How can the number of people living on less than a dollar a day be halved by 2015? What factors matter for pro-poor growth and the processes needed to bring it about? This report for the Organisation for Economic Cooperation and Development (OECD) focuses on the role of the private sector operating in a market economy. It provides an analytical framework to asses the potential for pro-poor growth and identify the institutional and policy changes required. Overall, donors need to widen their agenda for private sector support by focussing on institutions and policies, rather than simply supporting small enterprises and agribusiness.
Governments of developing countries and their donor partners will fail to halve the number of people living on less than a dollar a day before 2015 unless there is a dramatic change in the rate of poverty reduction. The rate at which the average income of the poor rises depends on the rate of economic growth and the distribution of the resulting rise in incomes. The extent to which poor people are able to benefit from growth is determined by their access to markets and opportunities. Institutions play a key role in determining terms of access and in ensuring that growth is sustainable. The report suggests an analytical framework to asses whether the conditions exist for the private sector to deliver growth and identify institutional and policy changes required. The framework consists of five interlinked factors:
- Providing Incentives for Entrepreneurship and Investment. Lowering the risk and cost of doing business and providing access to productive resources leads to pro-poor growth
- Increasing Productivity, Competition and Innovation. These are important for sustaining as well as accelerating growth
- Harnessing International Economic Linkages. Greater trade integration stimulates foreign direct investment and enables the economy to focus on areas of comparative advantage
- Improving Market Access and Functioning. Developing institutions to regulate, facilitate, and promote markets, addressing market failures, lowering transaction costs, and reducing social exclusion have direct pro-poor impacts
- Reducing Risk and Vulnerability. Insurance, credit, and savings schemes provide buffers against adversity while enabling the poor to pursue strategies that maximise income
In the past, private sector development for pro-poor growth focussed mainly on small enterprises and agribusiness which were considered important for poor people’s livelihoods. However, it is market outcomes that may be more or less pro-poor rather than types of enterprise. What matters is the extent to which the rate and pattern of growth provides opportunities for the poor. Policy makers need to broaden the agenda of private sector support to encompass the institutions and policies that influence market outcomes. This requires systemic change to alter the incentives of the private sector for delivering pro-poor outcomes. For donors to achieve this:
- Private sector development needs to be a central part of the country assistance that donors provide, rather than being regarded as one tool among many
- The range of skills employed should encompass macroeconomics, governance, institutional change, and the provision of basic social services to reduce poverty traps as well as enterprise development and finance for small business
- Support should be through programmes rather than projects because the greater flexibility allows sequencing of support to be altered if necessary
- Coordination with other donors is necessary to ensure the breadth of interventions required.
