Thirty development finance institutions (DFIs) and multilateral development banks (MDBs) recently launched a report entitled “International Financial Institutions and development through the private sector.” The purpose of this report is to get the word out that the private sector is important for development, and the target audience is policy makers and the unconverted. The report makes some assumptions about the private sector and then pushes the economic growth and infrastructure mantra that we have been hearing from development institutions, particularly the DFIs.

I had recently blogged, quite cheekily, about the launching of this report which I had intimated seemed more like the launch of a new Starbucks franchise. The report itself is quite innocuous. It speaks of the importance of the private sector, and the role of governments to create an enabling environment. There is no doubt that the private sector is an important tool for development, but the report also seems to put it in the place of a glistening utopia where all the challenges are exogenously based.

The report states that the main challenge to the private sector engaging as a development actor is the lack of an enabling environment conducive to economic growth. There are some assumptions made on the role of economic growth in development as well- the basic assumption is that all growth is good growth. During the launch of the report there was a discussion of how to change the connotation amongst development practitioners that profit is a dirty word. It is unfortunate that this report does not open up this discussion by addressing one of the fundamental issues with the private sector which is the profit vs. development paradigm.

The provision of public goods is often not profitable and in the past the privatization of these goods has led to disastrous results.

The report refers to a world bank research paper entitled, “global poverty and inequality: a review of the evidence” by Francisco Ferriera and martin Ravallion, as evidence that growth is good for development. In the paper’s conclusion it states that while economic growth reduces absolute poverty it has no correlation to reducing inequality. The distinction appears subtle but as long as growth does not address issues of inequality, it cannot be considered inclusive growth. Trickle down theory has proved disastrous at creating equitable societies, and it is surprising to see it still being talked about in the context of the 2007 economic crises and youth movements in Northern Africa and the United States. Economic growth is a tool that when aptly used, can bring positive development results. But like a hammer, it makes no judgment call on which nails to hit, so long as it is hitting nails.

There is also not a clear understanding of who is being targeted by the IFIs. The private sector is not a monolith and is composed of a variety of actors ranging from small holder farmers to large multi-national corporations to investments banks. Within this sundry of actors and agents there are elements that can be partners in development, such as the domestic private sector in developing countries, and there are elements that need to be effectively coerced to be development partners, such as multi-national companies. In the past DFIs have not been effective at getting the latter to engage productively in development pursuits so it is not clear what added value there is to increasing their involvement and access to public development finance.   

Overall I don’t think anyone will disagree that the private sector has a role to play in development. What is contestable in this report is that scarce public development finance should be channeled away from providing public goods, to investing in the private sector. If the role of governments is to create an enabling environment with clear regulatory and distributive capacity, and to provide public services in order to create a vibrant private sector, then that is where public finance should go.