Unleashing Entrepreneurship

Commission on the
Private Sector
&
Development
R E P O R T T O T H E S E C R E T A RY - G E N E R A L O F T H E U N I T E D N A T I O N S
UNLEASHING
ENTREPRENEURSHIP
MAKING BUSINESS WORK FOR THE POOR

Commission on the
&
Private Sector
Development
R E P O R T TO T H E S E C R E TA RY - G E N E R A L
O F T H E U N I T E D N AT I O N S
UNLEASHING
ENTREPRENEURSHIP
MAKING BUSINESS WORK FOR THE POOR
1 March 2004
The analysis and policy recommendations of this

Report do not necessarily reflect the views of the
United Nations Development Programme, its
Executive Board or the United Nations Member
States. The Report is an independent publication by
UNDP and reflects the views of the members of the
Commission on the Private Sector and Development.
Copyright © 2004
United Nations Development Programme
One United Nations Plaza, New York, NY 10017, USA
All rights reserved. No part of this publication

may be reproduced, stored in a retrieval system
or transmitted, in any form by any means, electronic,
mechanical, photocopying or otherwise, without
prior permission of UNDP.
COMMISSION MEMBERS
CO-CHAIRS
The Right Honourable Paul Martin
Prime Minister, Canada
Ernesto Zedillo
Director, Yale University Center for the Study of Globalization
Former President, Mexico
MEMBERS
Eduardo Aninat (Chile) Alan Patricof (United States)
Former Deputy Managing Director, Vice-Chairman and Founder, Apax Partners
International Monetary Fund
Kwame Pianim (Ghana)
Jorge Castañeda (Mexico) CEO, New World Investments
Former Minister of Foreign Affairs, Mexico C.K. Prahalad (United States)
Distinguished Professor of Politics & Harvey C. Fruehauf Professor of Business
Latin American Studies, New York University Administration, University of Michigan
Luisa Diogo (Mozambique) Business School
Minister of Planning and Finance, Mozambique Robert Rubin (United States)
Carleton Fiorina (United States) Director and Chairman,
President and CEO, Hewlett-Packard Company Executive Committee, Citigroup
Former Secretary of the Treasury, United States
Rajat Gupta (India)
Senior Partner Worldwide, Miko Rwayitare (South Africa)
McKinsey & Company President and Executive Chairman,
Telecel International
Anne Lauvergeon (France) Owner Mont Rochelle Winery
Chairman of the Executive Board, Areva Group
President and CEO, Cogema Juan Somavia (Chile)
Director-General,
Jannik Lindbaek (Norway) International Labour Organization
Chairman, Statoil ASA
Hernando de Soto (Peru)
Peter McPherson (United States) President, Institute for Liberty
President, Michigan State University and Democracy, Peru
EX-OFFICIO MEMBERS
Maurice Strong (Canada)
Special Adviser to the Commission
Mark Malloch Brown (United Kingdom)
Administrator, United Nations Development Programme
A LT E R N AT E S
Debra Dunn for Carleton Fiorina (United States)
Senior Vice President of Corporate Affairs, Hewlett-Packard Company
Michael Froman for Robert Rubin (United States)
President and CEO, CitiInsurance
C O M M I S S I O N S E C R E TA R I AT
Executive Director: Nissim Ezekiel
Core Team: Jan Krutzinna, Naheed Nenshi, Yann Risz and Sahba Sobhani
UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR i
Photo: Sonya Laurence Green/UNDP Somalia
FOREWORD
E
nding poverty, the aspiration of the Millennium
Development Goals, is the overriding developmental
objective of the 21st century. Despite great progress
in the past 50 years, 1.2 billion people—one-fifth of
the people on Earth—live on less than US $1 a day, without access to many
of the social services basic to a decent human life. Their plight requires a global
response making full use of all the financial, intellectual and organizational
resources that we can muster.
It is against this urgent background that Secretary-General Kofi Annan
asked us to convene the Commission on the Private Sector and Development
to answer two questions. How can the potential of the private sector and
entrepreneurship be unleashed in developing countries? And how can the
existing private sector be engaged in meeting that challenge? This report is
our responses to these questions.
The report offers recommendations on how the major actors—governments,
public development institutions, the private sector and civil society organizations—
can modify their actions and approaches to significantly enhance the ability
of the private sector to advance the development process. The objective of
ii UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR
poverty alleviation leads us to focus based individuals as much as it does believe that it is critical to develop
on developing businesses that create that of the managers and innovators a set of pilot actions and initiatives
domestic employment and wealth— in multinational corporations and that would test the main observations
by unleashing the capacity of large local companies. It is their voices and conclusions of our work—
local entrepreneurs. that we have heard the loudest. so that their relevance to the real
world of development could be
We set an ambitious time limit for The Commission has also
demonstrated on the ground. That
our work, which has been completed attempted to highlight a broad
is why the report ends with an
in a little more than half a year since range of good practices that show illustrative portfolio of actions that
our first meeting in June 2003. Our how the capabilities of the private will be developed in greater detail
intention was not to carry out basic sector can best be harnessed for the over the next few months—actions
research. Much work on the subject cause of development and poverty that could be implemented on a
is already under way, and major alleviation. The cases include pilot basis shortly thereafter. Some
development agencies, private successful approaches that originate of them could be driven by the UN
foundations and academic institutions with the traditional development system, and some by other partners
are already focusing their energies players, such as the multilateral and stakeholders.
on the private sector’s contributions development institutions and
to development. Instead, our approach bilateral aid agencies. But more These initiatives are far from
has been to understand and assimilate often they include lesser known but enough. We put them out to all of
the work already carried out by all innovative approaches implemented you as indicative of the types of
parts of the development coalition, by the private sector—both by actions that we believe can and
including business, civil society and companies and civil society should be replicated for the widest
labour organizations, and to integrate organizations. Those approaches possible impact. Nor do we believe
that thinking in the framework rely on market mechanisms and that each of them is a perfect model.
presented here. private sector incentives and thus Country differences require modifying
lend themselves much more to the the initiatives—as well as some of
The Commission’s work has been our overall recommendations—to
replicability and scalability that
heavily influenced by the voices of fit particular circumstances. Our
we believe needed. One of our key
entrepreneurs, expressed through ideas and conclusions are presented
observations is the lack of knowledge
their actions and through their as directional, to elicit reaction and
about best practices and the great
responses to wide-ranging surveys constructive dialogue. The intent is
need for more sustained research
launched to understand what most to catalyze a renewed coalition of
and analysis of what works and
affects their ability to be productive the major stakeholders—focused
what doesn’t.
and to grow. It is the capacity, drive more clearly on the challenges
and innovation of entrepreneurs We concluded at the outset that outlined here. Such a coalition is
that increase the impact of a it would not be enough for this essential to unleashing the capacity
broadly constituted private sector. Commission to produce a traditional of the private sector, to achieving
Entrepreneurship encompasses the report voicing opinions and urging the Millennium Development
actions of small, informal, village- others to take action. Instead, we Goals and to alleviating poverty.
Paul Martin Ernesto Zedillo

Co-Chair Co-Chair
UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR iii
Photo: Luc Anh/UNDP
ACKNOWLEDGEMENTS
I
he Commission’s work would not have been
possible without the input and assistance of many
individuals and organizations. We are deeply
grateful to all those listed here.
A SPECIAL THANKS…
To McKinsey & Company, who provided input and counsel to the Commission
and its Secretariat throughout the project. The team of Maria Blair, Michael
Monson and Mark Templeton was led by Tilman Ehrbeck, Diana Farrell,
Jeremy Oppenheim and Les Silverman.
To Jennifer Barsky, Prabal Chakrabarti and Irene Philippi who also provided
vital inputs to the work of the Secretariat.
READERS AND EXPERTS

Our work has been informed by many who have gone before, and a number
of them generously gave of their time and expertise to help shape our thinking.
These include: Adrian Hodges, International Business Leaders Forum;
iv UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR
Lalita Gupte, Mahdav Kalyan Bill Kramer, Water Research Institute; Arvind Gupta, Jemal-ud-din
and K. V. Kamath, ICICI Bank; Hugh Locke, Locke Associates; Kassum, Michael Klein, Khalid
Nandan Nilekani and Sanjay Purohit, Bill Draper, DraperRichards; Mirza, Francois Nankobogo, Neil
Infosys Ltd.; Percy S. Mistry, Joaquim Boborquez; Maria Cattaui Roger, Marilou Uy and Dileep
Oxford International Group; Livanos and William Stibravy, Wagle, the World Bank; Gerald T.
Richard Frank, Bob Graffam, Julio the International Chamber of West, the Multilateral Investment
Lastres and Alexander Schwedelheim, Commerce; Robert Litan, Robert Guarantee Agency; Jonathan
Darby Overseas Investments Ltd; Chernow, The Ewing Marion Fiechter and Prakash Loungani,
Michael Barth, Netherlands Kauffman Foundation; Professors the International Monetary Fund;
Development Finance Company; John McMillan and Paul Milgrom, Karen Decker and Arvind Mathur,
Nancy Bearg, Enterprise Works; Stanford University; Christopher the Asian Development Bank;
Gary Bond, Noreen Doyle and Woodruff, University of California, Nancy Boswell, Transparency
Michael McCullough, the European San Diego; Professor Jonathan International; Antonio Vives, the
Bank for Reconstruction and Morduch, New York University; Inter-American Development
Development; Cameron Rennie, Jeb Brugman and Craig Cohon, Bank; and Ric Cameron and
the World Business Council for GlobalLegacy; Bob Fitch, Arthur Saper, the Canadian
Sustainable Development; Enrique Enterplan; Daniel Zelikow, International Development Agency.
Ferraro, Jim Kaddaras and Maria JP Morgan; Kenny Pegram and
Otero, Accion; Jide Zeitlin, Ray Smilor, the Foundation for CONSULTATIONS
Goldman Sachs; Masood Ahmed, Enterprise Development; Sunil
David Stanton and Adrian Wood, Sinha, Emerging Market Economics; The Commission Secretariat
the U.K. Department for Roland Dominicé and Jean-Philippe conducted four formal consultations
International Development; de Schrevel, BlueOrchard; with international labour represen-
Professors Michael Chu, Calestous Professor Roger Leeds, Johns tatives; European foundations,
Juma, Tarun Khanna, George Hopkins University; Professor academics, and Canadian civil
Lodge, Michael E. Porter, Iqbal Ted London, the Base of the society organizations. Our thanks
Quadir and Deborah Spar, Harvard Pyramid Learning Laboratory at to the hosts of these consultations,
University; Michael Fairbanks, the University of North Carolina; including the International Labour
On the Frontier; Craig Wilson, John Richardson and Sevdalina Organization and the European
DeltaPearl; Elli Kaplan; Benjamin Rukanova, the European Foundations Foundations Centre, as well as to
Krutzinna; Neysan Rassekh; Alex Centre; Kenneth Borghese, John participants of these consultations,
Shakow; George Ivanov; Eleonore E. Wasielewski, the United States who included: Bob Kyloh, workers’
Kopera, Business Humanitarian Agency for International relations branch, the International
Forum; Barbara Samuels, Samuels Development; S. Aftab Ahmed, Labour Organization; Raul Requena,
Associates; Donald Snodgrass, Sabine Durier, Mariann Kurtz, Union Network International;
Development Alternatives, Inc.; Guy Pfeffermann, Harold Rosen, Wendy Caird, Public Services
Elizabeth Littlefield, CGAP; Thomas Schipani, Bernard Sheahan International; Carla Coletti, the
and Udayan Wagle, the International International Metalworkers’
Finance Corporation; Gerard Byam, Federation; Esther Busser, the
Cesare Calari, Gerard Caprio, International Confederation of
Free Trade Unions; Sándor Köles,
the Carpathian Foundation;
ACKNOWLEDGEMENTS v
Matthieu Vanhove, Cera Holding; North-South Institute; and Kathy Gilbert Houngbo, Lauren Canning,
William White, the Charles Vandergrift, World Vision Canada. Alan J. Lee and Mark Suzman;
Stewart Mott Foundation; Dario Djibril Diallo, Victor Arango,
Disegni, Compagnia di San Paolo; UNITED NATIONS Carmen Higa, Hyacinth Morgan
Charles Buchanan, the Luso- and William Orme in the
American Foundation; Michael Many within the extended UN Communications Office of the
Brophy, Help for All Trust; Luc family gave generously of their time Administrator; Christina Barrineau,
Tayart de Borms, the King Baudouin and expertise, including Michael Normand Lauzon and Peter Kooi
Foundation; Michel Bourges Henriques and Stephen Pursey at the of the United Nations Capital
Maunaury, the Madariaga European International Labour Organization; Development Fund; and Bibi
Foundation; Raymond Georis Wilfried Luetkenhorst and his team Amina Khan and Golda Kruss
and Alexandre Kirchberger, the at the United Nations Industrial who provided assistance to the
Network of European Foundations Development Organization; Commission Secretariat.
for Innovative Cooperation; Ineke Georg Kell and his team, Global
Derkzen, the Rabobank Foundation; Compact; and Antti Piispanen,
EDITING, DESIGN
John Mroz, the EastWest Institute; Lorraine Ruffing, Karl Sauvant and
AND PRODUCTION
Charles Maynes, the Eurasia the team at the United Nations
Foundation; John Wyn Owen, Conference on Trade and Last but not least, we thank whole-
the Nuffield Trust; David Dollar, Development. Our thanks also heartedly those who have helped us
the World Bank; Michael Klein, to John McArthur and his team with the editing, production and
the World Bank Group; Raymond of the Millennium Project; and translation, working under very
Fisman, Columbia University; colleagues in the United Nations tight deadlines: Bruce Ross-Larson
Florencio Lopez-de-Silanes, Yale Development Programme (UNDP): and Meta de Coquereaumont,
University; Nazeer Aziz Ladhani, Zéphirin Diabré, Associate Elizabeth McCrocklin, Thomas
the Aga Khan Foundation; Gerry Administrator; Bruce Jenks of the Roncoli and Christopher Trott of
Barr, the Canadian Council for Bureau of Resources and Strategic Communications Development,
International Co-operation; Partnerships, who provided the over- Inc.; Julia Dudnik-Ptasznik of
John Watson of Cooperative for all UNDP guidance to the project; Colonial Communications; Michel
Assistance and Relief Everywhere Sanjay Gandhi, Connie Gratil, Coclet; Edward Ranney Carta
(CARE) Canada; Patricia McCullagh, Sirkka Korpela and Casper of EurOz Technologies; Thomas
Ric Cameron and Arthur Saper, Sonesson, also of the Bureau of Barbush and the team at Moore
the Canadian International Resources and Strategic Partner- Wallace-Hoechstetter Printing;
Development Agency; Michel ships; Kalman Mizsei of the Bureau Kaika Clubwala of A.K. Office
Chaurette, the Canadian Centre for Europe and CIS; Shoji Supplies and Elizabeth Scott Andrews,
for International Studies and Nishimoto of the Bureau for Naeem Arastu, Sokhna Diouf,
Cooperation; Pam Foster, the Development Policy; Hafiz Pasha Françoise Gerber, Rajeswary
Halifax Initiative; Molly Kane, of the Bureau for Asia and the Iruthayanathan, Maureen Lynch
Inter Pares; Robert Letendre, the Pacific; the staff of the Office of and Jeremy Owens of UNDP.
Canadian Catholic Organization the Administrator, particularly
for Development and Peace;
Mark Fried and Rieky Stuart,
OXFAM Canada; Roy Culpeper, the
TABLE OF CONTENTS
COMMISSION MEMBERS
FOREWORD i
ACKNOWLEDGEMENTS iii
HIGHLIGHTS 1
C H A P T E R 1 . W H Y T H E P R I VAT E S E C T O R
I S S O I M P O R TA N T I N A L L E V I AT I N G P O V E R T Y 5
Deep poverty remains intractable 6
The private sector is important for the poor—and often is the poor 7
Who are all the entrepreneurs? 8
A focus on the domestic private sector 9
CHAPTER 2. CONSTRAINTS ON THE

P R I VAT E S E C T O R I N D E V E L O P I N G C O U N T R I E S 11
Widespread informality for microenterprises 12
Few competitive small and medium size enterprises 13
Lack of competitive pressure on large companies 14
Foundations for entrepreneurship—not yet in place 14
Three pillars of entrepreneurship—too often missing 17
CHAPTER 3. UNLEASHING THE

P O T E N T I A L O F T H E P R I VAT E S E C T O R 21
Building the foundations 23
Erecting the pillars 24
CHAPTER 4. ENGAGING THE

P R I VAT E S E C T O R I N D E V E L O P M E N T 29
Serving markets at the bottom of the pyramid 30
Forming ecosystems and building networks 30
Fostering public-private partnerships for sustainable development 33
Improving corporate governance 34
Advancing responsible business practices
and corporate social responsibility standards 34
CHAPTER 5. RECOMMENDED ACTIONS 37

Actions in the public sphere: create an enabling environment 38
Actions in the public-private sphere: partner and innovate 40
Actions in the private sphere: mobilize capabilities and resources 41
Looking forward 42
BIBLIOGR APHIC NOTE 43
BIBLIOGRAPHY 45
B OX E S
Box 1.1 The Millennium Development Goals 7
Box 3.1 Costa Rica’s private sector—unleashed 27
Box 4.1 Resources under the radar screen for private sector development 30
Box 4.2 Showing what’s possible at the bottom of the pyramid 32
FIGURES
Figure 1.1 More investment—more growth 7
Figure 1.2 Four billion people at the bottom of the pyramid 8
Figure 2.1 Informality thrives in poorer countries 12
Figure 2.2 Small and medium enterprises become more important
and informality less important as countries become wealthier 13
Figure 2.3 Foundations for the private sector
and pillars of entrepreneurship 15
Figure 2.4 Enterprises in low income countries face
many more burdens when registering 17
Figure 3.1 Strengthening the effectiveness of traditional
private sector development activities 22
Figure 4.1 Private sector contributions to private sector development 30
Figure 5.1 Actions in the three focus areas 38
UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR 1
Photo: Pedro Cote/UNDP
HIGHLIGHTS
I
he Commission believes that any approach to private
sector development—and the policy and action
recommendations that accompany it—should be
grounded in the realization that the savings, investment
and innovation that lead to development are undertaken largely by private
individuals, corporations and communities.
The private sector can alleviate poverty by contributing to economic
growth, job creation and poor people’s incomes. It can also empower poor
people by providing a broad range of products and services at lower prices.
Small and medium enterprises can be engines of job creation—seedbeds
for innovation and entrepreneurship. But in many poor countries, small and
medium enterprises are marginal in the domestic ecosystem. Many operate
outside the formal legal system, contributing to widespread informality and
low productivity. They lack access to financing and long-term capital, the
base that companies are built on.
The Commission believes that the primary responsibility for achieving
growth and equitable development lies with developing countries. This
2 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR
responsibility includes creating the 2. In the public-private sphere, with representatives of the domestic
conditions that make it possible facilitating cooperation and private sector to implement changes
to secure the needed financial partnerships between public and and ensure that the voice of the private
resources for investment. private players to enhance access sector includes small and medium
to such key factors as financing, enterprises and microenterprises.
Those conditions—the state of
skills and basic services.
governance, macroeconomic and For developed
3. In the private sphere,
microeconomic policies, public country governments
encouraging the development
finances, the financial system and Foster a conducive international
of business models that can be
other basic elements of a country’s macroeconomic environment and
scaled up and copied and that
economic environment—are largely trade regime. Increasing the flow of
are commercially sustainable.
determined by the actions of development aid and reforming the
domestic policymakers. Their global trading system to provide fair
challenge is to capitalize on advances ACTIONS IN THE economic opportunities to producers
in macroeconomic stability and PUBLIC SPHERE: from developing countries are
democracy and to launch reforms CREATE AN ENABLING essential for promoting rapid growth
that bring about further changes in ENVIRONMENT in domestic private investment.
institutional frameworks to unleash Creating an enabling environment Redirect the operational
and foster the private sector. involves steps to reduce the share of strategies of multilateral and
Most of the recommended actions the informal sector in an economy, bilateral development institutions
involve more than one of the through reform of the overall and agencies. In encouraging
actors working together. Where enabling environment for the sustainable private sector develop-
governments are implementing formal economy. ment developed countries need to
policy change, it is often with the For developing ensure that the collective actions
direct support and involvement of country governments of these agencies are better
multilateral development institutions. Reform regulations and strengthen coordinated—to improve their
Where the private sector is taking a the rule of law. Developing country efficiency and to reduce the pressures
more active stance on sustainable governments have to make a strong on the administrative capacity of
development, it is often with civil and unambiguous policy commit- developing country governments.
society raising the profile of this ment to sustainable private sector Untie aid. Changes in the
issue. Where governments are development—and combine that administrative rules controlling
implementing regulatory reform, with a genuine commitment to tied funds would permit more
it may be in direct consultation reform the regulatory environment effective use and delivery of
with representatives of the private by eliminating artificial and policy- technical assistance to stimulate
sector. The individual actions induced constraints to strong private sector development.
identified here should be seen in economic growth.
the framework of this broader For multilateral
cooperation—needed even more Formalize the economy. development institutions
to reduce poverty. Developing country governments Apply the Monterrey recommen-
need to focus on creating the dation of specialization and
Our interest lies in three areas: conditions to reduce informality partnership to private sector
1. In the public sphere, promoting and change the composition of the development activities. The
the reform of laws, regulations private sector ecosystem over time. extent of overlapping activities is
and other barriers to growth. Engage the private sector in counterproductive and needs to
the policy process. Governments be urgently addressed.
need to create a real partnership Address informality in developing
countries. Some pioneering work
is underway to map the structure of
the informal sector, and a global
HIGHLIGHTS 3
effort to expand the coverage For the private sector Increase accountability in the
of this work is likely to yield Channel private initiative system. This is a core part of the
significant benefits. into development efforts. We work of civil society organizations,
believe that the private sector has as is their leadership in pushing
ACTIONS IN THE tremendous potential to contribute forward the concept of sustainable
PUBLIC-PRIVATE to development through its development. This work should
SPHERE: PARTNER knowledge, expertise, resources be strengthened.
AND INNOVATE and relationships.
Develop new partnerships and
The Commission believes that all Develop linkages with relationships to achieve common
stakeholders need to make concerted multinational and large domestic objectives. Civil society organizations
efforts in finance, skills and public- companies to nurture smaller are closest to the base of the pyramid.
private partnerships for the delivery companies. Linkages between They also are often proxies for
of basic services. different types of firms in experimenting with new technologies
developing countries provide an for solving problems.
Facilitate access to broader effective channel for local companies
financing options. We envision to gain access to markets, financing,
continuing development of domestic LOOKING FORWARD
skills and know-how.
financial markets coupled with To promote progress, the Commission
skill-building for regulators and Pursue business opportunities recommends that the United Nations
private financial institutions. in bottom-of-pyramid markets. sponsor the tracking of private
Recognizing the needs of bottom-of- sector development. An annual
Assist skill and knowledge the-pyramid markets (the 4 billion
development. Skill-building progress report would maintain the
people who are earning less than prominence of the Commission’s
activities could range from
$1,500 a year) and creating innovative overall recommendations and ensure
programs for top public and
solutions to meet these needs are the commitment to addressing the
private leadership to training
other vital actions required from many issues identified here.
microentrepreneurs to joint efforts
the private sector, both domestic
with public authorities and unions The Commission is assembling
and international.
to improve workforce skills. a first set of actionable initiatives
Set standards. The private to facilitate transformations in
Make possible sustainable delivery
sector needs to make a genuine individual countries and to provide
of basic services, particularly energy
commitment to sustainable the tools for governments and
and water. The Commission sees
development—with a sharp the private sector to supplement
the need to develop innovative
focus on corporate governance available resources and begin rapidly
models for partnerships of
and transparency. implementing a programme of
governmental service providers,
multinational companies and For civil society and change. These first actions are
local companies. labour organizations intended to stimulate a collaborative
The Commission believes that civil response from potential partners
society and labour organizations who read this report. Our message
ACTIONS IN THE
PRIVATE SPHERE: have to continue as critical to all of you is: join us.
MOBILIZE CAPABILITIES observers of the development
AND RESOURCES agenda—and as facilitators and
supporters of innovative approaches
The Commission believes that the for meeting the Millennium
private sector, particularly large Development Goals and improving
local companies and multinational the quality of life for poor people.
corporations, must realize that
it can contribute to accelerated
economic development and to
poverty alleviation.
Photo: Boris Missirkov
CHAPTER 1
WHY THE PRIVATE SECTOR

IS SO IMPORTANT IN
ALLEVIATING POVERTY
I
his report is about walking into the poorest village
on market day and seeing entrepreneurs at work.
It is about realizing that the poor entrepreneur
is as important a part of the private sector as the
multinational corporation. It is about acknowledging that the private sector
is already central to the lives of the poor and has the power to make those
lives better. It is about using the managerial, organizational and technological
innovation that resides in the private sector to improve the lives of the poor.
It is about unleashing the power of local entrepreneurs to reduce poverty in
their communities and nations.
The Millennium Development Goals, ambitious in scale and scope, can be
achieved only through committed application of best knowledge and practice.
The problem is huge, with a fifth of the planet’s people living on less than
$1 a day. But some encouraging examples show how private enterprise can
alleviate poverty. Consider garment exports in Bangladesh, information
technology in Costa Rica and cut more than one-third of electricity DEEP POVERTY
flowers in Kenya—new industries customers nationwide. REMAINS INTRACTABLE
creating jobs, boosting incomes, ■ Fierce competition between
lifting hopes. And consider the private locally owned mobile Despite great progress in some
following successes, ranging from phone companies in Somalia has countries and regions, deep poverty
modern multinationals to domestic driven costs on international remains a stubborn and intractable
entrepreneurs, demonstrating phone calls to less than $1 a problem across much of the world.
the potential of private return minute, about a sixth that in Substantial gains in some countries
to boost development. many other African countries. have been accompanied by deep
This, in a country where there losses in others, and far too many
■ Cemex, the Mexican cement people still earn less than $1 a day,
is no official banking or postal
firm, has become one of the suffer from hunger and lack access
system and where many do
world’s leading producers and to water, sanitation and energy.
not have regular running water
innovators in the industry, The latest Human Development
or electricity.
employing thousands. Report of the United Nations
■ In Guatemala the Confederation
■ Casas Bahia in Brazil has Development Programme reports
of Agricultural Cooperatives
developed a unique business that the proportion of people in
formed a joint venture with a
model providing efficient retail extreme poverty fell to 23.2% in
Canadian firm. The enterprise
services aimed at poorer customers. 1999 from 29.6% in 1990. But the
now exports vegetables worth
■ Infosys, an Indian information number of people living on $1 a
more than $3 million a year
technology services firm, grew day slipped only to 1.17 billion from
to Canada, providing steady
from less than $10 million in 1.29 billion a decade earlier. Moreover,
income for 100 indigenous
sales in the early 1990s to become if the dramatic improvement in
women and supporting more
a leading global player with China’s poverty indicators is excluded,
than 1,000 farmers.
almost $800 million in sales the number of people living in
■ In Mozambique a farmer bought
today. Along the way, it has also absolute poverty actually increased.
an oilseed press on credit. Now
been setting international standards
as the owner of four presses, he In recent years poverty alleviation
for corporate governance and
has organized nine other press has moved to the centre of the global
creating a new partnership for
operators into a small cooperative dialogue as the primary overriding
development with local and
association, bargaining with local objective of development—not a
central government.
banks and customers as a group. derived outcome. The Millennium
■ ICICI Bank, also in India, is
■ In India small-scale soybean Declaration was an unprecedented
applying technology and a
farmers use a village Internet expression of solidarity and determi-
comprehensive approach to the
kiosk to check spot prices for nation to rid the world of poverty,
full range of its client base—
their products on the Chicago committing countries, rich and
particularly in rural markets and
Board of Trade’s website, poor, to eradicate poverty, promote
to small and medium enterprises
bypassing local intermediaries human dignity and equality and
and microentrepreneurs.
and getting better prices. achieve peace and environmental
■ In Cambodia hundreds of small
sustainability. It led to agreement
private providers offer services These examples are not just success
on the Millennium Development
ranging from battery recharging stories—they are stories about the
Goals (box 1.1).
to fully metered electricity successes of the domestic private
provision for entire communities. sector. They are what this report is Yet progress is more than possible—
These providers now serve an about. But moving from example and it occurs with regularity under the
estimated 115,000 customers— to broad achievement requires right conditions. Economic growth
thinking freshly about development, has lifted hundreds of millions of
unconstrained by ideology, unhinged people out of subsistence agriculture
from tired debate. into manufacturing and service
employment, increasing wealth
and reducing poverty. Witness the
C H A P T E R 1 : W H Y T H E P R I VAT E S E C T O R I S S O I M P O R TA N T I N A L L E V I AT I N G P O V E R T Y 7
BOX 1.1 T H E M I L L E N N I U M FIGURE 1.1 MORE INVESTMENT—MORE GROWTH

DEVELOPMENT GOALS
16
■ Private ■ Public
Investment as percent of GDP, 1970–98

1. Eradicate extreme poverty and
hunger: reduce by half the proportion 14
of people living on less than $1 a day;
reduce by half the proportion of people 12
who suffer from hunger.
10
2. Achieve universal primary education:
ensure that all boys and girls complete 8
a full course of primary schooling.
6
3. Promote gender equality and
empower women: eliminate gender 4
disparity in primary and secondary
education by 2005, and at all levels of 2
education by 2015.
4. Reduce child mortality: reduce by 0
< 3% 3–5% > 5%
two-thirds the mortality rate for children
Growth rates, 1970–98
under five.
5. Improve maternal health: reduce Source: Bouton and Sumilinski (2000)
by three-quarters the maternal
mortality ratio.
6. Combat HIV/AIDS, malaria and other
6.4% resulted in a 15% decline in quantity of employment and the
diseases: halt and begin to reverse the the rate of poverty (using the $2 a rate of pay are crucial. For the self-
spread of HIV/AIDS; halt and begin to day criterion), and in South Asia employed, productivity and returns
reverse the incidence of malaria and 3.3% annual growth led to an 8.4% are important, influenced by
other major diseases.
decline. In contrast, the slow growth technology, inputs and prices.
7. Ensure environmental sustainability:
of 1.6% in Latin America and the Employment is thus the key link
integrate the principles of sustainable
development into country policies Caribbean and 1.0% in the Middle between output growth and
and programmes; reverse the loss of East and North Africa caused a poverty alleviation.
environmental resources; reduce by marginal deterioration in poverty
half the proportion of people without
sustainable access to safe drinking water rates. More dramatically, negative THE PRIVATE SECTOR
and basic sanitation; achieve significant growth rates increased poverty rates IS IMPORTANT FOR
improvement in the lives of at least by 1.6% in Sub-Saharan Africa and
100 million slum dwellers by 2020.
THE POOR—AND
13.5% in Europe and Central Asia. OFTEN IS THE POOR
8. Develop a global partnership
for development. The message is clear: sustained The private sector is central to the
economic growth reduces poverty. lives of the poor. First, all poor
The link is equally clear between people are consumers. Across the
dramatic improvement in the living economic growth and strong private
standards in East Asian countries, world the story is the same—poor
investment. A study of 50 developing consumers pay more than rich
including Indonesia, The Republic of countries from 1970 to 1998 examined
Korea, Malaysia and Thailand, and consumers for basic services. In
the relationship between private Mumbai, slum-dwellers in Dharavi
the sizable reduction in the number and public investment and growth
of people in poverty in China. pay 1.2 times more for rice, 10 times
and incomes. Countries with higher more for medicine and 3.5 times
The impact of economic growth, growth featured higher private more for water than do middle class
overall, on poverty depends on a investment (figure 1.1). people living at the other end of
range of factors that influence the But for output growth to contribute the city on Bhulabhai Desai Road.
nature of this growth, but the empirical to poverty alleviation, it must translate
evidence is compelling. In East Asia into incomes of the poor. For wage
and the Pacific, the region with the labourers and salaried workers, the
strongest growth in the 1990s,
annual per capita GDP growth of
Fully 4 billion people in the world— F I G U R E 1 . 2 F O U R B I L L I O N P E O P L E AT T H E B O T T O M O F T H E P Y R A M I D

those who earn less than $1,500 a
year—make up the “bottom of the Purchasing power Population
parity in dollars in millions
pyramid” markets (figure 1.2).
The quality of goods that poor > $20,000 Tier 1 75–100
people purchase—whether food,
water or financial services—is
almost always substandard. Often, $1,500–20,000 Tiers 2–3 1,500–1,750
an informal private sector fills the
gaps with goods of higher prices
and varying quality. It serves an
important need, for informal
< $1,500 Tier 4 4,000
economies sustain the majority of
poor families in many countries.
Yet the advantages of economies
of scale and scope are missing Source: Prahalad and Hammond (2002)
from the lives of people at the
bottom of the pyramid. Some of
the barriers are poor marketing data on the distribution of new The first creates employment
and poor distribution. water connections by income and income growth. The second
quintile from three countries in improves the quality of life for the
The private sector is already Latin America show that 25–30% poor. And the greater interaction
meeting the needs of poor people of the network expansion was between those at the base of the
in places governments do not reach. targeted at the lowest fifth of pyramid and the private sector creates
In some countries, for example, the income profile. opportunities for direct involvement
the government has little impact on in the market economy.
the poor. In the slums there are no Put simply, an innovative private
health services, no public education sector can find ways to deliver
and no infrastructure. This story low-cost (even sophisticated) WHO ARE ALL THE
repeats itself across the developing goods and services to demanding ENTREPRENEURS?
world. In many cases, where services consumers across all income ranges. The Commission takes an expansive
exist, they are provided by private It can sell to the urban distressed view of the private sector. Large
sources. Anywhere from 15% area as well as the poor rural village companies are a vital part of the
to 90% of primary education is or town. It can develop distribution private economy, but the poor are
provided in private schools. Some links to the consumer in the village an equally important part. They are
63% of health care expenditures in and so be better able to harness often entrepreneurs themselves—
the poorest countries are private, knowledge about the actual needs frequently of necessity, operating
almost twice the 33% in high of this segment of the market. informally, trapped in subscale
income countries that belong to It can keep costs low through enterprises. We endorse the view
the Organisation for Economic outsourcing, for greater flexibility. that market-oriented business
Co-operation and Development. The private sector can thus alleviate ecosystems comprise many forms
poverty by: of private enterprise coexisting
With the right attention and
in a symbiotic relationship. The
regulatory requirements, privately ■ Contributing to economic growth. ecosystem generally includes
provided services can help meet ■ Empowering poor people by multinational corporations, large
the needs of poor people. Recent providing them with services and domestic companies, cooperatives,
consumer products, increasing small and medium enterprises and
choices and reducing prices. microenterprises, with formal and
informal players. It thus encompasses
C H A P T E R 1 : W H Y T H E P R I VAT E S E C T O R I S S O I M P O R TA N T I N A L L E V I AT I N G P O V E R T Y 9
the farmer in the field as much as executives take the initiative to the potential value of land, the
the multinational company. innovate and expand the business. domestic assets that can be tapped
This report highlights many are significantly larger than the
Agriculture is of particular interest
instances of large companies that cumulative FDI or private portfolio
because 75% of the people living
have targeted bottom-of-the-pyramid flows. Third, unleashing the domestic
on less than $1 a day are in rural
markets and developed products resources in an economy—both
areas, with livelihoods dependent
and processes to serve the poor financial and entrepreneurial—is
on mostly subsistence production.
profitably or to operate sustainably likely to create a more stable and
In Africa agriculture supports
in very challenging environments. sustainable pattern of growth.
more than 70% of the population,
Entrepreneurship by individual
contributing an average of 30% Estimates of the informal assets in
engineers and executives is often
of GDP. Providing inputs to the developing countries range as high
at the root of such moves by big
agricultural sector and the value as $9.4 trillion, many multiples of
corporations, which can have a major
added processing and marketing cumulative portfolio flows or of
positive impact on development.
of agricultural goods are important FDI flows to developing countries
parts of private sector development. Entrepreneurship also drives many over the past 15 years. These
The critical importance of agriculture civil society organizations, and it comparisons are illustrative only,
in alleviating poverty reinforces exists in government and public comparing flows and stocks of assets.
the need for urgent progress on administrations. Individuals in these
Converting informal assets into
eliminating subsidies for producers organizations have the drive to
financial resources will require a
in developed markets, and on innovate and pursue opportunities
broad programme of reform that
trade reform. with the passion and dedication of
will enable these assets to be used
an entrepreneur, albeit with little
In many developing countries, as collateral in the banking system.
if any pecuniary reward.
women constitute the majority of But keep in mind the size of these
microentrepreneurs in the informal Entrepreneurship flourishes assets. Recent work in Egypt, for
economy and a significant percentage perhaps most in small and medium example, concludes that the country
of the formal sector. Many of them firms with significant potential to has a large and vibrant extra-legal
are illiterate and live in poor rural grow and innovate. This dynamic economy that employs over 8
communities. And setting up segment is typically the hotbed of million people (about 40% of the
their own enterprises—generally entrepreneurship and innovation. workforce) and has assets of almost
microenterprises—is usually the It can drive economic growth, $250 billion, 30 times the market
only possibility for them to be create jobs and foster competition, value of all companies registered
employed and earn an income innovation and productivity. on the Cairo Stock Exchange.
on their own. In Latin America
This focus on the domestic
and the Caribbean between 25% A FOCUS ON private sector does not diminish
and 35% of formal sector micro- THE DOMESTIC the importance of FDI. Beyond the
enterprises and small and medium PRIVATE SECTOR financial resources that FDI brings,
enterprises are owned and operated
We focus here on the domestic its infusion of a corporate culture
by women. In the Philippines women
private sector—for three main can change the way business is
own 44% of the microenterprises,
reasons. First, domestic resources done, bring managerial know-how
more than 80% in rural areas.
are much larger than actual or and best practices, provide access
In Zimbabwe women run the
potential external resources. to international markets, transfer
majority of microenterprises and
Domestic private investment technology and innovation, introduce
small enterprises (67%), while
averaged 10–12% of GDP in the competitive pressures in previously
enterprises run by men tend to
1990s, compared with 7% for closed markets and be the principal
provide proportionally more of
domestic public investment and driver for the growth of local business.
the household income and have
2–5% for foreign direct investment In these situations, FDI can improve
more employees.
(FDI). Second, when informal the overall investment climate.
Entrepreneurship exists in large resources are examined, such as
companies, where individual
Photo: UNDP Cuba
CHAPTER 2
CONSTRAINTS ON
THE PRIVATE SECTOR IN
DEVELOPING COUNTRIES
D
eveloping countries have remarkable energy
and assets, and all segments of the private sector
have demonstrated the ability to respond when
empowered. But the Commission finds that three
major structural challenges confront the private sector in all developing
countries, to varying degrees.
■ Microenterprises and many small and medium enterprises operate informally.
■ Many small and medium enterprises have barriers to growth.
■ A lack of competitive pressure shields larger firms from market forces
and the need to innovate and become more productive.
12 U N L E A S H I N G E N T R E P R E N E U R S H I P : M A K I N G B U S I N E S S W O R K F O R T H E P O O R
FIGURE 2.1 INFORMALIT Y THRIVES IN POORER COUNTRIES

could otherwise be invested in making
operations more productive.
Estimated share of nonagricultural
workforce that is informal Cruel and arbitrary informal
enforcement systems limit the ability
Portugal 30 of entrepreneurs to be productive
as well. Local debtor prisons and
Chile 38
mafia-like punishments can hurt
Mexico 40 an entrepreneur’s full access to
crucial human inputs. According to
Thailand, Turkey, Brazil 50 Hernando de Soto, a third of debtors
India, Indonesia,
who obtained credit informally in
Pakistan, Philippines 70 Egypt spent some time in private
jails because they did not pay back
Sub-Saharan Africa 80
what they owed.
Source: World Bank and International Labour Organization

Entrepreneurs who operate formally
are hurt by the implicit subsidies
that informal enterprises receive
WIDESPREAD Difficulties in getting finance also through uneven enforcement and
INFORMALITY FOR trap developing country entrepreneurs by poor mechanisms for protecting
MICROENTERPRISES in subscale operations. Entrepreneurs property and contracts, both of which
and enterprises that operate informally distort competition. Both aspects
Microentrepreneurship is a common cannot borrow at a reasonable cost create an uneven playing field and
form of employment in many
because they do not have legal status reduce formal entrepreneurs’ access
developing countries (figure 2.1).
or title to the land they occupy. to inputs and markets, discouraging
Almost all microenterprises operate
Frequently, the only option for entrepreneurs who operate formally
outside the formal legal system,
access to capital is through illegal from making investments to
contributing to widespread informality.
moneylenders who charge high increase productivity.
Informality provides some benefits rates and who may be able to lend
Informal firms can charge less
in some circumstances. It can act as only small sums relative to the
because they avoid paying taxes or
a form of employment substitution needs of a growing enterprise.
complying with other regulations.
for labourers who have difficulty
The access of businesses that More productive formal firms have
finding jobs. For example, urban
operate informally to the formal difficulty capturing market share
dwellers in Thailand who lost their
legal system and its benefits are from informal firms because the
jobs during the economic crisis of
limited. In general, the formal legal formal firms pay taxes and other
the late 1990s supported themselves
system should enforce contracts and contributions, which increases their
by turning to informal street-vending
protect property rights more fairly costs significantly. More productive
opportunities. In societies that limit
than informal enforcement systems do. firms are less able to drive the less
the economic role of women, home-
Predictable rules and dispute competitive informal firms out
based enterprises provide women
resolution mechanisms are essential of business. So, poor enforcement
with opportunities to earn money.
for entrepreneurs to engage in the permits the informal firms to
If the formal rules, enforcement
long-term arrangements that enable continue to exist, holding back the
systems and cultural conditions in a
them to innovate, to scale up and productive firms from reaching
country are so restrictive that most
to diffuse their knowledge and maximum scale. Yet, given the
entrepreneurs cannot use their
significant productivity advantage
talents, the economy may benefit benefits. Side payments to officials
held by formal firms, the inability
if they operate informally. that increase predictability in an
to compete may reflect an unwill-
uncertain world reduce income that
ingness to serve some parts of
the market rather than the cost
advantages offered by informality.
C H A P T E R 2 : C O N S T R A I N T S O N T H E P R I VAT E S E C T O R I N D E V E L O P I N G C O U N T R I E S 13
Moreover, worker rights and developing countries, exposing FIGURE 2.2 SMALL AND MEDIUM
protections in the informal sector formal entrepreneurs to even more E N T E R P R I S E S B E CO M E M O R E
I M P O R TA N T A N D I N F O R M A L I T Y
stand up poorly to those in the risks (due to more visibility) than L E S S I M P O R TA N T A S CO U N T R I E S
formal sector. And consumers— if they remained informal. B E CO M E W E A LT H I E R
able to purchase only goods of
Percentage of GDP
inappropriate quality and safety FEW COMPETITIVE
standards—do not have access to the 13
SMALL AND MEDIUM 31
greater choice and lower prices in ENTERPRISES
truly competitive consumer markets. 47
Small and medium enterprises tend
There are many constraints on to be engines of job creation— 51
entering the formal sector. The over- seedbeds for innovation and 39
arching issue is one of costs versus entrepreneurship. By providing 16
benefits for the individual entrepreneur new entry and competition, they
who has to choose between formal can boost efficiency and growth
and informal operations. and lead to economic development. 37 36
30
In most developing countries it is Indeed, recent research indicates
costly to be formal. Formal players that economic growth in poor Low Middle High
are often overtaxed (a vicious circle, countries is accompanied by a income income income
countries countries countries
since they are overtaxed because a more than proportional growth in
few formal companies carry most the share of the formal small and ■ Informal activity
of the tax weight). Registering a medium enterprise sector. In low ■ Small and medium enterprise activity
■ Remaining activity
business can be a long and expensive income countries the share of formal
proposition (in Angola it takes 146 small and medium enterprises in Source: Ayyagari, Beck, and
Demirguc-Kunt (2003)
days and more than 8 times the per employment is about 30% and in
capita income). Regulations and GDP about 17%, while in high
government requirements are income countries the shares are Rules that constrain market entry and
complex—and compliance costs about 60% and 50%. Indeed, richer expansion have a chilling effect on
high. The opportunities for bribery countries see far less informal and small and medium enterprises at the
increase with the complexity of much more small and medium expense of established larger firms.
regulations, exposing smaller players enterprise activity (figure 2.2). Small and medium enterprises
who lack the legal resources to often could compete effectively in
defend themselves. The reality in many poor countries, niche markets, but the advantages
especially in Sub-Saharan Africa, that accrue to established large
Entrepreneurs also see little benefit is that the small and medium players fend off competition from
in going formal. While formal enterprise sector is relatively the small and medium enterprise
businesses in developed countries marginal in the domestic ecosystem. sector. Without the reasonable
can raise capital by mortgaging their Why are small and medium compliance costs that exist only in a
assets, this is often not possible in enterprises not able to “graduate” fairer system of competition, small
many developing countries where to the ranks of larger companies? and medium enterprises cannot
mortgage laws are weak and banks
For this evolution to be possible, grow and become more productive.
prove reluctant to finance small
it is essential that a reasonably Ineffective or arbitrary tax laws,
players. In theory, being formal
level playing field and supporting onerous business regulations and
would facilitate selling beyond
institutional structures exist other restrictions penalize them.
geographic boundaries, but poor
local infrastructure and customs between (often larger) incumbents
abuse limit the opportunities. and (often smaller) new entrants.
And bankruptcy laws, which
protect formal players in developed
countries, are often ineffective in
Widespread informality and the LACK OF COMPETITIVE alliance between large protected
lack of skills also affect the ability PRESSURE ON LARGE incumbents and poor people,
of entrepreneurs to scale up a COMPANIES who fear a loss of jobs in
business. While often animated competitive markets.
by innovative ideas or addressing Large companies form the hub of
networks and clusters and, by the Corruption combined with weak
untapped markets, small and
virtue of their size and range of and arbitrary legal enforcement
medium enterprises suffer from
business activities, provide the spark buttresses incumbent firms at
lower total factor productivity,
for the private sector ecosystem. the expense of potentially more
by using older technologies or
But in many developing countries competitive ones. Specifically,
employing inferior workforce
large incumbent companies can also incumbents might receive subsidies,
practices. The cost of business
stifle entrepreneurial energy and special licenses or other privileges
services is often more than small
initiative. Too often, they can take that preserve their position and
and medium enterprises can pay,
advantage of weak institutional dampen the incentive to innovate
or is not in tune with their needs.
environments to raise anticompetitive and reduce prices. Such firms may
Lower export sales from small
barriers and protect their dominant respond to perverse incentives to
and medium enterprises come
position. While local informal strip assets or dole out contracts to
in large part from lack of access
markets can often function without uncompetitive suppliers even when
to knowledge about foreign
much regulation, more mature and more efficient providers exist. The
standards of quality.
complex markets need appropriate poor domestic macro environment
Perhaps most important, small and regulations to function effectively. encourages wasteful rent-seeking and
medium enterprises lack access to retards the growth of competitive
financing and long-term capital, A dynamic financial sector, in which firms based on productivity.
the base that companies are built new entrants and incumbents can
get finance under competitive terms, These firms might also indirectly
on. High risks associated with
is also important for creating starve competitors from receiving
small and medium enterprises,
competitive pressures in the market. capital by contributing to an
whether real or perceived, exist in
But companies with a protected environment that keeps finance
the absence of financial instruments
position in these markets often underdeveloped. Large firms
that manage and diversify the risk.
have strong incentives to use their thus command the lion’s share of
Banks also face high costs or
lobbying power to slow government resources in an underdeveloped
cannot acquire information that
progress in improving the institutional financial system.
they can trust, even when small
and medium enterprises are credit- infrastructure for markets.
worthy. These factors raise interest Such practices directly hurt poor FOUNDATIONS FOR
rates and reduce lending volumes, people, through higher prices ENTREPRENEURSHIP—
setting up price and quantity and lower quality products. Poor NOT YET IN PLACE
barriers to small and medium people benefited from the opening Building a sound private sector
enterprise growth. Small and medium of competitive markets in India in requires a strong foundation in
enterprises have to resort to financing the early 1990s. Until then the the global and domestic macro
from networks of family or friends, population was effectively subsidizing environments, physical and social
from retained earnings, or from a large part of the private sector, infrastructure and rule of law
short-term credit from other small which was selling low quality (figure 2.3).
buyers or suppliers, rather than products at high prices—made
from larger institutions providing possible by controls on entry by Global macro environment
dedicated long-term financing domestic competitors and severe The foundations for growth in
vehicles for specific purposes. quotas and high tariffs on imports. the private sector start with a well-
Such anticompetitive policies are functioning global macro business
often perpetuated by an unlikely environment involving a dynamic
global economy that provides
markets, as well as adequate trade
rules that enable competitive access F I G U R E 2 . 3 F O U N D AT I O N S F O R T H E P R I VAT E S E C T O R

to market opportunities. The open AND PILLARS OF ENTREPRENEURSHIP
exchange of goods, capital and
information—and the transfer of
Private sector growth
technology and ideas—stimulates
private sector development. This
occurs through several mechanisms:
open markets, good-quality foreign
investment, effective development aid
and efficient transfers of technology Level Access to Access to
Pillars of
entrepreneurship playing financing skills and
and knowledge. It requires such field knowledge
reforms as dismantling the agri-
cultural subsidies and other forms
of protection that so evidently
impede export-oriented private
sector development in the rural
Rule of law
areas of developing countries.
Physical and social infrastructure
There is broad agreement that open Foundations for
markets have supported economic the private sector
Domestic macro environment
growth. The advantages, while
well catalogued, merit repeating. Global macro environment
An open trade policy fosters
productivity growth by opening
the private sector to competition. human capital, the misallocation of Low quality roads can shut small
Free trade helps countries allocate scarce public funds, the devastation of producers off from regional markets—
their resources towards their most land, the seizure of natural resources and encumber large producers with
productive areas of comparative and the elimination of market access. shortages of critical inputs.
advantage. Cheaper imports raise Physical and Well-maintained infrastructure
the domestic standard of living social infrastructure improves commerce by speeding
and allow for the use of lower cost A country’s physical and social the transport of goods and raw
inputs as the private sector produces infrastructure includes roads, power, materials, sustaining energy-
for domestic or foreign customers. ports, water and telecommunications intensive production and making
Such a regime provides open market as well as basic education and health. information readily accessible
access through lower tariff and Building up these basic services has and communication timely. Poor
nontariff barriers. a dual benefit: improving the lives physical infrastructure often
Domestic macro environment of poor people directly and enabling precludes business activity.
The central elements of a strong the growth of businesses.
Ensuring connectivity through
domestic macro environment for Technical inefficiencies in roads, telecommunications and information
business include peace and political railways, power and water alone technology has become particularly
stability, good governance with policy caused an estimated $55 billion a important in recent years, helping
predictability, transparency and year in losses in the early 1990s— to overcome some of the barriers of
accountability, and sound macro- an amount equal to 1% of the inadequate physical infrastructure.
economic policies. For businesses, GDP of developing countries Efficient access to information is
internal or external conflict increases or twice the annual budget for clearly a vital part of the basic infra-
cost and uncertainty, deterring both financing infrastructure in the structure need of modern economies.
domestic and foreign investment. developing world. These losses fall
Worse, conflict forestalls private on firms large and small—and on
sector development, because it often
individuals, especially the poorest.
leads to the tragic destruction of
Maintaining high quality physical Improving the social infrastructure property rights circumscribe private
infrastructure is largely, but not and ensuring that those surviving sector behaviour. Confusing and
solely, a matter of capital investment. on the lowest incomes have access contradictory legal systems make
Efficient contracting, open bidding, to affordable and high quality formal business practices difficult
regulatory credibility and private health and education services is an and push businesses to become or
and public managerial capability important foundation for private remain informal. Poor legislation
carry weight as well. sector development. buttresses oligarchic and corrupt
firms against competitive forces,
Studies demonstrating the social The rule of law
often at the expense of small
and private returns from investments The rule of law means that
and medium enterprises. Cosy
in education and health spotlight government decisions are made
relationships between business and
their efficacy. High levels of according to a set of written laws and
regulator impair the development
investment in human capital, rules, to be followed by every citizen.
of open, free market competition.
especially in education and health, The rules are applied consistently,
The poor are likely to be the first
lay the groundwork for private administered by a professional
victims of lawlessness.
sector growth. A healthy, educated bureaucracy and adjudicated by a
workforce is a productive workforce. fair and transparent judiciary that is Even though a written set of laws
One need look only at countries adequately compensated. In nearly may exist, the legal system in many
ravaged by poor health or disease all cases, courts provide reasons for developing countries works informally.
to see the deleterious effects of their decisions based on the law, In the shift from informal to formal
an underfinanced or inadequate through some form of due process. systems, many countries have old
health infrastructure on previously Countries may subscribe to different and new systems coexisting, often in
productive economies. Private firms legal systems arising from different conflict. The loser is often the more
profit from investments in education, political and social cultures, but the formal new system, implemented in
from primary to university, from fair administration and enforcement a shallow and ineffective manner.
universal to targeted. Ensuring that of a just system of laws is a cardinal One estimate suggests that as many
such education is appropriate for a principle. Both elements matter— as 80% of the legal issues facing the
future workforce is a core task of laws and their administration. poor are addressed through customary
a well-functioning education or informal systems.
Laws form an intrinsic layer of
infrastructure. Educating women
the foundation for a robust private Corruption and confusion over the
has particularly positive effects on
sector. Without a transparent legal enforcement of rules are often to
their future earnings—and society’s.
framework and a fair judicial and blame for high compliance costs.
Investments in health and education administrative system, other efforts Bureaucratic red tape, backlogs,
involve both the public and private to foster private sector development arbitrary decisionmaking and other
sectors, and counter to conventional cannot work as intended, and may onerous requirements and inefficient
belief, many education and health even do harm. Home governments practices hamper private activity.
services in developing countries are must establish the “rules of the game”, Arbitrary or corrupt enforcement
delivered through private initiatives, a system that reduces transaction subvert laws intended as benevolent
including cooperatives and mutual costs by making them predictable protections, including laws for worker
health insurance organizations. In and enforceable. Legal and admin- safety, environmental protection
some systems 70–80% of health care istrative systems influence whether and consumer safety. And corrupt
expenditures are through private and how transactions take place. practices distort prices and markets,
actors. Often, but not always, and hinder free and fair competition.
The rule of law manifests itself in
private involvement is a response
the private sector with commercial The World Bank estimates that
to government underinvestments.
laws, customs laws and contract corruption can reduce a country’s
laws, among others. Critically, growth rate by 0.5 to 1.0 percentage
the assignment and protection of points a year. Transparency
International’s Corruption
Perception Index could, with
very few exceptions, almost FIGURE 2.4 ENTERPRISES IN LOW INCOME COUNTRIES
be ordered by income—poorer FA C E M A N Y M O R E B U R D E N S W H E N R E G I S T E R I N G
countries are almost universally Income Number of Duration Cost (% of
rated more corrupt, though there procedures (days) GNI per capita)
is plenty of recent evidence that
corruption is not limited to lower Low and ■ Enterprises
lower 11 70 115
income categories. middle
in low and
lower middle
income
countries face
THREE PILLARS OF the longest
Upper
ENTREPRENEURSHIP— middle
11 58 29 duration and
the highest
TOO OFTEN MISSING cost (as a
percent of GNI
Even with strong macroeconomic per capita).
and institutional foundations, three High 8 42 17
additional factors are indispensable
for entrepreneurship and the private
sector to flourish in an economy: a Note: Low and lower middle-income countries had GDP per capita (purchasing power
level playing field, access to finance, parity) of less than $2,976 in 2001, upper middle-income countries were between
$2,976 and $9,205, and high income countries were above $9,205.
and knowledge and skills.
Source: World Bank (2003a)
A level playing field—
with fair rules, fairly enforced
Perhaps most important in allowing and licensing procedures raise the need to make choices about the
entrepreneurship and the private cost of entry into the formal sector products they purchase and the
sector to blossom is a level playing and tilt the playing field in many capital they allocate. Labour market
field for firms competing in the developing countries (figure 2.4). rules are critical to protecting
domestic market. That can be For example, the World Bank’s Cost employees from exploitation. But
created only by a system of rules of Doing Business survey estimates a number of developing countries
and enforcement mechanisms that that starting a business requires have excessively complex labour
is fair, trustworthy and effective. $5,531 in Angola (more than eight rules, more than wealthier countries.
Predictable rules ensure that times the per capita income) and For laying off employees, companies
entrepreneurs have open access about $28 in New Zealand (far less in middle and low income nations
to markets and can do business than 1% of the per capita income). face higher barriers on average than
efficiently. And basic trust in the Cumbersome entry regulations their counterparts in developed
system encourages entrepreneurship are directly correlated with lower economies. The mechanisms for
and attracts talent (local, foreign productivity. When countries are social dialogue to find ways of
and diaspora) to embark on ranked by ease of starting a business, mitigating the effects of layoffs,
entrepreneurial ventures. the top quartile of countries has and safety nets to protect the poor
labour productivity of about $40 are often weak or non-existent
Good rules are a critical element in per worker, almost twice that of the in most developing countries.
creating a level playing field, and bottom quartile. Longer registration Moreover, rigid employment
effective regulations are essential processes are directly associated regulations are associated with
for the market economy. Rules, if with higher levels of corruption. higher female unemployment.
excessively complex and incorrectly Note, however, that few of these
applied, can turn into significant Operating rules. Disclosure
rules are regularly enforced, making
barriers for enterprises and hamper requirements can have a positive
the case for simpler rules with
business growth. This applies to rules impact at the industry and business
for entry, operating, market and exit. environment by giving consumers
and investors the information they
Entry rules. Excessive procedural
requirements for business registration
better enforcement. Complex tax Product market barriers also not have the skills and resources
rules and structures also impose stifle growth. Subsidies and trade they need to enforce the laws.
high costs that fall more on small barriers in the developed world They often require additional
and medium enterprises than on are the biggest culprits. But many training or tools.
large enterprises, which can afford developing countries also raise
Access to financing
tax experts. barriers to entry—say, by forbidding While foreign direct investment
small companies to distribute has had an essential role in the
Credit rules. Many countries lack
electricity in rural areas, even development process, it is impossible
rules for sharing credit information,
when state monopolies do not for a country to progress without
which makes it virtually impossible
serve those areas. domestic investment based on
for creditors to check how indebted a
potential client already is. In addition, Restrictions on pricing can also domestic savings. This requires
domestic financial institutions
creditors have limited protection in cloud the business environment.
that can efficiently manage risk
the case of default, significantly For example, many governments
and allocate capital to productive
lessening their willingness to assume charge excessively high prices for
investments. Many developing
the risks associated with small and fixed-line domestic and international
countries have had weak, state-
medium enterprise lending. telecommunications services. The dominated financial sectors unable
monopolies that operate in these to act as a catalyst for development.
Tax rules. High tax rates and
conditions are highly profitable as a But where genuine reform has been
complex tax administration is a
result, but their capital and labour implemented, the benefits have
significant constraint for small and
productivity are low. The high been quick and evident, even if
medium enterprises and can lead
prices provide few incentives for creating and restructuring an
them to the informal sector if tax
telecommunications players to use efficient domestic financial sector
burdens become excessive.
their resources more effectively. is a long task.
A large informal economy can
Exit rules. Inadequate bankruptcy Large companies are well served
mean lower government revenues
rules and protections can create by existing banking systems, and
and higher taxes for firms in the
additional hurdles for financing there has been good progress in
formal economy, creating more
enterprises. Countries with better microfinance over the last 10 years—
incentives for informal operation.
insolvency regulations tend to have with 41 million poor people served
For example, in Brazil the informal
more and cheaper lending. in more than 65 countries. But the
economy grew as tax revenues
progress on small and medium
increased from 24% of GDP in Poor enforcement by formal enterprise financing has been slow
1991 to 29% in 1999. institutions permits enterprises at best. It is not only about money
to avoid some or all of these rules, needed, though. Small and medium
Market rules. Barriers in the land
advantaging some of them over enterprises are risky ventures. They
market are high in many nations.
others. Breakdowns in formal require risk capital, but the sources
For example, it takes about 168
institutions occur when officials of such capital are difficult to tap.
steps, involving 53 public and private
do not have the skill or will to So small and medium enterprises
agencies and 13–25 years to acquire
carry out their oversight functions. generally have to turn to classic debt
“informal” land and receive legal
Government officials may not have financing. This can be difficult for
title to it in the Philippines. This
the will to enforce the laws because them, because few entrepreneurs in
arduous process discourages people
the institutions they work for do developing countries can leverage
from formally purchasing land,
not provide the right incentives. assets as collateral the way they do in
making it impossible to use land
The institutions may not reward developed countries. Why? Mainly
as collateral for getting credit, one
officials for applying the law fairly because of informal property rights
of the main sources of capital in
and equally, and the organizations and the lack of mortgage markets.
developed countries.
may lack transparency and may not Collateral requirements act as a
supervise officials sufficiently. In screen that selects wealthy borrowers
addition, government officials may and crowds out many entrepreneurs
with high growth potential.
Most emerging markets finance up accustomed to full-blown risk It contributes directly to a firm’s
to 90% of their investments locally, assessments working with large productivity by enabling the
although for Sub-Saharan Africa clients—too costly for small adoption of innovative technologies
the figure is closer to 65% and medium enterprises. and processes. A firm’s competitive
(and most productive enterprises At the other end of the spectrum advantage comes from its
generate revenue in local currency, microfinance institutions lend with entrepreneurial capabilities;
so the reliance on local financing very limited analysis, relying mostly its management and technical
is sustainable). Private credit as a on social networks for repayment. know-how, including labour-
percentage of GDP rises from This does not work well for the management relations; and the
12% in low income countries larger amounts that small and skills, education and adaptability
to 25% in lower middle-income medium enterprises require. of its employees.
countries, 30% in upper middle- ■ A lack of reliable credit information
The level of education matters,
income countries and 85% in also hampers the growth of
and the skills of employees need to
high income countries. small and medium enterprise
be continually upgraded through
lending—usually because there
A web of factors is at work, more on-the-job training to increase the
are no credit information agencies
than just the lack of capital. firm’s productivity and its ability to
and disclosure requirements are
absorb new technologies. In Costa
■ Rules and their enforcement are weak or not enforced.
Rica, Mauritius and Singapore the
often at the core. Most countries ■ Investors lack exit opportunities.
private sector has benefited from a
have weak property rights, Capital markets are absent or
virtuous cycle with formal education
making the use of assets as highly illiquid in many poor
reinforced by on-the-job learning
collateral difficult. Even when countries, making public offerings
and training. Costa Rica has the
property rights are well defined, impossible. Private offerings
most software exports per capita
the enforcement of mortgage can work, but most markets are
in Latin America, making it a
contracts is often impossible, far from liquid, with very few
technological hub in the region,
for both political and judicial transaction opportunities.
thanks to its investments in both
reasons. In addition, bankruptcy ■ Entrepreneurs often lack the skill
basic education (producing one
laws are typically lacking, and the will for receiving risk
of the highest literacy rates) and
increasing the risk to creditors capital. On skill, management
technical education.
and further deterring them talent is limited. On will,
from investing in small and private equity investors report Many developing countries suffer
medium enterprises. the reluctance of small and from low levels of human capital
■ Poor financial institutions medium enterprises to open investment, aggravated by the
are also a problem. Domestic their books to outsiders in outward migration of highly skilled
financial institutions can operate environments where parallel professionals. The cumulative
in oligopolistic or monopolistic accounting is widespread. “brain drain” since 1990 has been
conditions, with limited share- estimated at 15% for Central
Access to skills and knowledge
holder pressure to enter new and America, 6% for Africa, 5% for
Technological innovations and the
more difficult markets, such as Asia and 3% for South America.
shift towards knowledge-based
lending to small and medium The International Organization
economies make human capital
enterprises. Added to the lack for Migration estimates that some
investment a prerequisite for
of incentives is the public 300,000 professionals from the
sustained economic growth and
borrowing that crowds out African continent live and work
central to the start-up, growth
private borrowing. in Europe and North America.
and productivity of firms. Human
■ Even when financial institutions
capital can determine the potential
have the will, they often lack
for a firm’s growth and survival.
the skills for small and medium
enterprise lending. Banks are
By some estimates up to a third ■ ■ ■

of R&D professionals from
This diagnosis of the structure
the developing world reside in
of the private sector and the
OECD countries.
constraints to its rapid growth
This persistent brain drain deprives applies in differing degrees across a
developing countries of the know-how wide range of developing countries.
of thousands of their most talented The balance among the different
people. It reduces the stock of factors varies with income,
human capital at home, erodes the institutional development and
domestic tax base and shrinks the the composition of the private
educated middle class, a stabilizing sector. Addressing the constraints
factor in most societies. to unleash the potential of
the private sector will require
The migration of talented risk-
programmes tailored to the needs
seeking entrepreneurs from the
of individual countries, but the
developing world seeking opportu-
underlying approaches will be
nities in more entrepreneurially
broadly similar. We turn to
minded societies spotlights the
them now.
obstacles to starting and scaling up
businesses in their native countries.
The underlying cause is a disabling
social environment that limits both
the number of potential entrepreneurs
and the degree to which they can
unfold their potential.
Photo: Evan Schneider/UNDP
CHAPTER 3
UNLEASHING THE POTENTIAL

OF THE PRIVATE SECTOR
I
he Commission acknowledges that the constraints
on developing a sustainable private sector are widely
known—and generally accepted. So are the key
elements of policies for addressing them. The big
challenge is moving from an understanding of the broad constraints to
putting together specific, country packages. Now the focus must shift from
determining “what” the constraints are to “how” they are to be lifted and
“who” is to lift them. Here we examine the policies and administrative steps
that can alleviate these constraints and help create the capacity needed to
govern transactions, capacity that is vital to the development of the private
sector and to the efficient functioning of a market economy.
The Commission has emphasized that the private sector is important to the
poor in many ways. If the benefits of reform are clearly articulated and the
results of reform are quickly evident, constructive approaches to private sector
development can translate into greater political support. And the momentum
and consensus for change that this creates can provide the springboard for
a comprehensive programme of reform and change.
FIGURE 3.1 STRENGTHENING THE EFFECTIVENESS OF

The main public players in this
T R A D I T I O N A L P R I VAT E S E C T O R D E V E L O P M E N T A C T I V I T I E S field are the World Bank Group
Targeted at public Targeted at private
(including the International
sector players sector players Finance Corporation and the
Multilateral Investment Guarantee
Driven by private ■ Setting broader standards ■ Business linkages and
Agency) and the International
sector players (industry norms,sustainability, partnerships
■ Companies corporate governance) ■ Investment, including Monetary Fund. The regional
■ Civil society ■ Lobbying for policy changes foreign direct investment development banks, including the
organizations ■ Promoting participatory ■ Mentorship for Asian Development Bank, the
■ Foundations processes through entrepreneurs
social dialogue
African Development Bank, the
European Bank for Reconstruction
Driven by public ■ Policy reform ■ Public-private partnerships, and Development and the Inter-
sector players ■ Policy advice for example, for basic American Development Bank, are
■ Local ■ Funding and delivering service delivery
governments technical assistance for ■ Public-private also focused on helping to create
■ Donor public sector reforms consultative bodies the enabling environment for
governments ■ Financial transfers ■ Privatization or contracting entrepreneurial development in
■ Development (aid, loans) ■ Investment promotion
their respective regions. Important
agencies ■ Direct business
development services roles are also being played by
■ Direct financing the Organisation for Economic
Co-operation and Development
in research and policy, and by the
Some broad lessons of experience: of poor governance (Kenya,
major UN specialized organizations
Nigeria in the past few years)
■ Successful policy reforms have such as the United Nations Industrial
can often use the impetus of
generally been those in which Development Organization, the
change to implement reforms.
concerned governments and United Nations Conference on
■ Changes almost always
policymakers have made strong Trade and Development, the
include new roles for the local
and voluntary commitments International Labour Organization
private sector and civil society
to change. and the United Nations Development
organizations, including employer
■ Reforms linked to conditionality Programme. Bilateral agencies and
and worker organizations.
rarely succeed when implementing institutions (such as the United
■ Technology is the agent for much
governments are not committed States Agency for International
of the needed change, and new
to them. Development, the U.K. Department
technology enables change to be
■ Significant changes often occur for International Development, the
implemented much faster than
when countries are faced with Canadian International Development
might generally be expected.
major economic crisis (India in Agency and the Netherlands
1991, East Asia in the late 1990s), Support to private sector Development Finance Company)
and the response to these changes development—both global and are also focused on important
can be rapid. Of course, it is better national—can involve economic elements of the task, including
not to wait for a crisis to reform. research, macro and sector policy enhancing access to capital and
■ Changes can also follow advice, technical assistance and supporting the development of
major shifts in basic economic direct financial support to specific micro entrepreneurs and small
philosophy (China, Vietnam private sector projects. Barring and medium enterprises.
and Eastern Europe). the latter, the bulk of these
The Commission believes that
■ New governments that replace interventions involve governments
any approach to private sector
previous regimes with a history and public institutions directing
development—and the policy
their support to governments and
and action recommendations that
public institutions in developing
accompany it—needs to be grounded
countries (figure 3.1).
in the realization that the savings,
investment and innovation that
C H A P T E R 3 : U N L E A S H I N G T H E P O T E N T I A L O F T H E P R I VAT E S E C T O R 23
lead to development are undertaken enforcement is required before implementation of these policies
primarily by private individuals, proceeding to full liberalization. can help private entrepreneurs enter
corporations and communities. ■ Influencing national, regional into transactions with confidence
Governments should thus act and global risk perceptions that the contractual underpinnings
as facilitators of private sector favourably through better of these transactions can be enforced.
development and avoid actions information dissemination in In any economy, a strong
that impede it. Governments and real time (rather than simply capacity to govern transactions
intergovernmental agencies can through promotional marketing is needed to unleash domestic
facilitate private sector development of investment opportunities) entrepreneurial energy.
only by fostering properly functioning and encouraging government
competitive markets. Strengthening the rule of law
behaviour that excites and
For private enterprises the rule of
■ Providing conducive operating supports rather than turns off
law provides the foundation for a
and investment environments investors, whether domestic
predictable regulatory framework
in which all private enterprise or foreign.
and capacity to govern transactions
(domestic, foreign, politically ■ Targeting subsidies and tax
between private parties. Ensuring the
connected or otherwise) can incentives where clearly needed
rule of law is not only about having
flourish without fear or favour. to address market imperfections,
or introducing the appropriate set
This involves an overall social and moving away from broader
of laws—it is about ensuring that
context that is politically stable reliance on measures that may
laws can be enforced, fairly.
and predictable, with appropriate be politically attractive in the
procompetition rules and short run but are generally The overriding need is to ensure
effective enforcement and sound counterproductive for sound integrity in public service, which
macroeconomic fundamentals, private sector development in requires governments to:
including a fiscal policy conducive the long run.
■ Establish and use transparent,
to the development of the formal ■ Providing or enabling the private
public, open, nonexclusionary
private sector and adequate to the provision of essential infrastructure
and objective procedures in
financing of the required human (power, water, communications,
public procurement contracts.
and physical infrastructure. transport) through public-private
■ Establish open, transparent,
■ Establishing properly functioning partnerships, innovative regulatory
efficient and fair employment
legal and judicial systems for models and other means to ensure
systems for public officials to
protecting property rights that private enterprises are not
ensure efficiency and good
and resolving contractual put at a competitive disadvantage.
service and avoid patronage,
disputes—systems seen to nepotism and favouritism.
operate credibly and efficiently BUILDING ■ Provide education, training,
when judged by international THE FOUNDATIONS supervision, incentive structures
(not national) standards. and codes of conduct that
Chapter 2 discussed the global and
■ Facilitating the movement of breed and reward integrity
domestic macro environment and
private capital of all kinds, not and professionalism.
the availability of physical and
just foreign direct investment, ■ Establish a system to avoid
social infrastructure. We focus here
through the progressive devel- conflicts of interest and improper
on more specific actions relating to
opment of national capital influence on officials and to
fostering the rule of law and creating
markets and their links to provide mechanisms for officials
a level playing field for entrepreneurs.
regional and global capital to report such misconduct
We also address the broad principles
markets. Liberalization of without endangering their
that need to be applied to improve
financial capital flows requires safety and professional status.
access to financing and the availability
great prudence, however. of skills and knowledge. Effective
A sound financial system
with good regulations and
Related to ensuring integrity in public countries—the court system, property ERECTING

service is ensuring accountability registries and law enforcement THE PILLARS
and transparency in the actions agencies—are often the least
of public officials. This requires modern and least funded of all Chapter 2 also described the three
governments to: public institutions. pillars that are indispensable for
entrepreneurship and the private
■ Build a broad base of support Business property rights can often sector to flourish: a level playing
by running well publicized, be protected by providing alternative field, access to finance, and
participatory anticorruption channels for resolving disputes with knowledge and skills.
campaigns addressing the public other businesses, customers, suppliers
and private sectors. and government officials. Creating a level playing field
■ Establish appropriate auditing Creating and defending a level
■ Alternative dispute resolution playing field for companies requires
procedures for public adminis-
systems provide a substitute a system of rules and enforcement
tration and the public sector,
for slow and expensive formal that inspires trust and reasonably
and measures and systems to
courts in their ability to provide limits the cost and burden on
provide timely public reporting on
predictable legal protection for enterprises. In recent years this
performance and decisionmaking.
the contracts and property of area has received more attention
■ Ensure transparent procedures
small entrepreneurs. Argentina from private and public players in
for public procurement, privatiza-
piloted such a system, with development. One focus has been on
tion, state projects, state licenses,
66% of 32,000 commercial cases improving legislation and regulation.
state commissions, national
resolved in an average of 2 months In Vietnam a new enterprise law
bank loans, other government
(not the typical 3–4 years). helped create a million new jobs.
guaranteed loans, budget
■ Automated assignment of cases, A level playing field also requires
allocations and tax breaks. These
involving random computerized strengthening the institutions that
procedures should promote fair
assignment of individual cases to implement and enforce regulations.
competition and deter corrupt
judges, increases a judiciary’s The content of the solution seems
activity. They should also establish
efficiency and reduces corruption. clear—overcoming the entrenched
adequate simplified regulatory
In a Slovakian pilot case the time behaviour that led to poor regulation
environments by abolishing
between the filing and the first in the first place. Someone benefits
overlapping, ambiguous or excessive
hearing fell from 73 days to 28, from every rule, and finding out
regulations that burden business.
with the number of steps in case how to overcome resistance by
■ Promote systems for access
processing reduced from 23 to 6. those who benefit is the first step
to information about public
■ Specialized debt collection in effective reform.
expenditure.
courts resolve claims faster
■ Strengthen antibribery actions Simplifying regulations. An
because those who preside over
and promote integrity in important element for a level playing
them have more command over
business operations. field is simplifying regulations
the law and have responsibility
Enforcing property rights for the entire debt collection affecting the entry, operation and
There is also evidence that system, from seizure to auctioning exit of private enterprises. The
governments do too little to protect of property, if necessary. In approach to resolving these issues
property rights. The best-practice Colombia a specialized debt is simple, and the experience is
countries build efficient courts and collection court increased the well demonstrated—needed is the
support laws and institutions that number of cases filed from will to implement change. The
define the rights of citizens and 4,000 a year to 11,000 (1996– basic steps involve adopting best
businesses to their property. Yet, the 2000), with 75% of cases practices for business registration,
institutions that define and enforce resolved in a year and the for changes of ownership and
property rights in many developing number of pending cases closures and for the governance
falling by 5,000. of transactions. Illustrative action
programmes include:
■ Kiosks and one-stop shops trade fairs and creating links with when social safety nets are not
that simplify business and title international buyers. Affordable in place. So, opening markets to
registration make registration business development services competition may best happen in
more efficient, and the greater for boosting management skills, phases, with full openness occurring
transparency minimizes corruption productivity and quality are a after a strong set of market institutions
at all levels. In Tanzania the demonstrated way of supporting is in place. A safety net focused on
Business Registration and formal small and medium enterprises. people, not firms, is needed to
Licensing Agency reduced the provide socio-economic security
Much of this rests on increasing
time to register a business from for those left behind.
awareness of the costs of informality—
90 days to about 3. In India
and on shifting mindsets. Public To keep this process going
electronic title registration in
dialogue can be fostered through despite these tensions, the costs
the state of Andhra Pradesh
public awareness campaigns. And of uncompetitive markets should
reduced the process from 7–15
lobbying groups that represent small be made transparent. The public
days to a few hours.
businesses can be strengthened. should be able to understand when
■ Single business permits enable
it benefits from rules that keep
governments to consolidate Creating competitive markets.
politicians and incumbents in
registering businesses so that Creating a competitive market and
check. A simple way to accomplish
entrepreneurs need secure only reducing the influence of incumbents
this might be to demonstrate quality
one permit to own and operate are critical ways to level the playing
and price differences between goods
a business, rather than different field. Where incumbents have
in protected economies and that of
ones at each level of government. already taken hold, three levers
goods in roughly comparable open
In Kenya the single business can open markets—technological
economies. Another might be to
permit reduced the costs to innovation, financial development
show the amounts of subsidies that
small enterprises and increased and freer trade and capital flows.
go to protected firms.
government revenues by 30–40%. Technological change fosters
■ Unified tax authorities are competition and relaxes the pressure Reforming taxes—simplicity,
responsible for tax collection for entry restrictions. By bringing clarity, stability. Creating a positive
(including customs duties) and in competitive pressure from outside, and enabling business environment
inspections for all levels of technology helps erode barriers to for small and medium business
government. In Zambia such entry and creates a constituency requires a tax policy that responds
a system eliminated duplicate for the further freeing of market to business needs, encourages new
inspections and investigations entry restrictions. A well developed businesses to start and helps existing
while improving overall customer financial market promotes competition businesses to expand. Governments
service and compliance. by making debt capital and equity need to develop tax policies in
financing available to firms without partnership with small and medium
Many of these changes could
connections or access to subsidies. businesses, simplifying the rules applied
greatly reduce informality in most
Trade and capital flows also to these businesses, reducing the
economies, particularly if accompanied
reduce the ability of incumbents to burden of compliance and promoting
by country efforts to fully understand
influence governance by creating transparency and stability.
the characteristics of informal firms.
competition between domestic
But informality is so pervasive that Governments also need formal
and foreign firms.
a special approach is needed. mechanisms for regular briefings
Competition creates winners and and consultations to ensure that
Finding ways to increase the benefits
losers, a source of great tension small business representatives are
of formalization is one such approach.
between markets and democracy. kept up to date on changes in tax
It can be accomplished in part by
Some of those employed in codes and can give their views
opening public contracts to informal
inefficient firms might bear the
players willing to formalize if they
downside of change, particularly
win the contract, and improving
market access through organizing
on proposals. To help small and assistance programmes complement focus on using the existing banking
medium businesses comply with rather than compete with private and financial system to direct
the rules and ensure common financing that could be available resources rather than creating
interpretations across the country, on commercial terms. dedicated state agencies, which
tax officials need to be trained have demonstrated for too long
Policymakers should concentrate
on the substance of tax rules their inability to channel funds
on reducing barriers to access to
and procedures. themselves. A Small Business
finance, recognizing that access
Administration type of approach
Reforming finance is generally more important than
has been successful in the United
and access to capital the cost of financing. They should
States and may be useful as a model.
Creating efficient domestic financial recognize that subsidized credit
The goal is to bring about a financial
markets and increasing the access programmes are unsustainable and
system that can catalyze growth for
of domestic businesses to credit have unnecessary and that reducing
small and medium enterprises and
been major goals of the multilateral transaction costs and increasing
allay the nonbusiness risk that
development banks and bilateral innovation and productivity among
entrepreneurs can do without.
development agencies. Their activities financial service providers are more
are mainly geared towards fixing important. They should also reform Entrepreneurs should have the risk
the business environment and financial market rules and build management tools that large private
strengthening financial institutions. enforcement capabilities, introducing firms do. These tools include a range
new legal structures and removing of savings and insurance products as
The big issue with today’s
obstructive caps and ceilings. Legal well as more sophisticated products
interventions, working through
conditions and well-functioning that minimize foreign exchange or
many intermediaries of varying
implementation systems need to be inflation risks, for example. But
effectiveness, is that they are not
established to address bankruptcy, networks and partnerships may
always demand driven. Successful
registration and collateral and the matter even more. Funds may come
models have taken a multiple-
regulations for leasing. Such measures from diasporas, nascent venture
stakeholder approach to developing
can have benefits far more important capitalists, equity funds or other types
functioning markets. Consider the
than targeted credit programmes. of firms or groups of individuals,
IFC’s efforts to develop the leasing
commonly referred as “angels” who
sector across countries—a model Strengthening the range and
have made progress in the system
also applicable to micro-finance operational capabilities of financial
and are willing to help others.
and housing finance. The model institutions will better serve the
Access to these funds can embed
involves a coalition of market needs of smaller businesses. Subject
the entrepreneur in professional
players including governments and to appropriate regulation, nonbank
networks that use common standards
regulators, international leasing financial institutions should become
for evaluating new firms. To the
companies, local financial institutions more prevalent. New financial
extent that access to these networks
and experts in the legal, regulatory products and liquidity vehicles
is formalized through institutions,
and tax aspects of leasing. would allow them to better serve
even entrepreneurs who are poor can
small and medium enterprises with
Governments should play a key receive financing and manage risk.
tailored insurance, lending and
role in creating and building long-
savings products. The long-term goal should be to
term and sustainable financial
have private financial institutions
institutions and infrastructure, In some cases public finance might
supporting small and medium
strengthening the banking bridge the gaps in financing. But
enterprises—and to encourage
system to make it competitive. governments must ensure that
well-functioning capital markets.
In the process, governments public programmes complement
This will require putting into place
must ensure that public financial rather than compete with private
and developing credit bureaus and
financing that could be available on
other mechanisms to provide credit
commercial terms. Efforts should
references—an effective way of
strengthening financial systems.
Developing human B O X 3 . 1 C O S TA R I C A’ S P R I VAT E S E C T O R — U N L E A S H E D

skills and knowledge
More investment is needed in local Costa Rica has attracted some leading information technology companies. Intel’s $0.5
billion chip assembly and manufacturing plant now produces 25% of Intel’s global
business-related skills, including output and 40% of Costa Rica’s exports. This has made the country one of the top 30
foreign languages, information software exporters worldwide and the highest per capita information technology
technology skills and basic finance, exporter in Latin America. Between 1985 and 2002 Costa Rica's exports grew fivefold,
economics and project management. from $1.1 billion to $5.1 billion. Foreign direct investment inflows grew more than
tenfold, from $59 million in 1989 to $661 million in 2002.
Public-private partnerships that
Costa Rica has a 95.5% literacy rate, and 18.5% of the active labour force has completed
combine more practical training on
university, technical or parauniversity studies. Government policy has upgraded the
the job with basic education could be educational system by incorporating technical education and training in electronics,
the basis for viable apprenticeship informatics and engineering. Costa Rica has 85 vocational high schools (educating more
models. Also effective are recent than 85,000 students a year), 4 state universities and 46 private universities, including
one of Latin’s America’s best known business schools, INCAE. The government also set
efforts to conduct more leadership up a National Learning Institute, which offers technical training free of charge and has
training by pre-eminent educational trained more than 127,000 people.
and leadership institutions for top The private sector took the lead in attracting investment and creating a pro-business
decision makers from developing environment through an apolitical nonprofit organization, the Costa Rica Investment
countries. Of particular importance and Development Organization (CINDE) in 1983, with funding from international donors
and strong support at the highest levels from the government. In the mid-1990s CINDE
is building local training capacity
began to woo multinational corporations, and it played a key role in influencing Intel’s
by “teaching the teachers”, the only decision to locate its first Latin American chip plant in Costa Rica, which was not origi-
way to meet the large demand for nally on Intel’s short list of countries. Intel was swayed by the open, business-friendly
local (and developing country to environment, with a stable political system, respect for the rule of law, low corruption
and good infrastructure.
developing country) training.
More than 30 multinational companies have relocated to Costa Rica, employing more
There are also opportunities to than 10,000 people in the electronics industry. Multinational corporations like Intel have
accelerate skill-building and foster also directly contributed to the development of a skilled workforce through on-the-job
training and support for formal education institutions. And Intel’s presence has increased
entrepreneurship by using social ties awareness of career opportunities in engineering and other technical fields.
to the developing country’s private
sector. A country’s diaspora in Source: UNDP (2001)
advanced economies is well suited to
mentoring local entrepreneurs—or
■ Tap the private sector’s potential characteristics and the business
becoming investors or entrepreneurs.
to deliver on-the-job training and environment.
Expatriates in developing countries
apprenticeships as a vital part of ■ Develop government policies to
may also have skills that could be
human capital development. encourage skilled emigrants to
tapped for coaching and motivating
■ Build an effective national return home.
local entrepreneurs.
system for training and skills
True involvement of relevant
Additional steps for governments: development involving employer
stakeholders in the process of change
and worker organizations as
■ Build entrepreneurial networks is useful only if accompanied by
key stakeholders.
and associations for peer-to-peer commitment from the top and
■ Develop institutions of
learning. Networks can create confirmation of the belief that
management learning, including
an entrepreneurial climate for change is taking place. Particularly
business schools, to develop a
coaching, mentoring and learning in the beginning of such a process,
pool of local managerial talent.
and strengthen links between early evidence of victories and real
■ Conduct additional research on
companies. Networks support change is vital to dispel the mood
entrepreneurship in developing
indigenous and private systems of scepticism and disbelief that
countries to better understand
of learning, so that entrepreneurs the interplay of entrepreneurial
can be encouraged to learn from
their peers.
often accompanies government to be supplemented by international

announcements of change. And or developing country to developing
particularly where the changes country learning.
involve administrative rules, the
Poor people have repeatedly
authorities generally already have
demonstrated the ability to use
the authority to implement newer
technology—so it should be a
approaches and to do so rapidly.
central element of any change
Building explicitly on successful programme, allowing the leap-
models of change in other developing frogging that is essential if progress
or neighbouring countries is likely is to be rapid. And working with
to be particularly useful in ensuring civil society organizations to audit
support because it is more likely and monitor impact and extract
to be seen as applicable to local lessons will continue the process
conditions. Thus, tapping the of coalition building and lay the
intellectual and implementation groundwork for future stages
capacity of the domestic private of reform.
sector will be particularly
important where it is available,
Photo: Sonya Laurence Green/UNDP Somalia
CHAPTER 4
ENGAGING THE PRIVATE

SECTOR IN DEVELOPMENT
M
ost efforts to address the constraints to
sustainable private sector development originate
in governments and public development
institutions. But the Commission believes that
to reach the needed level of change, it is essential to go farther and think about
how better to engage the private sector in addressing the development challenge.
Many critical resources for private sector development are under the radar screen
of development, since they are not carried out by traditional development
players and do not occur under the explicit label of development (box 4.1).
Private actions and public-private partnerships fall into two categories.
They are commercial transactions driven by market incentives, developed as
part of a corporation’s evolving business and commercial strategy, which
nonetheless have strong implications for development. Or they are specifically
structured as innovative efforts to apply private sector principles and approaches
to developmental problems (figure 4.1). From a different perspective, these
innovative private sector activities are either purely private-private interactions
or they fall more obviously into the area of public-private partnerships.
BOX 4.1 R E S O U R C E S U N D E R T H E R A D A R S C R E E N
As today’s advanced economies
F O R P R I VAT E S E C T O R D E V E L O P M E N T become a shrinking part of the
world economy, the accompanying
Many private actors outside the traditional development community are addressing
the challenges of development: shifts in spending could provide
Companies significant opportunities for global
■ Large corporations (both multinational and local) are leading private ecosystems companies. Being invested and
that develop and strengthen the capabilities of local small and medium enterprises involved in the right markets—
and microenterprises.
■ Global financial institutions and emerging local financial institutions are developing
particularly the right emerging
innovative approaches and technologies to improve access to credit for the poor markets—may become a much
and for small and medium enterprises. more important strategic choice.
■ Individual companies, generally multinational corporations but also some large local
Indeed, many companies are already
ones, are launching corporate social responsibility programmes to address specific
development needs. serving the world’s poor in ways
■ Important local companies—alone or with domestic private sector associations—are that generate strong revenues, lead
broadening their strategy and reach from strictly lobbying for actions beneficial to to greater operating efficiencies and
the private sector to informing and influencing the development process.
uncover new sources of innovation.
Associations and foundations
■ International private sector associations, such as the Council on Sustainable Development,
For these companies—and for
International Chamber of Commerce, International Business Leaders Forum, World those following their lead—building
Economic Forum, International Organization of Employers and others at the regional businesses aimed at the bottom of
level, such as the West African Business Network and the Commonwealth Business the pyramid promises to provide
Forum, are focusing on various aspects of development. National business associations,
such as the Confederation of Indian Industries and the Federation of Malaysian competitive advantages as the 21st
Manufacturers, have played a key role in national economic planning. century unfolds. At the same time,
■ Private foundations are engaging in the broader development process, with a focus
it provides critical links to the
on accountability and results.
marketplace for consumers at
Academic institutions
■ Academic institutions (including management schools)—both in countries that are
the bottom of the pyramid.
members of the Organisation for Economic Co-operation and Development and in
some developing countries—are focusing more on private sector development and
broader development issues.
FORMING
■ Leading business schools are working with African counterparts for the joint ECOSYSTEMS AND
management training of local public officials and private sector leaders. BUILDING NETWORKS
Networks of individuals
■ Individuals are playing or wishing to play a bigger role in resolving global issues by One of the most compelling ways to
contributing their know-how and services to various types of “developmental peace help firms succeed is by increasing
corps” organizations (retired senior executives, business administration students, the power of the linkages and
financial sector experts).
■ Expatriate executives of multinational corporations are mentoring local entrepreneurs
networks they are part of. Many
or teaching business in schools where they are stationed. business ecosystems bypass weak
■ Diaspora members in North America and Europe are supporting entrepreneurs in regulatory environments by creating
their homelands with remittances, informal financing of small businesses, and business
advice and mentorship. They are the mirror image of the brain drain discussed in
private capacity for regulation and
chapter 2 and represent the potential brain bank that could play a bigger role as enforcement within the network.
the changes in country policies discussed in chapter 3 begin to take hold. This capacity can reduce asymmetries
within networks and enhance the
ability to enforce contracts, thus
SERVING MARKETS income of less than $1,500—
building trust in the system.
AT THE BOTTOM OF THE provides multinationals and large
ECONOMIC PYRAMID local companies with an attractive Networks can bring many benefits by:
market for their goods and
The vast emerging consumer services (box 4.2; see page 32). ■ Enabling the transfer of skills,
market at the base of the pyramid— India has 700 million people technology and quality.
4 billion people with a per capita in rural markets. China ■ Ensuring that foreign direct
has a billion. investment has positive
spillover effects.
■ Bringing companies into the
formal sector.
C H A P T E R 4 : E N G A G I N G T H E P R I VAT E S E C T O R I N D E V E L O P M E N T 31
■ Creating the capacity to F I G U R E 4 . 1 P R I VAT E S E C T O R C O N T R I B U T I O N S

govern transactions through T O P R I VAT E S E C T O R D E V E L O P M E N T
commercial contracts. Targeted at public Targeted at private
■ Opening markets and the supply sector players sector players
of inputs to smaller firms through
Driven by private ■ Setting broader ■ Business linkages and
networks of larger partners.
sector players standards (industry partnerships
■ Improving the ability of small ■ Companies norms, sustainability, ■ Investment, including
and medium enterprises in such ■ Civil society corporate governance) foreign direct investment
networks to get financing on organizations ■ Lobbying for ■ Mentorship for
■ Foundations policy changes entrepreneurs
commercial terms.
■ Promoting participatory
■ Increasing the wages, employment processes through
standards and productivity of social dialogue
local companies.
Driven by public ■ Policy reform ■ Public-private partnerships,
■ Increasing the choice and sector players ■ Policy advice for example, for basic
lowering the prices for poor ■ Local ■ Funding and delivering service delivery
consumers by bringing a greater governments technical assistance for ■ Public-private
■ Donor public sector reforms consultative bodies
variety of goods to market.
governments ■ Financial transfers
■ Privatization or contracting
■ Development (aid, loans)
These networks—which can ■ Investment promotion
agencies
include vertical supply-chain ■ Direct business
relationships and horizontal development services
■ Direct financing
clustering—also have enormous
potential. But so far their impact
has been limited, concentrated in a Working with women entrepreneurs, of spreading innovation. In view
few developing countries, such as Hindustan Lever is leveraging the of the limits on Korean textile
Brazil, China, India and Malaysia. ecosystem to target the potential of and garment exports to the United
In Sub-Saharan African countries more than 200 million consumers States, Daewoo started a joint
there are few commercial transactions in rural areas. These business women venture with a local Bangladeshi
between large multinationals and learn about products, prices and company to produce garments for
small local companies. A study of returns and advise the customers in export and trained local employees
5 foreign and 36 local companies their villages about the products in the latest production techniques.
in Kenya showed that none of the they sell. Hindustan Lever has Over time, however, as many as
multinational affiliates engaged the potential to reach customers it 115 of the first 130 Korean-trained
in local sourcing. could not effectively reach otherwise managers left with the knowledge
through normal distribution channels. and networks they had acquired
A good example of a business This market-based ecosystem is a to set up their own companies.
ecosystem at work is Hindustan means of informing the poor about The industry has grown to more
Lever Ltd., a major producer of the benefits of transparency in than $2 billion in annual sales and
personal care and food products in transactions and the need to respect accounts for more than half the
India. Its ecosystem includes 80 contracts—be they explicit or country’s exports.
manufacturing facilities, 150 small implicit with the company. This
and medium enterprise suppliers Networks link entrepreneurs with
connection with national and
employing up to 40,000 people, potential sources of financing,
global business systems reduces
7,250 exclusive stockists, 12,000 human skills, partners, suppliers
reliance on local moneylenders
wholesalers and small retailers, and information. Through such
and slumlords.
300,000 shop owners and 150,000 networks entrepreneurs share
individual entrepreneurs in remote Another example is the $2 billion information and assessments of
villages who sell its products, a garment export industry in
number likely to grow to 1 million Bangladesh, based on the power
on current expectations.
B O X 4 . 2 S H O W I N G W H AT ’ S P O S S I B L E AT T H E B O T T O M O F T H E P Y R A M I D
In the financial sector ■ Patrimonio Hoy targets the low income, do-it-yourself home-
ICICI Bank-India is offering innovative ways to deliver financial builder segment of the population. It is set up like a microcredit
services to the poor. It has developed two models: scheme, with small lending groups, but the savings are used to
purchase cement and other building materials.
■ The direct-access–bank-led model promotes and nurtures self-help
■ Construmex is an innovative way of tapping the diaspora
groups, to create a savings pool. Once a pool reaches a certain
community so that money sent home for construction can be
size (few hundred U.S. dollars), ICICI will consider making loans of
transferred directly to the cement company without paying
$5,000 with a distribution of $250 per individual. Group pressure
financial intermediaries. The service allows Mexicans living in
is the best collateral, and repayment rates are 99.9%.
the United States to send their money and their orders directly
■ In the indirect channel ICICI partners with microfinance institutions
to cement distributors in Mexico, who then deliver cement to
drawing on the advantages of each.The microfinance institution
the site of the person's future home or business.
draws on its skills to contribute the social intermediation aspects,
while the bank carries out the financial intermediation and CEMEX knew that a significant part of the $10 billion in remittances
bears the credit risk.This can effectively leverage the risk capital to Mexico (about 10%) is used for construction of houses.
that already exists with banks and can be a potential solution
Patrimonio Hoy tripled the rate of cement consumed by its low
to the capital constraints of microfinance institutions. This
income, do-it-yourself homebuilders. Construmex has reported
model reduces the cost of intermediation without affecting
$2.5 million in sales since it started in July 2001, mostly from
the quality of the portfolio.
emigrants in Los Angeles. With its U.S. sales potential estimated
The strategy has both made good business sense and had at $160 million a year, Construmex is planning to expand to
significant development impact. For example, the number of other cities with large Mexican communities, including Chicago
self-help groups has increased to over 10,000, allowing ICICI to and Houston. Both programmes provide the poor with more
substantially increase its market share in rural areas. Villagers cost-effective opportunities to build their homes and improve
have had a surge in financing opportunities. Interestingly, a study their livelihoods.
conducted independently has shown a strong surge in self- confidence
In the cellular network sector
of members in self-help groups.
GrameenPhone is the largest cellular operator in Bangladesh. Vodacom
In the retail sector is a South African subsidiary of Vodafone and thelargest operator
Casas Bahia, the largest retailer in Brazil, focuses almost entirely on in South Africa. Both companies work with local entrepreneurs
poor consumers. It uses a carne, or passbook, system of financing who acquire cellular phones and resell phone services within their
that allows poor customers to buy on credit. Casas Bahia uses a villages. GrameenPhone combines this activity with microcredit
proprietary system that does credit checks and applies common- for entrepreneurs and focuses mostly on women.
sense rules to determine whether to offer financing to those
GrameenPhone has built the largest cellular network in the country,
without credit history.
with investments exceeding $300 million and a subscriber base of
Casas Bahia has 4.2 billion reais in revenues, 330 stores, 10 million more than 1 million. Its rural programme is already available in
customers and 20,000 employees. Some 70% of its customers have more than 35,000 villages, providing telephone access to more
no formal or consistent income and are primarily maids, cooks, than 50 million people, while helping to create microentrepreneurs.
independent street vendors and construction workers whose The key to the success of the village phone has been a cadre
average monthly income is two times the minimum wage. The of entrepreneurs, 95% of them women, who benefit from the
poor now have access to a much broader range of products and opportunity to run their own microentreprises.
benefit from better credit schemes than they previously had.
Vodacom provides more than 23,000 cellular lines at more than
In the cement sector 4,400 locations throughout South Africa.The company has provided
CEMEX, Mexico’s largest and the world’s third largest cement affordable communication services to millions of South Africans
company, created two key programmes to tap the large poor and empowered thousands of previously disadvantaged individuals
population of Mexico, where 60% of the people survive on less with income-generating opportunities and lasting business skills.
than $5 a day. These accounts generate Vodacom’s highest revenues.
Source: Prahalad (forthcoming)
markets and technology and lessons Informal entrepreneurial networks and informal contract enforcement—
from their own experiences. They (often ethnic or religious in origin) facilitate cross-border trade and
can also coalesce into groups to predominate in developing countries. business transactions and provide
discuss issues of common interest In the absence of clear legal enforce- a source of financing. Best known
and contribute more broadly to the ment of contractual obligations, is the extensive network of
communities they live in. these relationship-based networks— Chinese overseas entrepreneurs
relying on trust, personal guarantees with predominantly family-owned
businesses, found among the 50
million-strong Chinese diaspora.
It has played a key role in the Business associations, especially through agreements with the
economic transformation of trade and industry organizations, are public sector grid. Solar power
China and emerged as a business representing the common interests and small run-of-the-river hydro
force in Southeast Asia. Official of their members by coordinating plants are examples.
Chinese statistics reveal that overseas activities, establishing self-regulatory
Public-private partnerships are also
Chinese entrepreneurs account for standards, lobbying governments
effective in implementing sustainable
70% of China's foreign direct and providing direct services to
development objectives. Noteworthy
investment—more than $50 members. Direct services include
here are the United Nations’ Global
billion recently. the promotion of linkages, training,
Compact—a voluntary corporate
information dissemination and access
The Indian diaspora has been less commitment to environmental, human
to markets. Business associations
involved in direct investment back rights and labour standards—and the
have taken the lead in improving
home than in making business International Finance Corporation’s
the competitiveness of their
connections between overseas Equator Principles, an agreement
members by:
investors and the local business by leading international financial
community and in facilitating ■ Lowering the costs of information. institutions to observe global
the faster development of ■ Establishing horizontal standards in environmental and
private ecosystems. coordination (quota allocation, social policies in all large projects
capacity reduction) and they finance, regardless of whether
With market development and the
vertical coordination these are jointly financed with
emergence of larger firms, informal
(upstream-downstream). public institutions that observe
ties based on personal ties are
■ Setting standards and the same rigorous standards.
supplanted by formal networking
upgrading quality.
organizations, such as chambers of Similar public-private partnerships
commerce, alumni associations and in corporate governance and
incubators. These formal networking FOSTERING PUBLIC- transparency are attempting to
organizations have long been PRIVATE PARTNERSHIPS influence private sector behaviour.
sources of mutual support in the FOR SUSTAINABLE The “Publish What You Pay”
developed world and are now DEVELOPMENT campaign aims to help citizens of
providing the same in the developing Important benefits can be obtained resource-rich developing countries
world, playing a vital role in: by fostering more effective public- hold their governments accountable
private partnerships, particularly for how revenues from the oil, gas
■ Organizing and pooling
in the selective provision of such and mining industries are managed
resources to create shared
services as energy and water. Energy and distributed.
institutions and capabilities.
■ Creating relationships and production and basic water supply The campaign, backed by a
levels of trust that make them projects can use the most effective worldwide coalition of more than
more effective. ownership structure necessary, 170 nongovernmental and civil
■ Defining common standards. including public ownership. But society organizations, was founded
■ Conducting or facilitating final delivery to the rural customer by Global Witness, George Soros's
collective action in procurement, or to the informal sector can often Open Society Institute, CAFOD,
information gathering and be managed by smaller domestic Oxfam, Save the Children U.K. and
international marketing. companies. Decentralized power Transparency International U.K.
■ Defining and communicating production, through distributed
common beliefs and attitudes. energy of various kinds, can also
■ Providing mechanisms to be contracted to the private sector
develop a common economic
or regional agenda.
The coalition calls for international IMPROVING governance to protect shareholders

regulation on the disclosure of CORPORATE and other constituents—and standards
net taxes, fees, royalties and other GOVERNANCE of social responsibility to respond to
payments made by companies to external stakeholders. Private sector
developing country governments in Corporate governance is a focal task forces promoting corporate
all countries where they operate. point in creating safeguards against governance and business associations
corruption and mismanagement, developing codes of corporate
Because individual companies limiting insider dealing and cronyism governance for its members are
might be put at a disadvantage by while promoting the values of a market promising starting points.
disclosing information others fail economy in a democratic society.
to reveal, expecting voluntary The values include accountability,
disclosure might not be a viable transparency and the rule of law— ADVANCING
option. Yet all companies and the as well as fairness, responsibility RESPONSIBLE BUSINESS
investment community would and ownership and protection for PRACTICES AND
benefit from a level playing field minority shareholders. CORPORATE SOCIAL
if regulators required disclosure. RESPONSIBILITY
The importance of this approach The benefits of committing to STANDARDS
is also reflected in the Extractive corporate governance mechanisms
are less corruption, a healthier To some extent the mainstreaming
Industries Transparency Initiative of what is now commonly referred
developed by the U.K. government private sector, fairer markets and
greater institutional development— to as “the triple bottom line”—
and recently endorsed by the reconciling respect for the
World Bank. all supporting a growing economy.
Separate from corporate governance, environment, social equity and
In addition to setting standards for which at its heart is the protection financial profitability—is good
the private sector, a small but growing of shareholders rights, is the news for business. The triple
number of companies are driving growing interest in corporate bottom line focuses corporations
standards higher themselves—to be social responsibility. Companies are not just on the economic value they
the pacesetters for measuring other not only pressured by government, add, but also on the environmental
private companies. These newer which adopts corporate governance and social value they add—and
trends provide a valuable complement regulations forcing codes of destroy. The term captures the
to the traditional approach of a conduct on businesses, but also by values, issues and processes that
regulated private sector and a public opinion galvanized by civil companies must address to minimize
regulating government agency. society and labour organizations. any harm from their activities and
Infosys in India is not only paving Self-regulating or voluntary codes to create economic, social and
the way in this field but also of corporate behaviour prove that environmental value. This involves
engaging directly with governments companies are willing to be good being clear about the company’s
to influence the broader reform and corporate citizens. purpose and taking into consideration
developmental agenda in its state of the needs of all the company’s
operations and in the country. This It is important for the public and stakeholders—shareholders,
kind of role for the private sector is private sectors to work together to customers, employees, business
vital to the development effort. develop a set of rules binding for partners, governments, local
all, establishing the ways companies communities and the public.
have to govern themselves. Business
associations, such as chambers of The possibilities of such an
commerce and industry groups, should alignment, between social and
try encouraging their members commercial interests, remain
to develop standards of corporate largely untapped. The majority
of companies that have taken an
enlightened approach to sustainable
development have been pushed and
pulled in that direction: pushed by
changing societal expectations and public, using sophisticated corporate development. Among the new
stakeholder demands, and pulled social responsibility reports. standards are: AA1000 (developed
towards emerging markets by by the Institute for Social and
Global partnerships to define
greater competition for market Ethical Accountability), ISO14001
standards in different sectors of
share in the mature markets of (International Organization for
industry have also facilitated private
the developed world. Standardization) and Project Sigma
sector leadership and corporate
(a sustainability management
Most of the efforts have been governance attributes that reflect
standard under development by
concentrated in traditional changing corporate behaviour.
the British Standards Institution,
philanthropic or charitable models: These include Responsible Care
Forum for the Future and others).
building schools and health clinics in the chemical industry, the
or supporting cultural and artistic Sustainable Forest Initiative, The development and improvement
organizations. Though valuable Sustainable Fisheries, and the of indicators for development by
and perhaps necessary, this model Global Mining Initiative launched international development agencies,
is more window-dressing than a in 1998 by nine mining companies such as the International Finance
substantive or sustainable contribution from around the world. Corporation’s Sustainability Frame-
to the lives of the poor. Because it work, and by corporations, such as
The global mining industry sought
lies outside the traditional business the Global Reporting Initiative,
to redefine its role by demonstrating
model, the benefits are measured in present unique opportunities to
corporate commitments to stake-
intangibles—such as reputation, risk track private sector contributions to
holder dialogue and sustainable
reduction and license to operate— sustainable development. So does
development. The initiative led to
rather than the bottom line. It the scoring of corporate efforts to
an independent research project on
represents mainly short term, pursue the Millennium Development
mining, minerals and sustainable
unquantifiable and unaccountable Goals, published through the
development and a multistakeholder
financial contributions. And World Economic Forum’s Global
conference in May 2002. The
commitments can come and go Governance Initiative. Such
partnerships and research efforts
with changes in the business quantitative tools will allow
that flowed from these initiatives
climate or management. corporations to move beyond
continue through the International
qualitative stories associated with
In the last decade there has been Council on Mining and Metals,
traditional philanthropy towards
a growing body of evidence that the World Business Council for
strategic social investments with
pioneering companies that actively Sustainable Development and other
short, medium and long targets.
manage their impacts on sustainable industry associations and companies
Being able to budget and report
development have better financial that share experience in promoting
on results will have the benefit
performance. Companies have been local growth through sustainability
of quantifying private sector
pushed by advocates, labour unions, principles and standards.
contributions to international
the media and even shareholders
The partnerships reflect the evolution poverty reduction targets while
to take the positive and negative
of new voluntary standards for simultaneously creating incentives
impacts of their activities into far
judging corporations. Some critics for more proactive approaches
more consideration than they did
will point to these partnerships as to sustainable development.
before. They are building human
corporate ways of avoiding binding Standard indicators based on
rights, core labour standards and
regulations. Others see them existing international frameworks
sustainable development into their
as direct evidence of corporate
corporate commitments. They are
commitment and understanding
slowly learning to implement them
of the importance of taking a
through management systems and
leadership role on sustainable
broader accounting standards. And
they are reporting their successes
and failures along the way to the
also provide the tools for cost-benefit to make a much more serious
analysis of investments and the commitment to capturing the
identification of effective models. opportunities—by researching
bottom-of-the-pyramid markets, by
■ ■ ■
advancing standards of sustainability
The Commission sees a distinct need and public trust and by thinking
for accelerating the dissemination creatively about linking with other
of information on successful models, businesses locally or abroad for
creating new ones or adapting mutual benefit. Governments, from
existing ones to new environments, both developing and developed
replicating them across geographies countries, can facilitate this,
and scaling them up rapidly. and international development
institutions can assist them.
The private sector, particularly the
management of large local and
multinational companies, needs
Photo: Chao Doan/UNDP
CHAPTER 5
RECOMMENDED ACTIONS
I
he Commission believes that the primary responsibility
for achieving growth and equitable development lies
with developing countries.This responsibility includes
creating the conditions that make it possible to secure
the needed financial resources for investment. And those conditions—the
state of governance, macroeconomic and microeconomic policies, public
finances, the financial system and other basic elements of a country’s economic
environment—are largely determined by the actions of domestic policymakers.
Their challenge is to capitalize on advances in macroeconomic stability and
democracy and to launch reforms that would bring about further changes in
institutional frameworks to unleash and foster the private sector.
Most of the recommended actions involve more than one of the actors
working together. Where governments are implementing policy change, it is
often with the direct support and involvement of multilateral development
institutions. Where the private sector is taking a more active stance on
sustainable development, it is often with civil society raising the profile of
this issue. Where governments are implementing regulatory reform, it may
be in direct consultation with representatives of the private sector. The
individual actions identified here should be seen in the framework of this
FIGURE 5.1 ACTIONS IN THE THREE FOCUS AREAS
Targeted at public sector players Targeted at private sector players
Driven by private
sector players 3. Private sphere:
■ Companies
Mobilize capabilities and resources
■ Focus private sector capabilities to support
■ Civil society
organizations entrepreneurs and firms
■ Build ecosystems and linkages
■ Foundations
■ Pursue bottom-of-pyramid business
2. Public-private sphere:
Partner and innovate
■ Develop broader financing options for entrepreneurs
Driven by public ■ Build leadership and business skills and training
sector players ■ Broker public-private partnerships for basic services
■ Local
governments
1. Public sphere:
■ Donor
Create an enabling environment
governments
■ Reform regulations and strengthen rule of law
■ Development
■ Formalize the economy
agencies
■ Engage private sector in the policy process
broader cooperation—which is the contributions of the private commitment to sustainable private

needed even more to reduce poverty. sector to development, as outlined sector development—and combine
in chapter 4. that with a genuine commitment to
Our interest lies in three areas:
reform the regulatory environment
1. In the public sphere, promoting ACTIONS IN THE by eliminating artificial and policy-
the reform of laws, regulations PUBLIC SPHERE: induced constraints to strong
and other barriers to growth. CREATE AN ENABLING economic growth. Everything starts
2. In the public-private sphere, ENVIRONMENT with the tone at the top. There is
facilitating cooperation and no reason, for example, for the cost
partnerships between public and Creating an enabling environment of business registration in low income
private players to enhance access involves steps designed to reduce countries to be many multiples that
to such key factors as financing, the share of the informal sector in of similar procedures in OECD
skills and basic services. an economy, through reform of the countries. We emphasize a pragmatic,
3. In the private sphere, overall enabling environment for end-user perspective that focuses
encouraging the development the formal economy. These steps on actual improvements in an
of business models that can be should have the effect of both entrepreneur’s dealings with public
scaled up and copied and that reducing the costs as well as institutions or regulations. And as
are commercially sustainable. increasing the benefits of formality. governments develop and enforce
more effective formal rules and
The broad range of actions in these Recommended actions by
regulations, they need to understand
three focus areas—necessary for developing country governments
the importance of private sector
a successful program of private The Commission believes that
ecosystems in creating broader
sector development—flow from the developing country governments
participation in the economy and
analytical framework for unleashing should undertake the following actions:
in illustrating the value of the
the capacity of domestic entrepreneurs Reform regulations and strengthen capacity to govern transactions.
developed in chapters 2 and 3. the rule of law. Developing country
These actions reinforce and leverage Formalize the economy.
governments have to make a
Developing country governments
strong and unambiguous policy
need to focus on creating the
conditions to reduce informality
CHAPTER 5: RECOMMENDED ACTIONS 39
and change the composition of the ensure that the voice of the private Redirect the operational strategies
private sector ecosystem over time. sector includes small and medium of multilateral and bilateral
The focus should be on measurable enterprises and microenterprises. development institutions and
outcomes. Since the composition Government–private sector councils agencies. Developed countries
of the private sector ecosystem in a and advisory bodies are being set up. are the primary shareholders of
country is a measure of its development But the difference between notional the multilateral development banks.
progress (high levels of informality collaboration and truly effective They control most of the bilateral
are associated with lower incomes), cooperation can be ensured only by aid agencies and ministries active
the objective should be to strive governments and their private sector in the developmental arena. In
to change this composition in partners. When new arrangements encouraging sustainable private
a specific and measurable way. are put in place, a few high-profile sector development, they need to
Indicative targets should be set examples of successful cooperation can ensure that the collective actions
to increase the shares of formal change the environment from mutual of these agencies are better
enterprises and smaller enterprises distrust to strategic partnership. coordinated—to improve their
in the economy, monitorable over Public-private consultative bodies, efficiency and to reduce the pressures
a five to ten year horizon. where public officials and private on the administrative capacity of
sector representatives share a voice developing country governments.
A clear recognition of the informal
are another key element. But the full They also need to focus their support
sector will need to be accompanied
spectrum of private sector players for private sector development in
by rapid steps to analyze its local
must be at the table, including developing countries by creating
characteristics and put in place the
informal and small entrepreneurs the conditions to reduce informality
measures to improve its access to
and workers’ organizations. and change the composition of the
finance and to support from the
private sector ecosystem.
formal sector. We need to start by Recommended actions by
raising awareness and disseminating developed country governments Untie aid. Developed country
information about the prevalence Developed country governments governments are also the main
of informality—and by diagnosing are the principal players in source of technical assistance funds
the problem in a country context. creating and maintaining a used by multilateral development
Remedies include reforms of positive global environment. institutions to support policy and
specific government rules and institutional reform in developing
their enforcement. Foster a conducive international
countries. Although some flexibility
macroeconomic environment and
has been introduced in recent years,
One area for urgent action is trade regime. The Commission
the major elements of these funds
improving the rules and processes believes that developed country
are tied. This can create unnecessary
for registering and titling land, governments have to foster a
complications in how effectively
critical preconditions for financial conducive international macro-
funds can be deployed and can
access based on these assets. Needed economic and policy environment
affect the quality of the advisory
here are practical, user-friendly to unleash the full potential of
work that they support. Moreover,
processes to obtain and enforce entrepreneurs in developing countries.
the bulk of the funds are provided
property rights. As with any public A robust international economy
to governments rather than more
reform process, consultative bodies provides markets for goods from
directly to the final recipients.
need to steer reform efforts in a developing country companies.
Changes in the administrative rules
transparent way, involving informal In addition, increasing the flow of
controlling these funds would permit
entrepreneurs, cooperatives and development aid and reforming the
more effective use and delivery of
civil society organizations. global trading system to provide fair
technical assistance to stimulate
economic opportunities to producers
Engage the private sector in the private sector development.
from developing countries are
policy process. Governments need
essential for promoting rapid growth
to create a real partnership with
in domestic private investment.
representatives of the domestic private
sector to implement changes and
Recommended America has just been arranged by innovation in this area to develop
actions by multilateral the Inter-American Development truly sustainable partnership models
development institutions Bank in collaboration with the for developing countries.
The Monterrey Consensus explicitly Institute for Leadership and
Facilitate access to broader financing
acknowledged the role of private Democracy of Peru. There is also
options. We envision continuing
business in development. It touched great scope for facilitating linkages
development of domestic financial
on the need for improving the among multinational corporations
markets coupled with skill-building
functioning and efficiency of global and small and medium enterprises, for regulators and private financial
and bilateral development agencies. given the importance of private institutions. We see great promise
It recognized the limited absorptive sector ecosystems and the benefits in facilitating the South-South
capacity of many developing countries from private-private partnerships. transfer of expertise between financial
and the stretched administrative institutions and public regulators.
capability to deal with overlapping ACTIONS IN THE Broad alliances for microfinance,
activities of development institu- PUBLIC-PRIVATE as part of the United Nations
tions. The Consensus Document SPHERE: PARTNER International Year of Microcredit
thus encourages a fair degree of AND INNOVATE 2005, and for small and medium
specialization and partnership in the enterprise lending could develop
development community to improve The Commission believes that all financially sustainable models.
the overall impact of various forms stakeholders need to make concerted Innovative schemes are also needed
of development assistance. efforts in finance, skills and public- to transform financial flows from
private partnerships for the delivery the many diasporas into long-term
Apply the Monterrey recommen- of basic services. In each of these productive investment in their
dation of specialization and critical areas, developing country home countries.
partnerships to private sector governments and private players
development activities. Many need to develop viable partnership Assist skill and knowledge
institutions are engaged in efforts models that leverage their respective development. Skill-building activities
to support the development of strengths. Various civil society could range from programs for top
financial markets, provide business organizations can add valuable skills public and private leadership to
development services to small and insights to such partnerships. training microentrepreneurs to joint
companies, advise on the enabling Building sustainable partnerships efforts with public authorities and
environment, improve corporate requires sophisticated skills to unions to improve workforce skills.
governance and enhance the focus assess competing interests and The Commission envisions larger
on sustainability. While the choice negotiate pragmatic agreements. alliances with business and trade
of “supplier” is important to schools, public-private collaboration
Multilateral development institutions in professional education and
recipient countries, it is clear to
can be neutral conveners and training, and mentoring programs
us that these overlapping activities
moderators. To be effective inter- for entrepreneurs—all leveraging
are counterproductive and need
mediaries they must build the skills peers, expatriates and those in the
to be urgently addressed.
to create partnerships that make diaspora. We see a large opportunity
Address informality in developing economic sense for private players for organizational infrastructures
countries. Some pioneering work while being manageable for developing that network private resources world-
is underway to map the structure of country public agencies. Different wide with aspiring entrepreneurs in
the informal sector, and a global players may initiate and lead a developing countries. This includes
effort to expand the coverage of partnership at different times. formal programs of multinational
this work is likely to yield significant What matters most is that all parties companies to make their human
benefits. A partnership to accelerate approach partnerships with realistic resources and know-how available to
the pace of such work in Latin expectations of each party’s interests developing country entrepreneurs.
and capabilities. The Commission
sees a distinct need for further Make possible sustainable delivery
of basic services, particularly energy
and water. The Commission sees the
CHAPTER 5: RECOMMENDED ACTIONS 41
need to develop innovative models potential to contribute to development expanding markets and new business
for partnerships of governmental through its knowledge, expertise, opportunities. The interplay in
service providers, multinational resources and relationships. Unleashing domestic ecosystems is likely to
companies and local companies. this potential will require increasing result in parallel changes in the
The sustainable delivery of basic the visibility of the broad range of economic behaviour of all those along
services depends on effective private contributions (illustrated the chain, from informal operators
partnerships and other forms of in chapter 4) that remain disparate through small and medium enterprises
public-private cooperation, which and unnoted—and establishing and their financiers. This is important
has proven to be difficult. Still to be an infrastructure to channel these in empowering the poor. There
developed are the sophisticated skills contributions effectively. This could could also be great value in creating
to implement lasting partnerships, be accomplished through a new private a scorecard for multinationals and
where all players’ incentives are well focal point organization that would other large firms to measure their
balanced and proper governance is in match private know-how, services success in creating profitable markets
place. We see a clear need to create and resources with the needs for for poor consumers.
additional capacity to help overcome such services in developing countries,
Set standards. The private sector
market dysfunctions and information primarily by the private sector but
needs to make a genuine commitment
asymmetries, provide hands-on also by governmental agencies.
to sustainable development—with a
operational support, fill knowledge
Develop linkages with sharp focus on corporate governance
gaps and act as neutral intermediary
multinational and large domestic and transparency. We have highlighted
between competing interests. Effective
companies to nurture smaller successful companies that have
brokering can make more transactions
companies. Linkages between shifted the development debate
feasible because it can overcome
different types of firms in developing within their economies and created
the barriers that would otherwise
countries provide an effective channel a political consensus that eases the
impede action. We plan to follow
for local companies to gain access way for governments to facilitate the
up with public and private entities
to markets, financing, skills and expansion and growth of a vibrant
in this area to see how existing
know-how. There is an urgent need private sector. Such a shift will occur
institutional capacity can be
for multinational corporations to when pioneering managements
supplemented—and how poor
integrate better with local small realize the value of leading from the
people can be empowered to build
and medium enterprises and to front, being responsive to social
businesses directly.
strengthen links with the domestic development needs and setting
ecosystem, such as those between new standards that demonstrate the
ACTIONS IN THE microenterprise distributors and value of sustainability. Many large
PRIVATE SPHERE: large domestic companies. Many companies in developing countries
MOBILIZE CAPABILITIES parties need to work together for today are also multinational in the
AND RESOURCES this to happen, and the range of sense that their business operations
The Commission believes that the activities to make the links durable are no longer limited to their
private sector, particularly large includes information, know-how country of origin. Still, they do play
local companies and multinational and hands-on support. a different role within their home
corporations, should contribute to economies—and are seen differently
Pursue business opportunities in
accelerated economic development from multinationals in the traditional
bottom-of-the-pyramid markets.
and to poverty alleviation. sense of the term. Where such
Recognizing the needs of bottom-
high-profile local companies exist,
Recommended actions of-the-pyramid markets and creating
they too will need to understand
by the private sector innovative solutions to meet these
the broader framework of their
The required actions for the private needs are vital actions required from
operations and work actively to
sector are as laid out in chapter 4: the private sector, both domestic
create the new consensus that we
and international. Efforts should be
Channel private initiative into
driven mainly by the incentives of
development efforts. We believe that
the private sector has tremendous
propose. Many of the sustainability on a commercial and sustainable As the main actors begin to work
initiatives discussed in this report basis. Civil society organizations are together towards common goals, a
tend to involve large multinationals. closest to the bottom of the pyramid. significant change will be required
But similar initiatives or offshoots They also are often proxies for in the structure of economic and
of global initiatives involving the experimenting with new technologies political interactions in many
local private sector could be very for solving problems. And they, too, developing countries. Today’s
effective in redefining the roles will need to measure their success fractured and confrontational
of different stakeholders in the in facilitating innovative private- relationships will need to be
development process. private partnerships to address gradually replaced by collaborative
economic and social policy objectives. partnerships in which each player’s
Recommended actions
actions are influenced and modified
by civil society and
LOOKING FORWARD by larger challenges and by the
labour organizations
capabilities of others.
The Commission believes that civil Recognizing the size and complexity
society and labour organizations of the challenge, the Commission To catalyze this process, the
have to continue as critical observers concludes that it is necessary to Commission is assembling a first
of the development agenda—and channel private capabilities and set of actionable initiatives to
as facilitators and supporters of resources into unleashing the private facilitate transformations in individual
innovative approaches for meeting sector in developing countries. countries and to provide the tools for
the Millennium Development We believe that the energies and governments and the private sector
Goals and improving the quality opportunities remain untapped to supplement available resources
of life for poor people. Civil society because the needs in developing and begin rapidly implementing a
organizations have a major part in countries have not been appropri- programme of change. These first
a robust global alliance that builds ately matched with resources and actions are intended to stimulate a
on the strengths of each key player interests around the globe. Our collaborative response from potential
to meet the Goals. proposed programme of action is partners who read this report. Our
thus designed to catalyze the strong message to all of you is: join us.
Increase accountability in the
system. This is a core part of the private response that is the main In the coming months we will be
work of civil society organizations, objective of our work. launching initiatives and consulting
as is their leadership in pushing To promote progress, the Commission with the readers of this report to
forward the concept of sustainable recommends that the United Nations draw them into the undertaking.
development. This work should sponsor the tracking of private We invite the broad range of
be strengthened. sector development. An annual stakeholders identified in this
progress report would maintain the report to heed our call and to work
Develop new partnerships and
prominence of the Commission’s rapidly to convert initial ideas to
relationships to achieve common
overall recommendations and ensure specific business plans that can be
objectives. Numerous civil society
the commitment to addressing the launched within the coming six
organizations are also acting in
many issues identified here. The months. Only if we can generate
direct partnership with the private
report would offer an opportunity to an urgent sense of following up
sector to combine the management
celebrate progress and expose obstacles on our initial work can we hope to
skills and financial capacity of
to private sector development. It unleash the trapped entrepreneurial
private companies with their own
would be prepared with the support energy of the poor as a force for
know-how and contacts in bottom-
of a number of Commission members private sector growth.
of-the-pyramid markets. This can
facilitate the kind of private sector– and development institutions.
civil society organization collaboration
that builds microcredit programmes
Photo: Munira Morshed Munni/UNDP Bangladesh
BIBLIOGRAPHIC NOTE
A
s indicated in the Bibliography that follows
and in the detailed references cited below, this
report draws on a wide range of documents
and on numerous outside sources. Many people
contributed a tremendous amount of time and energy to informing the
Commission of their experiences and views, and they are identified in
the Acknowledgements.
Institutional resources from the World Bank Group, including the International
Finance Corporation and the Multilateral Investment Guarantee Agency,
were an important source of information, as detailed in the chapter references
below. The Bank’s Doing Business in 2004: Understanding Regulation deserves
special mention as the basis for a substantial amount of the analysis and
conclusions in Chapters 2 and 3. The recommendations in chapter 3 are
a synthesis of suggested policy interventions from a variety of sources and,
in particular, also benefit from the private sector development work of the
Organisation for Economic Co-operation and Development.
The Secretariat of the Commission ADDITIONAL

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Commission on the

MAKING BUSINESS WORK FOR THE POOR

The analysis and policy recommendations of this

All rights reserved. No part of this publication

Photo: Sonya Laurence Green/UNDP Somalia

Paul Martin Ernesto Zedillo

Photo: Luc Anh/UNDP

READERS AND EXPERTS

CHAPTER 2. CONSTRAINTS ON THE

CHAPTER 3. UNLEASHING THE

CHAPTER 4. ENGAGING THE

CHAPTER 5. RECOMMENDED ACTIONS 37

BIBLIOGR APHIC NOTE 43

Photo: Pedro Cote/UNDP

Photo: Boris Missirkov

WHY THE PRIVATE SECTOR

BOX 1.1 T H E M I L L E N N I U M FIGURE 1.1 MORE INVESTMENT—MORE GROWTH

Investment as percent of GDP, 1970–98

Fully 4 billion people in the world— F I G U R E 1 . 2 F O U R B I L L I O N P E O P L E AT T H E B O T T O M O F T H E P Y R A M I D

Photo: UNDP Cuba

FIGURE 2.1 INFORMALIT Y THRIVES IN POORER COUNTRIES

Source: World Bank and International Labour Organization

rules that enable competitive access F I G U R E 2 . 3 F O U N D AT I O N S F O R T H E P R I VAT E S E C T O R

By some estimates up to a third ■ ■ ■

Photo: Evan Schneider/UNDP

UNLEASHING THE POTENTIAL

FIGURE 3.1 STRENGTHENING THE EFFECTIVENESS OF

Related to ensuring integrity in public countries—the court system, property ERECTING

Developing human B O X 3 . 1 C O S TA R I C A’ S P R I VAT E S E C T O R — U N L E A S H E D

often accompanies government to be supplemented by international

Photo: Sonya Laurence Green/UNDP Somalia

ENGAGING THE PRIVATE

■ Creating the capacity to F I G U R E 4 . 1 P R I VAT E S E C T O R C O N T R I B U T I O N S

Source: Prahalad (forthcoming)

The coalition calls for international IMPROVING governance to protect shareholders

Photo: Chao Doan/UNDP

FIGURE 5.1 ACTIONS IN THE THREE FOCUS AREAS

Targeted at public sector players Targeted at private sector players

broader cooperation—which is the contributions of the private commitment to sustainable private

Photo: Munira Morshed Munni/UNDP Bangladesh

The Secretariat of the Commission ADDITIONAL

Photo: Phillip Archer/UNDP

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