House of Commons - International Development

Select Committee on International Development Fourth Report

4 MAKING MARKETS WORK FOR POOR PEOPLE

77. As discussed in Chapter 2, the Making Markets Work for the Poor (MMWP) framework[144] is a major donor strategy used in support of PSD. The Approach focuses on addressing the systemic barriers that prevent poor people's participation in markets.[145] Clearly, this approach depends on countries meeting the central challenge of generating and sustaining growth, without which opportunities for people to participate in markets simply won't exist. The MMWP strategy, then, complements growth policies and improvements to the investment climate, as Professor Adrian Wood of the University of Oxford told the Committee: "It is not a magical combination but it is fairly straightforward. What you need to do is to give the poor more assets and more access to markets so that they can participate in the growth process more".[146]

78. As well as discussing the specific MMWP interventions used by DFID under the MMWP approach, this chapter will take a wider view of how donors and the private sector can create opportunities for poor people to participate in growth. Clearly, the most direct way in which the private sector creates opportunities is through job creation and self-employment. But there are a number of other ways to empower, equip and support poor people to maximise their participation in growth, including improved skills, technology, health and education, access to finance and support to traditional markets, notably agriculture.

The Making Markets Work for the Poor Approach

79. Market access is a crucial component of sustainable growth and poverty reduction.[147] Markets offer the foremost means through which poor people can participate in economic activity, whether as producers (farmers, entrepreneurs), as employees or as consumers. If people don't participate in markets — for example, if unemployment is high or if access to key assets, such as human, physical and financial capital, is constrained — then their chances to benefit from growth are limited to 'trickle down' through tax or philanthropy.[148]

80. Yet markets in developing countries do not automatically offer opportunities for all sectors of society. Markets are often under-developed and unbalanced. Professor Andrew Atherton of the University of Lincoln identified a number of characteristics often present in developing markets: i) a large self-employed population, both formal and informal; (ii) a relatively small number of internationally competitive, i.e. growing and exporting, small firms; (iii) a 'missing middle', i.e. few medium-sized competitive indigenous businesses; (iv) an 'unbalanced' large company structure, typically made up of companies, often operating as loose or complex conglomerates, close to and often influenced by government, and (v) dependence on multi-national companies with headquarters and decision-making control elsewhere.[149]

81. The MMWP approach, however, does not recommend direct donor intervention in markets to address these problems. Learning from the flawed 'impulsive intervention' approach of the 1980s, MMWP recognises that development agencies are not businesses and do not possess the relevant skills or culture to become market players.[150] Instead, MMWP addresses the underlying macro-level constraints that prevent markets working and builds the right conditions for a more effective system.

82. There is a growing body of evidence to support the use of MMWP.[151] An example of the MMWP approach in practice is the DFID-funded ComMark Lesotho Textile and Apparel Project.[152] This project aims to improve the level of investment and competitiveness of Lesotho's garment sector so that it benefits poor people by creating formal job opportunities.[153] Another example is the FinMark Trust, again funded by DFID, a 'market catalyst' that seeks to make financial markets work for poor people in South Africa, Botswana, Lesotho, Namibia and Swaziland.[154]

83. There are (incipient) signs within DFID that MMWP is emerging as a unifying theme for the different disciplines within its PSD approach.[155] We recommend that DFID continues its leading role in demonstrating the value of the MMWP approach. adequately supported with sufficient funding and other resourcing. The Department must build on the successes of the FinMark and ComMark initiatives and scale up these innovative programmes. The technical assistance and creative thinking that underpin these MMWP programmes must not be sidelined by the increasing profile of either investment climate work or budget support.

Employment

84. Translating economic growth into new jobs that pay a just wage — that is, a wage that can help to lift people out of poverty — and treat employees fairly is a key objective of PSD. A recent International Labour Organisation (ILO) report found that half the world's workers do not earn enough to lift themselves and their families above US$2 a day.[156] For many countries, securing growth is largely about the need to create jobs.[157] But sometimes getting a job is not enough; securing 'decent work' — defined by the ILO as being freely chosen, with labour rights and social security[158] — remains elusive for many workers worldwide, who are subjected to poor labour conditions that mean that they pay a heavy cost for the wages they take home.

85. Particular concerns exist for young people out of work; almost half of the world's unemployed are aged 15 to 24, and this age-group is more than three times as likely as adults (25 and over) to be out of work.[159] For young people to be able to use education and skills in productive livelihoods not only fulfils their human rights but will positively affect political stability and growth in developing countries.[160]

86. Yet employment is not mentioned once within the MDGs.[161] As Albert Tucker, a key figure within the fair trade movement, told us, donors must help fill this void by developing and financing a clear target-driven focus on employment, especially in Africa, with measurable indicators of success attached.[162] The Secretary of State admitted that DFID does not offer specific employment generation schemes for young people, saying that the Department preferred to concentrate on creating the right climate for growth and job creation.[163] DFID's Chief Economist, Tony Venables, acknowledged that, "Youth employment issues possibly have not been thought about enough by the development community as a whole." He recognised, however, that attention to this area is increasing — for instance, next year's World Development Report will focus on youth.[164]Lord Brett, Director of the ILO in the UK, thought that youth employment was a crucial issue for donors, who need to support education and develop international partnerships around this issue.[165] The Commission for Africa Report recommended that donors should assist African governments in formulating and implementing national action plans on employment through the Youth Employment Network (YEN), an initiative backed by two UN resolutions and supported by the ILO and World Bank.[166]

87. In the absence of global targets on employment, a key priority for donors is achieving a more explicit focus on creating and sustaining jobs, especially within African countries. This should include increased support for improving the technical skills of those at the lowest end of the job markets. Consideration should be given to developing international targets on employment, with a particular focus on young people. DFID's current reliance on investment climate reforms as a means to create jobs is insufficient to reach the groups who are most in need, especially young people. The Department should seek to build partnerships with governments and companies that closely link education with job creation.

88. As William Kingsmill of DFID told the Committee, the reality is that, whilst a lot of jobs are being created in many countries, the vast majority of people are still self-employed, running small household businesses in the informal sector.[167] Lord Brett saw addressing job creation and labour rights for these informal private actors — unprotected by labour laws — as DFID's biggest challenge vis-à-vis employment.[168] Companies clearly have a major duty in formalising and expanding opportunities for decent work, and DFID told us that it seeks to make investors aware of their obligations in this regard.[169]

89. DFID's support to the ILO — with whom a new partnership agreement will be started this year, worth about £20 million — is clearly valued by the Organisation, especially in regard to child labour and HIV/AIDS work[170], and is an important contribution to upholding international labour standards and bringing poor people into the formal economy. Bringing the millions of informal workers in developing countries under international labour law protection is a major priority and DFID needs to seek active dialogue with the private sector, governments, multilateral organisations and other donors on how to ensure that investment climate improvements and other PSD strategies prioritise minimum labour standards enforcement.

Financial sector development

90. Financial markets will only work for poor people when access is available to the products and services supplied by, for instance, banks and insurance companies. Access to finance is crucial for entrepreneurs and firms of all sizes in increasing productivity and promoting technological progress.[171] Yet currently more than 90% of the population in African countries is financially excluded.[172] Increasingly, 'semi-formal' channels such as Micro Finance Institutions (MFIs) are filling the gap for the un-banked or under-banked.[173] However, currently MFIs still only reach a minority of the population. Only 8 countries across the world have seen MFIs succeed in serving more than 2% of the population; in 35 of 55 developing countries surveyed recently, MFIs reached less than 1% of the population.[174]

91. Microfinance is only one of the tools applicable to financial sector development. As the written submission from South Africa's FinMark Trust highlighted, "The policy priority should be on bringing about systemic change in the way financial markets operate — as a whole — rather than on the support of one fairly small aspect of financial sector activity."[175] Clearly, financial sector development is dependent on the institutional, legal and regulatory framework in which it is rooted, and hence must be integrated with reform programmes relating to governance and investment climate improvements.[176]

92. Financial products — especially those governed by commercial banks, generally the principal source of domestic investment — often need redesigning and repricing in order to work for all sectors of society, as they tend to cater for the status quo rather than new customers. Financial exclusion partly reflects the fact that poor people cannot afford to pay high charges demanded by banks. Citibank stated that there is a minimum level of income below which it is simply not economical to have a bank account, due to transaction costs.[177] Charges for remittance transfers are particularly high and this is an unnecessary obstacle to these important development flows.[178] Banks can also play a role in working out how to leverage the existing financial infrastructure so that more people can be reached. The Giro system, operated by post offices across Europe, offers an example of how this could work.[179]

93. But reaching even the poorest with financial services is possible, providing that the public sector or not-for-profit sector is prepared to step in and fill the gap that the private sector cannot viably bridge.[180] In South Africa, negotiations seeking lower transaction costs have taken place within a partnership of banks, the Government, civil society organisations and trade unions. Reducing such costs requires a broad transformation of the financial sector, incorporating improved access to credit and other services, as well as the willingness of banks to contribute to community reinvestment initiatives.[181]

94. Donors have shown they can support innovation in reaching the financially excluded, and have provided initial funding for a number of successful financial sector development initiatives.[182] DFID has attracted particular praise for its support for the FinMark Trust, a Johannesburg-based initiative that acts as a 'market catalyst' by communicating research and information about southern African markets to stakeholders.[183] FinMark liken themselves to a policy centre that facilitates public-private dialogue and provides research to the government and private sector about tackling the causes of financial market failure. Amongst the information-based tools that FinMark has pioneered is FinScope — a comprehensive annual study of the markets for financial services in South Africa, Namibia and Botswana. As FinMark's written submission pointed out, supporting the development of an information infrastructure has the important benefit of creating an open society that values information — and uses this information to create policy.[184] The FinMark methodology — developed from DFID's initial £5 million funding — is now being paid for by the private sector in South Africa and is spreading in use throughout the region and further north.[185] DFID is having "very active discussions with the World Bank" on taking the methodology to many more countries.[186] The FinMark Trust has deepened understanding and co-operation around financial sector development in southern Africa in a highly cost-effective and sustainable fashion. Negotiations with the World Bank regarding the FinMark methodology need to be taken up at a high political level to ensure that this important tool for financial sector development is successfully replicated and scaled up.

Agriculture

95. Agriculture is the most important private sector activity in many developing countries.[187] In sub-Saharan Africa, agriculture contributes to 70-80% of employment.[188] Making agricultural markets work for poor people has multiple and far-reaching benefits. As well as providing livelihoods, agriculture offers food security and drives economic development outside of agriculture. It is also of huge social, cultural and environmental significance for many rural communities, particularly for women, who are estimated to produce around three quarters of the food grown in developing countries.[189]

96. There has been much speculation about whether the 'green revolution' that has taken place in Asia since 1980 could be emulated in Africa, where agricultural productivity has stagnated. Witnesses could see no reason why Africa could not also transform its agricultural productivity, if a number of specific challenges are managed, including Africa's volatile rainfall.[190]However, Africa's agricultural potential is currently largely un-exploited.[191] Agricultural infrastructure — especially irrigation, post-harvest and rural infrastructure — has played a vital role in Asia's growth. Yet agriculture-supporting infrastructure is deficient in Africa, especially irrigation, of which there is an almost total lack — only 4% of arable land in sub-Saharan Africa is irrigated compared to 40% in South Asia.[192] The Commission for Africa recommended that, as part of a wider set of measures to promote agricultural and rural development, donors must increase funding of irrigation by 50% before 2010 (this should double Africa's arable land under irrigation by 2015).[193]

97. Other obstacles to unlocking Africa's potential for agricultural growth include inequitable land distribution and insecurity of land tenure; the international trade regime; climatic and ecological problems (pests, weeds and diseases) and the post-1980s decline of investment in small market towns and transport.[194] Overcoming these obstacles requires a package of measures: as Professor Keith Palmer put it, "I think that agricultural development in Africa is quite simple: it is simply a matter of bringing together the things everybody knows you need."[195] Farmers need far greater access to inputs (for example, fertiliser, pesticides and seeds); electricity to operate water pumps; transportation and telecommunications systems to sell food at markets; post-harvest facilities such as adequate storage; extension and information services, and improved access to finance.[196] Small-holdings experience problems in sharper focus than larger farms and need their particular problems addressed if they are to participate fully in the benefits of economic growth.[197] If a series of key constraints can be addressed, there is no reason that Africa cannot emulate Asia's successes in achieving agricultural growth. A lack of agriculture-supporting infrastructure is the primary barrier, and increases in infrastructure funding must be targeted towards this sector. Irrigation is a particular concern. DFID must work with other donors to achieve the Commission for Africa-recommended 50% increase in funding for irrigation before 2010. Another priority is re-building the seed industry within Africa. This package of measures should be closely linked into other investment climate improvements such as addressing property rights and land tenure.

98. Higher private investment in agriculture will only occur if there is a major increase in profitable investment opportunities for the private sector.[198] The key role for donors here is creating such opportunities and leveraging in private sector risk capital.[199] However, intervening in or directly funding agricultural markets carries the same risks as we discussed earlier in looking at the MMWP approach, and should be avoided.

99. DFID has been criticized in the past for agricultural market intervention and needs to learn from these criticisms. For instance, its Targeted Inputs Programme in Malawi, under which seed packs were handed out to farmers between 2000 and 2002, was criticised for compromising Malawi's existing seed industry and for its lack of sustainability.[200] As the previous Committee recommended in its 2003 report on the Humanitarian Crisis in Southern Africa, Targeted Inputs Programmes can play an important role in achieving food security, but to do so they must be part of a long-term and sustainable rural development strategy which, over time, reduces dependence on free inputs and makes inputs more affordable by raising rural incomes and promoting rural development.[201] The MMWP approach must underpin DFID's interventions in agriculture to ensure that market distortions are avoided.

100. In order to stimulate private sector investment in African agriculture, donors and governments must take the investment risks that companies cannot. Models for using donor money to take early risks and then leverage in private sector finance exist and could be scaled up, for instance Infraco, a privately-managed infrastructure development company (funded by a group of donors including DFID[202]) which has proven to be effective in identifying infrastructure opportunities in Africa.[203] When developing such initiatives, donors should balance making big loans to governments with smaller, more locally-sensitive operations[204], and these initiatives should be run on business lines. As Professor Keith Palmer, Chairman of Infraco, told the Committee:

205

101. Building partnerships is crucial in agriculture: a proven way to ensure that SMEs and smallholders benefit from investment in commercial agriculture is to build strong links between commercial farmers and rural smallholders.[206] Syngenta told us of their successful partnership with other producers in China, which has enabled investment in a major herbicide manufacturing plant that supplies and trains very small farmers on the south-eastern coast. Using this herbicide has enabled these farmers to double or triple their crop.[207] NGOs are vital members of such partnerships: agricultural-focused organisations such as Technoserve have done excellent work, for example the successful public-private partnership that they have built within the Ugandan fishing industry.[208]

102. Donors need to target funding in an intelligent way that mitigates private sector risk by providing early bursts of finance, supports the role of SMEs, co-operatives and small-holders (rather than creates a greater market role for government or donors) and allows projects to be run on business lines. Successful multi-donor initiatives of this kind already exist (for instance, Infraco). DFID should show leadership by pursuing the replication of such models. Partnerships are key to ensuring that the necessary linkages are built within the market that will bring the benefits of growth to small and large farmers alike.

Skills, technology, health and education

103. Strengthening the assets of poor people involves boosting human capital, such as health, education and skills, as much as physical capital, such as property and finance.[209]Ensuring that people have the skills they need to enter work is a primary responsibility of government.[210] However, there are obvious and very strong links with the private sector. Skills and technology provision are mutually beneficial to poor people and the private sector: as Dr Banjoko of AfricaRecruit told us, they increase the capacity of people to move from being "consumptive to productive citizens and become economic participants in society."[211]A similarly symbiotic relationship exists between health, education and the private sector.

104. In most developing countries, there are insufficient numbers of people trained in the skills needed by the key engines of growth — business, the professions, and technical and vocational roles — and technology is similarly lacking.[212] African countries, in particular, suffer from a limited pool of skilled personnel, reflecting insufficient education and training opportunities. Even South Africa only has 13% of tertiary level enrolment in technical subjects, compared with Thailand and Malaysia's 30%.[213]Women and girls are at particular risk at being excluded from education: in sub-Saharan Africa, only one in five girls are enrolled in secondary school[214] and 64% of the world's 800 illiterate adults are women.[215]

105. Written evidence from Professor Calestous Juma of Harvard University argues that the private sector can serve as a foundation for the transfer of technical skills in society:

216

106. AfricaRecruit identified a number of other strategies whereby the private sector can assist skills and technology transfer: apprenticeships; vocational training; the creation of knowledge centres; business support and advisery services; mentoring and assisting in the spread of Information Communication Technologies (ICT). AfricaRecruit itself has been a successful strategy — supported by donors through NEPAD and the Commonwealth Business Council — for boosting human capital within Africa.[217] A major function of the initiative is engaging the African diaspora and reversing the 'brain drain', under which approximately 40% of all African professionals have left the continent since decolonisation.[218] DFID supports other vocational and skills development programmes at country level.[219] AfricaRecruit expressed a concern in their written evidence that many of DFID's projects are too short-term, and recommend engagement with the private sector as a way to promote sustainability.[220]In its ongoing dialogue with the private sector (through groups such as Business Action for Africa), DFID needs to press for investments in developing countries to incorporate training, skills and technology transfer. The AfricaRecruit initiative should continue to receive support as a successful strategy for boosting human capital within Africa and addressing the 'brain drain'. This and other country-level skills programmes should receive longer-term donor support, in partnership with the private sector where possible.

107. DFID has a priority focus on the primary education sector towards achieving MDG 2, Universal Primary Education. Discussion of DFID's education strategy is beyond the remit of this report and is well-documented elsewhere.[221] Empirical evidence demonstrates the importance of education as an input to economic growth.[222] Private sector institutions, as well as charities and community groups, are also significant providers of education services in developing countries and DFID needs to work with these partners towards achieving education for all.[223]

108. The role of health in Africa's development, and in PSD specifically, is, similarly well-documented — for instance, in Chapters 6 and 7 of the Commission for Africa Report. The central charge of the evidence that we received on this subject was that private sector growth in developing countries will not gain momentum unless health services — together with the necessary infrastructure, skills shortages, access to medicines and other concomitant measures — are improved.

109. HIV/AIDS and malaria are having a particularly devastating impact in sub-Saharan Africa, resulting in skills shortages and reduced productivity amongst adults.[224] Large companies, such as Anglo American, are playing an important role in addressing HIV/AIDS, providing free anti-retroviral therapies to employees and developing care and treatment programmes in the wider community.[225] The multinational private sector is the main source of Research and Development (R&D) into new drugs, although companies based in developing countries are playing an increasing role.[226] In its Memorandum to this inquiry, DFID stated: "In developing countries the private sector is often the major provider of health services. The public-private boundary is increasingly blurred and there is great scope for greater private sector involvement in healthcare provision."[227] We agree that there is great scope for increased private sector involvement in healthcare provision. Private sector growth will only gain momentum in developing countries if basic services such as education and health are improved. Donors need to recognise the role of private sector providers of education and healthcare and strengthen partnerships with these bodies.

Making markets work in middle income countries

110. The economic booms in high growth Asian economies have succeeded in lifting large numbers of people out of poverty, with China alone pulling 400 million people over the dollar-a-day poverty threshold in the last twenty-five years. But these booms do not automatically embrace all sectors of society. For example, Sunil Sinha, of Emerging Market Economics, told the Committee that in India, states such as Uttar Pradesh and Bihar have seen very little pro-poor growth.[228] Job opportunities of the right skill level to be open to the poorest sectors of society have failed to materialise in these states.[229] The huge informal sectors which remain in many middle income countries mean many workers operate outside international labour law protection.[230] Inequality levels are currently rising within China, where poverty reduction has slowed to a standstill since 2000.

111. How can donors work with governments and the private sector to ensure that the benefits of economic growth reach all sectors of society? The Secretary of State, when this question was put to him, responded:

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112. Tony Venables, DFID's Chief Economist, supported this line of argument, stating that, "There are political choices for the countries themselves to make about their income distribution."[232] Lord Brett of the ILO gave a different response to this question, stating that the way to avoid excluding poor sectors of society from growth was, "To build social security — that is the way you provide a safety net... to how you stop people being left behind."[233] Yet beyond some research into the determinants of inequalities within countries[234]^, DFID does not appear to be giving adequate attention to PSD in middle income countries — where growth has taken off, but not reached all sectors of society. We consider assigning total responsibility to national governments for the equitable distribution of the benefits of growth to be an inadequate response by DFID. Achieving DFID's ultimate aim of poverty reduction requires not just triggering growth but assisting partner governments in finding the right strategies to ensure that poor people benefit from growth. DFID needs to build a coherent strategy for PSD in middle income countries with large inequalities. This strategy should involve dialogue with the Governments of China and India, in particular, about how to include the poorest sectors of their countries in economic growth.

144 This approach is also known as the Market Development or Business Development approach. Back

145 Ev 265 Back

146 Q 23 [Professor Adrian Wood] Back

147 Ev 303 Back

148 Alan Gibson, Hugh Scott and David Ferrand, 'Making Markets Work for the Poor: An Objective and an Approach for Governments and Development Agencies' (Woodmead, South Africa: ComMark Trust, 2004), p.2. Back

149 Ev 223 Back

150 Ev 266 Back

151 Ev 265 and Ev 266 Back

152 ComMark stands for 'Making Commodity Markets Work for the Poor in Southern Africa.' Back

153 Ev 230 Back

154 Ev 251 [FinMark Trust]. See the section on Financial Sector Development later in this chapter for more details. Back

155 Ev 267 and 'DFID and the Private Sector' (2005) Back