Public funds and private sector investment in economic development

A recent article in the Guardian reports that there is an increasing focus on private sector investment by the U.K. government's international aid agency, the Department for International Development (DfID). The agency's plan to provide £735m over the next three years to the CDC Group, the British development finance institution that specialises in private sector funding, is the immediate subject, but the article also highlights the sharp debate over the role of private sector investment in economic development, particularly when the source for that investment is public funding.

At the heart of this argument is the question of what is the most effective way to eliminate poverty. Some advocate more direct spending on housing and other necessities for the poor, while others argue that a strong private sector will provide jobs and a long-term reduction in poverty, and funding should be provided to businesses that will generate the greatest ROI--even if those businesses have little to no connection to poverty reduction.

The CDC Group's mission is "to support the building of businesses throughout Africa and South Asia, to create jobs and make a lasting difference to people's lives in some of the world's poorest places," according to its website. However, it has been criticized for investing in businesses, such as luxury hotels and high-end shopping centers, that are not focused on improving conditions for the poor.

The minister responsible for DfID points to the just-concluded Addis Ababa agreement, the U.N. sponsored initiative to coordinate global policies on sustainable development, as supporting an increased role for the investment of economic development funds in the private sector:

This is a historic international deal that takes us beyond aid. It is the first ever agreement that allows us to harness private sector investment and developing countries’ domestic resources, including tax revenues, to turbo-charge development.”

Alex Scrivener of Global Justice Now disagrees:

Pushing hundreds of millions of pounds towards the private sector like this at best seems like a waste of taxpayers’ money and at worst could end up actually causing more harm than good in the global south.”

This debate will not end here. The larger question of how the developed world can alleviate poverty and promote prosperity in Africa will require the private sector, non-governmental organizations and governments to try new approaches, measure the results, share information and find ways to work collaboratively. This is a debate of great interest to us as we focus on building new business models for Africa and elsewhere based on the Economics of Mutuality.

-- Yan Toh


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