most of the efforts have been concentrated in traditional philanthropic or charitable models:building schools and health clinicsor supporting cultural and artisticorganizations. Though valuable and perhaps necessary, this model is more window-dressing than asubstantive or sustainable contributionto the lives of the poor. Because itlies outside the traditional businessmodel, the benefits are measured inintangibles—such as reputation, riskreduction and license to operate—rather than the bottom line. It represents mainly short term,unquantifiable and unaccountablefinancial contributions. And commitments can come and gowith changes in the business climate or management.

In the last decade there has been a growing body of evidence thatpioneering companies that activelymanage their impacts on sustainabledevelopment have better financialperformance. Companies have beenpushed by advocates, labour unions,the media and even shareholders to take the positive and negativeimpacts of their activities into farmore consideration than they didbefore. They are building humanrights, core labour standards andsustainable development into theircorporate commitments. They areslowly learning to implement themthrough management systems andbroader accounting standards. Andthey are reporting their successesand failures along the way to the

public, using sophisticated corporatesocial responsibility reports.

Global partnerships to define standards in different sectors ofindustry have also facilitated privatesector leadership and corporategovernance attributes that reflectchanging corporate behaviour.These include Responsible Care in the chemical industry, theSustainable Forest Initiative,Sustainable Fisheries, and theGlobal Mining Initiative launched in 1998 by nine mining companiesfrom around the world.

The global mining industry soughtto redefine its role by demonstratingcorporate commitments to stake-holder dialogue and sustainabledevelopment. The initiative led toan independent research project onmining, minerals and sustainabledevelopment and a multistakeholderconference in May 2002. The partnerships and research effortsthat flowed from these initiativescontinue through the InternationalCouncil on Mining and Metals,the World Business Council forSustainable Development and otherindustry associations and companiesthat share experience in promotinglocal growth through sustainabilityprinciples and standards.

The partnerships reflect the evolutionof new voluntary standards forjudging corporations. Some criticswill point to these partnerships ascorporate ways of avoiding bindingregulations. Others see them as direct evidence of corporatecommitment and understanding of the importance of taking a leadership role on sustainable

development. Among the new standards are: AA1000 (developedby the Institute for Social andEthical Accountability), ISO14001(International Organization forStandardization) and Project Sigma(a sustainability management standard under development by the British Standards Institution,Forum for the Future and others).

The development and improvementof indicators for development byinternational development agencies,such as the International FinanceCorporation’s Sustainability Frame-work, and by corporations, such asthe Global Reporting Initiative,present unique opportunities totrack private sector contributions tosustainable development. So doesthe scoring of corporate efforts topursue the Millennium DevelopmentGoals, published through theWorld Economic Forum’s GlobalGovernance Initiative. Such quantitative tools will allow corporations to move beyond qualitative stories associated withtraditional philanthropy towardsstrategic social investments withshort, medium and long targets.Being able to budget and report on results will have the benefit of quantifying private sector contributions to internationalpoverty reduction targets whilesimultaneously creating incentivesfor more proactive approaches to sustainable development.Standard indicators based on existing international frameworks


also provide the tools for cost-benefitanalysis of investments and theidentification of effective models.

� � �

The Commission sees a distinct needfor accelerating the disseminationof information on successful models,creating new ones or adaptingexisting ones to new environments,replicating them across geographiesand scaling them up rapidly.

The private sector, particularly themanagement of large local andmultinational companies, needs

to make a much more serious commitment to capturing theopportunities—by researching bottom-of-the-pyramid markets, byadvancing standards of sustainabilityand public trust and by thinkingcreatively about linking with otherbusinesses locally or abroad formutual benefit. Governments, fromboth developing and developedcountries, can facilitate this,and international developmentinstitutions can assist them.


Pho

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he Commission believes that the primary responsibilityfor achieving growth and equitable development lieswith developing countries.This responsibility includescreating the conditions that make it possible to secure

the needed financial resources for investment. And those conditions—thestate of governance, macroeconomic and microeconomic policies, publicfinances, the financial system and other basic elements of a country’s economicenvironment—are largely determined by the actions of domestic policymakers.Their challenge is to capitalize on advances in macroeconomic stability anddemocracy and to launch reforms that would bring about further changes ininstitutional frameworks to unleash and foster the private sector.

Most of the recommended actions involve more than one of the actorsworking together. Where governments are implementing policy change, it isoften with the direct support and involvement of multilateral developmentinstitutions. Where the private sector is taking a more active stance on sustainable development, it is often with civil society raising the profile ofthis issue. Where governments are implementing regulatory reform, it maybe in direct consultation with representatives of the private sector. The individual actions identified here should be seen in the framework of this

C H A P T E R 5

RECOMMENDED ACTIONS


I

broader cooperation—which isneeded even more to reduce poverty.

Our interest lies in three areas:

1. In the public sphere, promotingthe reform of laws, regulationsand other barriers to growth.

2. In the public-private sphere,facilitating cooperation andpartnerships between public andprivate players to enhance accessto such key factors as financing,skills and basic services.

3. In the private sphere,encouraging the development of business models that can bescaled up and copied and thatare commercially sustainable.

The broad range of actions in thesethree focus areas—necessary for a successful program of private sector development—flow from theanalytical framework for unleashingthe capacity of domestic entrepreneursdeveloped in chapters 2 and 3.These actions reinforce and leverage

the contributions of the private sector to development, as outlinedin chapter 4.

ACTIONS IN THE PUBLIC SPHERE:CREATE AN ENABLING ENVIRONMENT

Creating an enabling environmentinvolves steps designed to reducethe share of the informal sector inan economy, through reform of theoverall enabling environment forthe formal economy. These stepsshould have the effect of bothreducing the costs as well asincreasing the benefits of formality.

Recommended actions by developing country governmentsThe Commission believes thatdeveloping country governmentsshould undertake the following actions:

Reform regulations and strengthenthe rule of law. Developing countrygovernments have to make a strong and unambiguous policy

commitment to sustainable privatesector development—and combinethat with a genuine commitment toreform the regulatory environmentby eliminating artificial and policy-induced constraints to strong economic growth. Everything startswith the tone at the top. There isno reason, for example, for the costof business registration in low incomecountries to be many multiples thatof similar procedures in OECDcountries. We emphasize a pragmatic,end-user perspective that focuseson actual improvements in anentrepreneur’s dealings with publicinstitutions or regulations. And asgovernments develop and enforcemore effective formal rules and regulations, they need to understandthe importance of private sectorecosystems in creating broader participation in the economy and in illustrating the value of thecapacity to govern transactions.

Formalize the economy.Developing country governmentsneed to focus on creating the conditions to reduce informality


F I G U R E 5 . 1 A C T I O N S I N T H E T H R E E F O C U S A R E A S






agencies

Targeted at public sector players Targeted at private sector players

3. Private sphere:Mobilize capabilities and resources� Focus private sector capabilities to support

entrepreneurs and firms � Build ecosystems and linkages � Pursue bottom-of-pyramid business

2. Public-private sphere:Partner and innovate� Develop broader financing options for entrepreneurs� Build leadership and business skills and training� Broker public-private partnerships for basic services

1. Public sphere:Create an enabling environment� Reform regulations and strengthen rule of law� Formalize the economy� Engage private sector in the policy process

and change the composition of theprivate sector ecosystem over time.The focus should be on measurableoutcomes. Since the composition of the private sector ecosystem in acountry is a measure of its developmentprogress (high levels of informalityare associated with lower incomes),the objective should be to strive to change this composition in a specific and measurable way.Indicative targets should be set to increase the shares of formalenterprises and smaller enterprisesin the economy, monitorable over a five to ten year horizon.

A clear recognition of the informalsector will need to be accompaniedby rapid steps to analyze its localcharacteristics and put in place themeasures to improve its access tofinance and to support from theformal sector. We need to start byraising awareness and disseminatinginformation about the prevalence of informality—and by diagnosingthe problem in a country context.Remedies include reforms of specific government rules and their enforcement.

One area for urgent action isimproving the rules and processesfor registering and titling land,critical preconditions for financialaccess based on these assets. Neededhere are practical, user-friendlyprocesses to obtain and enforceproperty rights. As with any publicreform process, consultative bodiesneed to steer reform efforts in atransparent way, involving informalentrepreneurs, cooperatives andcivil society organizations.

Engage the private sector in thepolicy process. Governments needto create a real partnership withrepresentatives of the domestic privatesector to implement changes and

ensure that the voice of the privatesector includes small and mediumenterprises and microenterprises.Government–private sector councilsand advisory bodies are being set up.But the difference between notionalcollaboration and truly effectivecooperation can be ensured only bygovernments and their private sectorpartners. When new arrangementsare put in place, a few high-profileexamples of successful cooperation canchange the environment from mutualdistrust to strategic partnership.Public-private consultative bodies,where public officials and privatesector representatives share a voiceare another key element. But the fullspectrum of private sector playersmust be at the table, includinginformal and small entrepreneursand workers’ organizations.

Recommended actions by developed country governments Developed country governments are the principal players in creating and maintaining a positive global environment.

Foster a conducive internationalmacroeconomic environment andtrade regime. The Commissionbelieves that developed countrygovernments have to foster a conducive international macro-economic and policy environmentto unleash the full potential ofentrepreneurs in developing countries.A robust international economyprovides markets for goods fromdeveloping country companies.In addition, increasing the flow ofdevelopment aid and reforming theglobal trading system to provide faireconomic opportunities to producersfrom developing countries are essential for promoting rapid growthin domestic private investment.

Redirect the operational strategiesof multilateral and bilateral development institutions andagencies. Developed countries are the primary shareholders of the multilateral development banks.They control most of the bilateralaid agencies and ministries active in the developmental arena. Inencouraging sustainable private sector development, they need toensure that the collective actions of these agencies are better coordinated—to improve their efficiency and to reduce the pressureson the administrative capacity ofdeveloping country governments.They also need to focus their supportfor private sector development indeveloping countries by creatingthe conditions to reduce informalityand change the composition of theprivate sector ecosystem.

Untie aid. Developed country governments are also the mainsource of technical assistance fundsused by multilateral developmentinstitutions to support policy andinstitutional reform in developingcountries. Although some flexibilityhas been introduced in recent years,the major elements of these fundsare tied. This can create unnecessarycomplications in how effectivelyfunds can be deployed and canaffect the quality of the advisorywork that they support. Moreover,the bulk of the funds are providedto governments rather than moredirectly to the final recipients.Changes in the administrative rulescontrolling these funds would permitmore effective use and delivery oftechnical assistance to stimulateprivate sector development.

C H A P T E R 5 : R E C O M M E N D E D A C T I O N S 39

Recommended actions by multilateral development institutions The Monterrey Consensus explicitlyacknowledged the role of privatebusiness in development. It touchedon the need for improving thefunctioning and efficiency of globaland bilateral development agencies.It recognized the limited absorptivecapacity of many developing countriesand the stretched administrativecapability to deal with overlappingactivities of development institu-tions. The Consensus Documentthus encourages a fair degree ofspecialization and partnership in thedevelopment community to improvethe overall impact of various formsof development assistance.

Apply the Monterrey recommen-dation of specialization and partnerships to private sectordevelopment activities. Manyinstitutions are engaged in effortsto support the development offinancial markets, provide businessdevelopment services to small companies, advise on the enablingenvironment, improve corporategovernance and enhance the focuson sustainability. While the choiceof “supplier” is important to recipient countries, it is clear to us that these overlapping activitiesare counterproductive and need to be urgently addressed.

Address informality in developingcountries. Some pioneering workis underway to map the structure ofthe informal sector, and a globaleffort to expand the coverage of this work is likely to yield significantbenefits. A partnership to acceleratethe pace of such work in Latin

America has just been arranged bythe Inter-American DevelopmentBank in collaboration with theInstitute for Leadership andDemocracy of Peru. There is alsogreat scope for facilitating linkagesamong multinational corporationsand small and medium enterprises,given the importance of private sector ecosystems and the benefitsfrom private-private partnerships.

ACTIONS IN THE PUBLIC-PRIVATESPHERE: PARTNER AND INNOVATE

The Commission believes that allstakeholders need to make concertedefforts in finance, skills and public-private partnerships for the deliveryof basic services. In each of thesecritical areas, developing countrygovernments and private playersneed to develop viable partnershipmodels that leverage their respectivestrengths. Various civil societyorganizations can add valuable skillsand insights to such partnerships.Building sustainable partnershipsrequires sophisticated skills toassess competing interests andnegotiate pragmatic agreements.

Multilateral development institutionscan be neutral conveners and moderators. To be effective inter-mediaries they must build the skillsto create partnerships that makeeconomic sense for private playerswhile being manageable for developingcountry public agencies. Differentplayers may initiate and lead a partnership at different times.What matters most is that all partiesapproach partnerships with realisticexpectations of each party’s interestsand capabilities. The Commissionsees a distinct need for further

innovation in this area to developtruly sustainable partnership modelsfor developing countries.

Facilitate access to broader financingoptions. We envision continuingdevelopment of domestic financialmarkets coupled with skill-buildingfor regulators and private financialinstitutions. We see great promisein facilitating the South-Southtransfer of expertise between financialinstitutions and public regulators.Broad alliances for microfinance,as part of the United NationsInternational Year of Microcredit2005, and for small and mediumenterprise lending could developfinancially sustainable models.Innovative schemes are also neededto transform financial flows from the many diasporas into long-termproductive investment in theirhome countries.

Assist skill and knowledge development. Skill-building activitiescould range from programs for toppublic and private leadership totraining microentrepreneurs to jointefforts with public authorities andunions to improve workforce skills.The Commission envisions largeralliances with business and tradeschools, public-private collaborationin professional education and training, and mentoring programsfor entrepreneurs—all leveragingpeers, expatriates and those in thediaspora. We see a large opportunityfor organizational infrastructuresthat network private resources world-wide with aspiring entrepreneurs indeveloping countries. This includesformal programs of multinationalcompanies to make their humanresources and know-how available todeveloping country entrepreneurs.

Make possible sustainable deliveryof basic services, particularly energyand water. The Commission sees the


need to develop innovative modelsfor partnerships of governmentalservice providers, multinationalcompanies and local companies.The sustainable delivery of basicservices depends on effective partnerships and other forms ofpublic-private cooperation, whichhas proven to be difficult. Still to bedeveloped are the sophisticated skillsto implement lasting partnerships,where all players’ incentives are wellbalanced and proper governance is inplace. We see a clear need to createadditional capacity to help overcomemarket dysfunctions and informationasymmetries, provide hands-onoperational support, fill knowledgegaps and act as neutral intermediarybetween competing interests. Effectivebrokering can make more transactionsfeasible because it can overcome the barriers that would otherwiseimpede action. We plan to followup with public and private entitiesin this area to see how existinginstitutional capacity can be supplemented—and how poor people can be empowered to buildbusinesses directly.

ACTIONS IN THE PRIVATE SPHERE:MOBILIZE CAPABILITIESAND RESOURCES

The Commission believes that theprivate sector, particularly largelocal companies and multinationalcorporations, should contribute toaccelerated economic developmentand to poverty alleviation.

Recommended actions by the private sectorThe required actions for the privatesector are as laid out in chapter 4:

Channel private initiative intodevelopment efforts. We believe thatthe private sector has tremendous

potential to contribute to developmentthrough its knowledge, expertise,resources and relationships. Unleashingthis potential will require increasingthe visibility of the broad range ofprivate contributions (illustrated in chapter 4) that remain disparateand unnoted—and establishing an infrastructure to channel thesecontributions effectively. This couldbe accomplished through a new privatefocal point organization that wouldmatch private know-how, servicesand resources with the needs forsuch services in developing countries,primarily by the private sector butalso by governmental agencies.

Develop linkages with multinational and large domesticcompanies to nurture smallercompanies. Linkages between different types of firms in developingcountries provide an effective channelfor local companies to gain accessto markets, financing, skills andknow-how. There is an urgent needfor multinational corporations tointegrate better with local small and medium enterprises and tostrengthen links with the domesticecosystem, such as those betweenmicroenterprise distributors andlarge domestic companies. Manyparties need to work together forthis to happen, and the range ofactivities to make the links durableincludes information, know-howand hands-on support.

Pursue business opportunities inbottom-of-the-pyramid markets.Recognizing the needs of bottom-of-the-pyramid markets and creatinginnovative solutions to meet theseneeds are vital actions required fromthe private sector, both domesticand international. Efforts should bedriven mainly by the incentives of

expanding markets and new businessopportunities. The interplay indomestic ecosystems is likely toresult in parallel changes in the economic behaviour of all those alongthe chain, from informal operatorsthrough small and medium enterprisesand their financiers. This is importantin empowering the poor. Therecould also be great value in creatinga scorecard for multinationals andother large firms to measure theirsuccess in creating profitable marketsfor poor consumers.

Set standards. The private sectorneeds to make a genuine commitmentto sustainable development—with asharp focus on corporate governanceand transparency. We have highlightedsuccessful companies that haveshifted the development debatewithin their economies and createda political consensus that eases theway for governments to facilitate theexpansion and growth of a vibrantprivate sector. Such a shift will occurwhen pioneering managementsrealize the value of leading from thefront, being responsive to socialdevelopment needs and setting new standards that demonstrate thevalue of sustainability. Many largecompanies in developing countriestoday are also multinational in thesense that their business operationsare no longer limited to their country of origin. Still, they do play a different role within their homeeconomies—and are seen differentlyfrom multinationals in the traditionalsense of the term. Where suchhigh-profile local companies exist,they too will need to understandthe broader framework of theiroperations and work actively to create the new consensus that we

C H A P T E R 5 : R E C O M M E N D E D A C T I O N S 41

propose. Many of the sustainabilityinitiatives discussed in this reporttend to involve large multinationals.But similar initiatives or offshootsof global initiatives involving thelocal private sector could be veryeffective in redefining the roles of different stakeholders in thedevelopment process.

Recommended actions by civil society and labour organizationsThe Commission believes that civilsociety and labour organizationshave to continue as critical observersof the development agenda—and as facilitators and supporters ofinnovative approaches for meetingthe Millennium DevelopmentGoals and improving the quality of life for poor people. Civil societyorganizations have a major part in a robust global alliance that buildson the strengths of each key playerto meet the Goals.

Increase accountability in the system. This is a core part of thework of civil society organizations,as is their leadership in pushingforward the concept of sustainabledevelopment. This work should be strengthened.

Develop new partnerships andrelationships to achieve commonobjectives. Numerous civil societyorganizations are also acting indirect partnership with the privatesector to combine the managementskills and financial capacity of private companies with their ownknow-how and contacts in bottom-of-the-pyramid markets. This canfacilitate the kind of private sector–civil society organization collaborationthat builds microcredit programmes

on a commercial and sustainablebasis. Civil society organizations areclosest to the bottom of the pyramid.They also are often proxies forexperimenting with new technologiesfor solving problems. And they, too,will need to measure their successin facilitating innovative private-private partnerships to address economic and social policy objectives.

LOOKING FORWARD

Recognizing the size and complexityof the challenge, the Commissionconcludes that it is necessary tochannel private capabilities andresources into unleashing the privatesector in developing countries.We believe that the energies andopportunities remain untappedbecause the needs in developingcountries have not been appropri-ately matched with resources andinterests around the globe. Ourproposed programme of action isthus designed to catalyze the strongprivate response that is the mainobjective of our work.

To promote progress, the Commissionrecommends that the United Nationssponsor the tracking of private sector development. An annualprogress report would maintain theprominence of the Commission’soverall recommendations and ensurethe commitment to addressing themany issues identified here. Thereport would offer an opportunity tocelebrate progress and expose obstaclesto private sector development. Itwould be prepared with the supportof a number of Commission membersand development institutions.

As the main actors begin to worktogether towards common goals, asignificant change will be requiredin the structure of economic andpolitical interactions in many developing countries. Today’s fractured and confrontationalrelationships will need to be gradually replaced by collaborativepartnerships in which each player’sactions are influenced and modifiedby larger challenges and by thecapabilities of others.

To catalyze this process, theCommission is assembling a firstset of actionable initiatives to facilitate transformations in individualcountries and to provide the tools forgovernments and the private sectorto supplement available resourcesand begin rapidly implementing aprogramme of change. These firstactions are intended to stimulate acollaborative response from potentialpartners who read this report. Ourmessage to all of you is: join us.

In the coming months we will belaunching initiatives and consultingwith the readers of this report todraw them into the undertaking.We invite the broad range of stakeholders identified in thisreport to heed our call and to workrapidly to convert initial ideas tospecific business plans that can belaunched within the coming sixmonths. Only if we can generate an urgent sense of following up on our initial work can we hope tounleash the trapped entrepreneurialenergy of the poor as a force forprivate sector growth.


s indicated in the Bibliography that follows and in the detailed references cited below, this report draws on a wide range of documentsand on numerous outside sources. Many people

contributed a tremendous amount of time and energy to informing theCommission of their experiences and views, and they are identified in the Acknowledgements.

Institutional resources from the World Bank Group, including the InternationalFinance Corporation and the Multilateral Investment Guarantee Agency,were an important source of information, as detailed in the chapter referencesbelow. The Bank’s Doing Business in 2004: Understanding Regulation deservesspecial mention as the basis for a substantial amount of the analysis andconclusions in Chapters 2 and 3. The recommendations in chapter 3 are a synthesis of suggested policy interventions from a variety of sources and,in particular, also benefit from the private sector development work of theOrganisation for Economic Co-operation and Development.

BIBLIOGRAPHIC NOTE

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The Secretariat of the Commissionalso benefited from extensive discussions and interviews withMichael Barth, Richard Frank andPercy Mistry, and their influence is felt throughout this document.Similarly, K.V. Kamath, LalitaGupte and Madhav Kalyan fromICICI Bank and Nandan Nilekaniand Sanjay Purohit from Infosysprovided broad insights into themanagement approaches of leadingcorporations in developing countries.Their perspectives have particularrelevance for the developmentalissues we address.

ADDITIONALREFERENCES

Chapter 1 draws on Bouton andSumlinski 2000; De Soto 2000;IFAD 2002; IFC 2000; McKinseyand Co. 2003; Pfeffermann 2000;Prahalad, forthcoming; Prahaladand Hammond 2002; World Bank 2002b, 2002c, 2003d;UNDP 2003b.

Chapter 2 draws on Ananth and Soju 2003; Ayyagari, Beck,Demirgüç-Kun 2003; Carringtonand Detragiache 1998; Cervantesand Guellec 2002; De Soto 2000;IFC 1997; McKinsey and Co. 2003;Transparency International 2003;World Bank 2003a.

Chapter 3 draws on De Soto 2000;IFC 1996; McKinsey and Co.2003; OECD 1993; OECD andUNIDO 1999; Rajan and Zingales2003; World Bank 2003a.

Chapter 4 draws on IFC 2002a;Porter 2003; Prahalad andHammond 2002; Prahalad, forth-coming; Saper and Saravanamutto2003; UNCTAD 2001, 2002;Wignaraja and Ikiara 1999.


Ananth, Bindu, and Annie George Soju. 2003. “Scaling up Micro-Financial Services: An Overview of Challenges and Opportunities.”ICICI Bank, Mumbai.

Ayyagari, Meghana, Thorsten Beck, and Asli Demirgüç-Kunt. 2003.Small and Medium Enterprises across the Globe: A New Database.Washington, D.C.: World Bank.

Baghai, Mehrdad, Stephen Coley, and David White. 1999. The Alchemy ofGrowth: Practical Insights for Building the Enduring Enterprise. Reading,Mass.: Perseus Books.

Batra, Geeta, Daniel Kaufman, and Andrew Stone. 2003. InvestmentClimate around the World: Voices of the Firms from the World BusinessEnvironment Survey. Washington, D.C.: World Bank.

Bouton, Lawrence, and Mariusz Sumlinski. 2000 “Trends in PrivateInvestment in Developing Countries: Statistics for 1970–1998.”Discussion Paper 21. International Finance Corporation, Washington, D.C.

Carrington, W.J., and E. Detragiache. 1998. “How Big Is the Brain Drain?”Working Paper 98. International Monetary Fund, Washington, D.C.

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