The private sector in the poorest countries faces many constraints of which poor access to affordable capital is one. It is not the case that there is no access to capital for many entrepreneurs in the poorest countries. Rather the cost of borrowing may be too high, the institutional environment may make formal borrowing seem onerous or potential borrowers may be unaware of the available options. Private capital flows into the poorest countries are generally lower than that to other developing countries suggesting less available capital in the poorest of the developing countries.
A 2003 UNDP Commission to identify obstacles to the development of the private sector in the developing countries identified three major structural challenges:
- Microenterprises and many small and medium enterprises (SMEs) operate informally, which can restrict access to finance and prevent legal redress in relation to property rights for entrepreneurs and in relation to workers rights for employees.
- Many SMEs lack the finance and skills to scale up their business.
- A lack of competitive pressure shields larger firms from market forces and from the need to innovate and become more productive.
Factors which could favour businesses in the poorest countries include:
- Global macro environment with favourable trade rules
- Domestic macro environment with political stability, good governance, policy predictability, transparency and accountability, and sound macroeconomic policies.
- Physical and social infrastructure with good roads, railways, power and water; and basic education and health.
- Rule of law where rules are applied consistently, transparently and fairly.
- A level playing field.
