Private Sector Development and poverty reduction
Private sector development emphasises the central importance of economic growth to reducing poverty. The links between the private sector and poverty reduction are manifold; PSD aims to maximise the benefits of these connections for poor people to achieve job creation, markets that work for poor people and the growth of the local private sector in developing countries.
The typical private sector entity is not a large multinational company, but a rural small-holding, a market stall or co-operative factory. 90% of people from sub-Saharan Africa are in the private sector: the Secretary of State for International Development, Hilary Benn, recently stated, "Poor people are the private sector".
Sustained poverty reduction will require the development of small and medium-sized enterprises through domestic and foreign investment and the movement of businesses from the informal to the formal economy.
Growth is a necessary, but not sufficient, condition for poverty reduction: the pace and pattern of growth both affect its ability to be pro-poor. Meanwhile, a series of factors affect the private sector's ability to deliver 'the right kind of growth': the climate in which investment takes place is foremost amongst these factors. The regulatory environment; the presence of supporting infrastructure; rights to property and land; governance; corruption; access to financial, physical and human capital all of these factors will nurture or inhibit investment climates.
Creating the right conditions for growth and job creation is a primary function of governments. However, donors can assist the ability of both governments and the private sector to generate and sustain growth. As well as supporting governments in improving their investment climates, donors can address the systemic factors such as poor employment opportunities and conditions, a lack of access to assets such as finance, health and education and dysfunctional market conditions that prevent poor people's participation in markets. Certain country circumstances, such as conflict, fragility and access to natural resources, will put such constraints in even sharper focus, and will require specific donor interventions.
Donors have a key role in mobilising the resources of the private sector primarily finance, human capital and regional and international networks and stimulating the investment of these resources in ways that contribute to poverty reduction. In particular, donors can act as investment pioneers, providing initial funding for investments perceived as too risky by the private sector and demonstrating the investments' potential. Donors and governments can also help markets reach even the very poorest, by sustaining markets that are not profitable for the private sector through microfinance.
Whilst the primary function of the private sector is clearly to drive growth, there is an increasingly wide acceptance that the manner in which private sector entities trade, invest, employ staff and address their social and environmental impacts has a profound impact on poverty reduction. Donors can maximise these pro-poor responses in a number of ways, for instance, through direct engagement with the private sector through public private partnerships and support for changes to trading structures and practices.