This study serves two main purposes: i) to inform Sida of the evidence of what works for market development and the results frameworks and results chains derived from it; and ii) to identify the gaps in evidence and recommend what Sida should focus on in evaluating its market development portfolio. It focuses on private sector development (PSD), financial sector development (FSD), trade and the use of instruments. It also includes an appendix on agriculture.
The study conducted a broad review of the literature to develop theories of change (ToC) and then subject the main results chains to the scrutiny of evidence. Evidence has been drawn from studies using a wide variety of methods of evaluation. It focuses on the findings of synthesis evaluations as these are able to rise above project implementation factors to assess what that type of intervention achieves. This helped to identify gaps in evidence and recommend what Sida should focus on in evaluating its market development portfolio.
Key Findings:
- The evidence that private investment and private sector led productivity increases are causal factors in delivering faster, sustained growth is very strong. However, whilst these factors are necessary, they appear not to be sufficient to create jobs and deliver inclusive growth.
- Policies to improve the investment climate and human capital boost growth. However, identifying priorities and the correct sequencing of reforms remains a challenge which calls for more contextual research that takes account not only of what is the binding constraint, but also the feasibility and timescale of implementation.
- Macro level evidence supports the view that financial stability and deepening play a vital, causal role in growth and poverty reduction. Macro stability, good prudential regulation and the preparation of contingency plans to cope with bank failures and financial crises help to promote stability. Good support functions that help to reduce information failures, secure transactions using movable and immovable forms of collateral and exercise creditor rights, are effective in promoting financial deepening. Promoting bank downscaling, micro finance that targets the needs of transformative enterprises and the supply of long-term finance are effective in promoting deepening.
- Macro evidence in support of inclusion is much weaker and micro level evidence has questioned whether microfinance is the magic bullet some had claimed. This evidence does not, however, amount to devaluing the importance of inclusion. Even if it is not a macro driver of growth, it is still important on the grounds of equity, enabling the poor to fulfil their latent potential.
Recommendations:
- It is important to carry out much more research to improve the microfinance business model and its associated products. Additionally, there is a need to target the recipients of microfinance more carefully to support transformative enterprises. The one size fits all approach tried to date may be the cause of the poor results delivered so far.
- Sida should undertake a full-fledged thematic evaluation of its support for market development. A thorough evaluation will enable Sida to ascertain where they are in regards to the development of robust ToCs, the evidence to support the assumptions that underpin them and how effective their interventions have been in delivering outcomes and impacts.
- The important areas that Sida should focus on in its evaluation are: i) the balance of its FSD portfolio across stability, deepening, and inclusion; ii) the extent to which the approach to financial deepening has adopted a systems approach including strengthening support functions; iii) whether the role of non-bank institutions in providing long term finance has been recognised; iv) the extent to which projects to deepen micro, small and medium enterprise (MSME) finance have targeted transformative enterprises; and v) the extent to which projects to promote inclusion have relied on the ‘miracle of microfinance’ or been informed by real evidence on what works for the poor. In addition, it should examine whether its programs in special environments have been adapted to the context.
