12 Economic Governance through
Private and Public Sector
12.1 INTRODUCTION
Table 12.1 ODA Expenditures of the Netherlands Per Category in 2010
| ODA expenditures of the Netherlands (euro) | 2010 |
| International justice | 43 million |
| Stability, good governance and humanitarian aid | 673 million |
| European cooperation | 461 million |
| Poverty reduction and growth strategies | 1,180 million |
| Social development | 1,609 million |
| Improved environment | 347 million |
| Care of asylum seekers from developing countries | 258 million |
| Other | 307 million |
| Total (0.8 percent of GDP): | 4,877 million |
Source: MoFA 2011 (2011:28).
Economic growth has found new grounds. In Asia the growth spurt in the nineties has been phenomenal, but more recently some countries on the African continent are also witnessing solid growth rates. New global and regional environments provide opportunities for sustainable growth. Crucial is the preparedness, willingness and capacities of government and private sector in sub-Sahara Africa to grab these opportunities. Lessons can be learned from experiences in Asia and Latin America, but probably even more from those in Africa itself. Context specificity has been broadly accepted as the most important lesson from the period of the so-called Washington Consensus. In a major work on Dutch development cooperation, the Scientific Council on government policies (WRR 2010)concludes that the time for grand designs based on blueprint thinking is now gone.
If all this is true, what does that imply for development cooperation policies? How can development cooperation come to terms with these new realities? In this chapter we will not present to you a new blueprint of development thinking. We will present an overview of what has been the thinking on questions of supporting economic growth and how to relate private-sector development to government policies to encourage market development, production and employment generation in developing nations.
The policy of the Netherlands government has been guided by the following assumptions:
- Economic growth in terms of enhanced economic productivity originates primarily from private-sector development.
- If economic growth is to be inclusive or pro-poor, policies are required that focus specifically on supporting poor people in their initiatives.
- Governments have a crucial role to play in building an enabling environment for private entrepreneurship and to improve access and control over resources, especially if these are to be accessible to the poor. This includes access to finance, land, skills and knowledge.
As Table 12.1 shows, the Netherlands government spent 4.9 billion euroson official development assistance (ODA) in 2010, which by then amounted to 0.8 percent of Dutch GDP. The Netherlands was one out of five donors1 that have achieved the OECD/UN target of 0.7 percent of GNP. Also on most other elements of the Commitment to Development Index of the Centre for Global Development, the Netherlands has built up a strong reputation, putting it ever since the first publication in the top three, usually together with Sweden and Denmark. In 2010 the new Dutch government decided to reduce the future budget for development aid to 0.7 percent of GNP, as part of a response package to the budget crisis that emerged as a consequence of the global financial and economic crisis of 2008/9. One can find economic support programmes in Table 12.1 under the category ‘Poverty reduction and growth strategies’. The total volume for such programmes is almost 25 percent of the overall budget.
In this chapter, we will start with a brief exploration of the complex relationship between private-sector development, economic growth and poverty-reduction, and the way this relationship is understood by the Netherlands Ministry for Development Cooperation (section 12.2). This is followed in section 12.3 by an exposition of the general strategy of the Netherlands ministry. To substantiate this strategy, a range of bilateral and multilateral instruments used to stimulate an enabling environment and pro-poor growthstrategies in developing countries are described and critically discussed in the subsequent sections 12.4 to 12.6, after which follows the conclusion.
12.2 PRIVATE-SECTOR DEVELOPMENT, ECONOMIC GROWTH AND POVERTY REDUCTION
After two decades of multilateral and bilateral development policies focusing heavily on the role of the public sector in promoting economic development, focus is shifting to the role of the private sector. Financially well-endowed public investment programmes in the 1980s, followed by debt-rescheduling policies and budget rationalization programmes under the Washington Consensus, provided important lessons with respect to the effectiveness of public-sector-led growth strategies. Nowadays recognition in the donor community is growing of the important role the private sec-tor can play in creating jobs and inclusive economic growth. Nine out often people in the developing world earn their income in the private sector(World Bank 2005a). The private sector in developing countries, both formal and informal, accounts on average for 70 percent of GNP. The Netherlands ministry sees private firms (formal or informal) as critical actors in the search for growth and poverty-reduction (OECD 2004b:5; Ministry of Foreign Affairs 2006a).
In Southeast Asia, rapid economic growth has lifted millions of people out of poverty. Many countries in sub-Sahara Africa have also experienced a substantialperiod of sustained growth. Currently IMF estimates that of the ten best performers in terms of economic growth, seven will be sub-Saharan countries2 (The Economist 2011). Nevertheless, the impact of growth on poverty has been generally lagging behind in Africa compared to what has been witnessed in Asia. But recent figures of the World Bank show that even in sub-Saharan Africa, the proportionate rate of poverty has diminished over the last five years. In sub-Saharan Africa, the percentage of people living on less than US$ 1.25 per day is reduced from 50.9 percent in 2005 tot 43.3 percent in 2010. In absolute terms, the reduction is slower due to the high population growth (World Bank 2011a). Also, because of a lack of redistributive mechanisms with in the economic systems, the effect of growth on poverty reduction is limited. There is mounting evidence that economic growth has less of an impact on poverty reduction if there are high levels of inequality in a country. Ravallion (2001) estimated that a 2percent increase in household incomes may reduce poverty by as much as7 percent or by a mere 1 percent annually, depending on the institutional context in a country and stage of growth. This shifts the focus from rateof growth to type and quality of growth, where inequality and distributive measures play a key role from the perspective of the poor (Ravallion 2005;Pouw 2011). Which redistributive mechanisms are needed (and where and how) still requires more research that is country specific and also sensitized to political and economic histories.
The poverty reduction-growth relationship depends on the initial levels of inequality, but also on the pattern of growth. If the pattern of growth is broad-based and includes sectors and regions where poor people earn a living, it is likely that their incomes will rise more rapidly (OECD 2006a:22; World Bank 2005b). According to Bourgignon, growth can have much more of an impact on poverty reduction if combined with policies for income redistribution (Bourgignon 2004:11). Bayraktar and Moreno-Dodson (2010) argue that government policies to reduce poverty will be more productive in an environment where private-sector investment, openness and macroeconomic stability are pursued.
Figure 12.1 Sources of transformation.
Source: WRR report (2010).
Fritz et al. (2008) emphasize that high levels of inequality can also under-mine growth. Inequality can lead to underinvestment and inefficiencies when people with the highest potential returns do not have the possibility to invest. Inequality can also lead to risk aversion. Poor households are much more vulnerable to external shocks which affect their incomes and they use various coping strategies (informal savings, livestock) to ensure that they do not run risks. Elbers and others suggest that this undermines growth (Elbers et al. 2007: 20). Bourgignon, on the other hand, shows that aggregate evidence is in conclusive on the question whether high inequality undermines growth or not (Bourgignon 2004: 18–22).
Global inequality is growing in terms of income inequality as measured by the Gini coefficient. Despite strong economic growth since the early 1990s, income disparities have widened dramatically between and within countries. From recent investigation by the International Labour Organization (ILO), it shows that in two-thirds of the countries for which figures are available, the income gap between the highest and lowest group of wage earners increased by an average of 70 percent in 1990–2005 (ILO 2010). Mainly middle-and high-income groups have benefited from economic growth during this time. According to the OECD, policies are needed to ensure that the poor are not marginalized from the growth process (OECDEconomic Governance through Private and Public Sector 2006a). Dagdeviren et al. (2002) show that policies for redistribution are often superior in reducing poverty than relying on growth alone.
In summary, the empirical evidence about the relationship between growth policies and poverty reduction is mixed. Nevertheless, recent developments seem to indicate that economic growth has been supportive of poverty reduction, in Asia as well as in sub-Saharan Africa to some extent. In many countries macroeconomic stability has increased and the recent global financial crisis has been surprisingly well withstood in Asia, Latin America and Africa.
12.3 GENERAL STRATEGY DUTCH DEVELOPMENT COOPERATION
A Theory of Change
With renewed emphasis on economic growth, the Netherlands is following examples set by the UK, Sweden and the US. Is it just the latest fashion in town or is the shift away from social investments based on a new theory of change? This is a particularly intriguing question, because the Dutch Scientific Council report of last year criticized donors for ganging up behind social-sector investment programmes without sufficient proof of the developmental impact of such programmes (WRR 2010). According to the Scientific Council, such programs did not generate sufficient transformative power to accelerate change and there by to produce a modernization of economy and society. The Scientific Council highlighted four sources of transformation, each potentially contributing to catalyze change (see Figure 12.1).
According to the Scientific Council, by far the most powerful source of transformation lies within the economy. In interaction with the economy, the political system will have to accommodate to new realities that emerge. Douglass North's analysis of open and limited-access societies has clarified that elite interest, well protected by the existing political and economic system, will change under pressure of new opportunities(North et al. 2009). Such new opportunities are often discovered through international networks in which such national elites operate. Through political pressure the system of governance (administration)will open up to increase potential benefits. In the end, society will have to cope with the processes of transformation. As long as potential conflict sin society can be mitigated and controlled, elite interest can be safeguarded. However, if society is not willing to accept changes, payoff mechanisms will be employed to pacify tensions. In the end, the polity may have to change strategies to accommodate demands from society. In that case transformation breaks through the existing power system to allow for new and deeper processes of transformation. In the end, the features of a social contract between government—and the controlling elites behind it—and society will emerge that can be reinforced overtime with sustained growth as the motor behind development.
Having accepted the economy as one of the prime sources for transformation, Dutch development cooperation thus focuses on type of growth. Within this focus, special emphasis is given to water and food security, sectors where Dutch companies and knowledge institutes have a long-standing international reputation. On the other hand, Dutch donor interventions in social sectors, like education and health, are being downsized. As argued above, these shifts in policy follow the report of the Scientific Council. However, the Scientific Council has not been the sole trigger of change. The Netherlands has also been influenced by a shift in international thinking infavor of the role of the private sector (see recent reports of the World Bank and the OECD). Also, according to the OECD Development Assistance Committee (DAC) peer review in 2006, the Netherlands could—given their long-standing reputation as a front runner in development cooperation—potentially play a stronger role in promoting private-sector development than it has done (OECD 2006b:38–39). In its forthcoming review of 2011, the DAC welcomes the strengthened focus on economic development.
Private-and Public-sector Development
Due to this shift in priorities, the current Dutch development cooperation is significantly intensifying its interventions in promoting private-and public-sector development aimed at creating more inclusive growth. To create economic growth and poverty reduction, the Dutch Ministry of Foreign Affairs aims at public-sector development through macroeconomic policy and transparent, accountable and democratic governance. Furthermore, private-sector development is being aimed at through improving access to markets, financial-sector development, infrastructure, skills and knowledge.
With regard to public-sector development, the Netherlands tries to influence and support governments in developing countries to take measures to improve the general business climate. These measures entail an effective macroeconomic policy, solid public finance management, market-based rules and a transparent system of market regulation with an aim to establish level playing fields for different economic actors (including anticorruption policies). Government policies strongly influence the business climate in developing countries through their impact on costs, risks and barriers to competition.
With regard to private-sector development, the Netherlands promotes economic growth and equity through private-sector development. Poor people, often self-employed, and small entrepreneurs need access to food, credit, infrastructure, markets, skills and knowledge and a secure business environment. The Netherlands implements for that purpose programmes that support governmental policies, but also programmes implemented by NGOs and private-sector institutions (for example, business-support organizations, local banks and farmers’ organizations).
The Dutch Advisory Council on International Affairs (AIV) has warned the Netherlands Ministry of Foreign Affairs against selective interventions in the form of support to individual activities, companies or groups of companies (AIV 2006). The ministry agrees that direct support to individuals or firms should always be approached with caution given the potential risk of market distortion and cost-ineffectiveness (Ministry of Foreign Affairs2007a). On the other hand, a too narrow focus on the broad investment climate diverts attention from the need to address market failures in a proactive way (Altenburg et al. 2007:9,14). In poor countries and regions, many markets are highly under developed. Selected and targeted policies are needed to help the poor (e.g., through the support to microfinance institutions or farmers’ organizations).
12.4 INSTRUMENTS FOR PUBLIC-SECTOR DEVELOPMENT
In their stimulating paper ‘Capability Traps?’ Pritchett et al. (2010) argue that implementation of development policies often fails because of a lack of theory of change. Above we have presented our extraction of the implicit theory of change of Dutch development cooperation. The logic that followed led us to the realm of the economy to understand the priority given to economic growth as the transformative power to produce positive development. However, the council is not in favor of blueprint approaches and thus recognizes the danger that Pritchett et al. put forward, namely that of isomorphic mimicry, which means adopting organizational forms that are successful elsewhere and by that very fact hide actual dysfunction when applied in new contexts. Nowadays such understanding is broadly shared in the development community. Context specificity is warranted. Many of the development challenges must be considered as complex, requiring not only the economy but also the three noneconomic domains (polity, society, administration) to transform into development-friendly institutions.
The Netherlands supports public-sector development as a main element inpromoting growth and equity. The Growth Report found that countries with a sustained economic growth of at least 7 percent annually all shared good policies and institutions (CGD2008). In his paper “Emerging Africa”(2010), Radelet is making the same argument for seventeen sub Saharan African countries that have witnessed annual growth of 5 percent and more for the last fifteen years. To make the ambition of inclusive growth come true, not only government but all actors have to play their part. As Ajakaiye(2005) argues, the major lesson of the past is that neither free market norpervasive state intervention and control, on their own, can lead to sustainable development. With all these observations in mind, we will look in more depth at the main instruments for public-sector development in Dutch development cooperation: macroeconomic policy, public finance management and rules and regulations.
Macroeconomic Policy
Macroeconomic policy concerns a wide range of instruments available to align economic behavior and performance to objectives of society at large. Key actor in macroeconomic policy is the government. Under the Washington Consensus of the Bretton Woods institutions, macroeconomic policies were geared towards downsizing the public sector and installing regulatory systems for market-led economic development. It is precisely this downsizing as a general and context-blind recipe that made critics of the Washington Consensus regard such policies as a prime cause of many of the poverty and development problems poor countries were facing—e.g., see also HaJoon Chang's much quoted article in the Guardian of November 9, 2010, on his proposal to reject the Washington Consensus.
It would be a mistake to narrow macroeconomic policy down to the role of governments solely. Solimano (2005), as quoted by Teunissen in the same report (2005:2), argues that “governance is not an exogenous variable that explains economic performance”. The current financial and economic crisis has brought to light the key role that financial institutions play in macroeconomic policymaking. Also private-sector entities, nonprofit organizations, research institutions, advocacy groups and the judiciary system are major players influencing macroeconomic policy. Clearly, macroeconomic policy under the Washington Consensus suffered from isomorphic mimicry. Has Dutch development cooperation learned from this? What has been the Netherlands’ strategy and does it allow for country specificity?The following three points summarize the main convictions Dutch development cooperation adheres to at present.
- Macroeconomic policy needs purpose. The Washington Consensus basically has focused on the macro level of economic policymaking. The Netherlands and other donors followed suit by imposing conditions to aid packages as a stimulus for improving macroconditions for economic growth. In addition, the donor community introduced—in the slipstream of the Heavily Indebted Poor Countries Initiative—the requirement for recipient countries to formulate poverty-reduction strategy papers. These first generation poverty-reduction strategy papers focused on macroeconomic stability, changing patterns of government expenditure towards social sectors and a number of public-sector reforms. One may observe that the recipes were largely blueprint by nature. Currently in most countries a second generation of poverty-reduction strategy papers (PRSPs) has been formulated. This new generation focuses more on economic growth,Economic Governance through Private and Public Sector in an attempt to restore the balance between spending and income generation. The second generation of PRSPs is more homegrown, butin their approaches they remain within the modernization thinking. Nevertheless, through consultation processes attention was paid to underlying social relations and to the interaction between society and government. In terms of purpose of macroeconomic policies enshrined in PRSPs, it would be fair to say that macroeconomic policymaking was mainly geared to restoring economic stability and preparing ground for more substantial reforms. Policies were principally focused on the role of governments as economic actors and much lesson pursuing deeper transformation by actively engaging and investing in the institutional relations of governments with market and civic institutions.
- Macroeconomic policy needs proper policy choices guiding the process of budget allocation and expenditures. What are considered proper policy choices by the Netherlands ministry? The broad coverage of social-sector investments, budget support, financial management, good-governance programs under the previous government indicate a strategy of growth combined with strategies to generate equality of opportunity, giving everyone afair chance to enjoy the fruits of growth. Otherwise the economy's progress may be jeopardized by diverse politics, protest and even violent conflict (CGD2008). Governments could, through active social spending, curtail the potential tensions in society. The Netherlands has spent increasing amounts on social sectors in developing countries during the last decades through or in cooperation with the local government (on education and health sectors). These strategies were fine-tuned for their distributional effects. Under the current government, social-sector investment programs are being curtailed. As a consequence, Dutch development cooperation will withdraw from the deeper transformational processes that are part and parcel of these programs. The specific emphasis on distributional effects through social investments will be left to the government in place and the polity behind it. At the sametime, Dutch development cooperation will engage more with market-based organizations, which may also entail deeper transformational processes. The shift in Dutch policies therefore seems more a matter of entry point than of purpose. However, in the theory of change following classical modernization, those in control of the income will become able to determine the institutional setting or delivery of social services. The transformation processes at the level of social relations will thus remain fully under control of those controlling governments. In shifting focus to the productive sectors, clearly Dutch development cooperation has and will even more look at the private sector to deliver growth. As part of macroeconomic policy formulation, macrolevel governments should consider the alternatives of direct investments 250 Maarten Brouwer and Sabine Blokhuis in production or investing in market-oriented institutions that will facilitate and support private-sector production. During the 1980s and 1990s, many poor countries neglected agricultural investments, partly in response to scarcity of resources, partly in response to low prices for agricultural produce and partly in response to donor policies. Still, current research that compares the developments in four Asian countries(Malaysia, Indonesia, Nepal and Vietnam) with the developments in four African countries (Kenya, Nigeria, Uganda, Tanzania) indicates that the interaction of three basic developments could be explanatory in the economic take off in the Asian countries that were not in place simultaneously in the African countries, i.e., macroeconomic stability, economic liberty for farmers and small entrepreneurs and a positive rural bias of government policy. The hypothesis still needs testing, but the initial findings under score the importance of the connection between macroeconomic policies and sector policies in terms of fighting poverty. Chiripanhura and Mosley (2009)found similar results in comparing the relative success of Ghana and Uganda compared to other African countries (Nigeria, Cameroon,Togo, Mali, Benin, Madagascar, Tanzania, Mozambique and IvoryCoast). Both countries focused their interventions on agriculture, achoice partly explained by the fact that governments of both countries had their power base in rural communities (Chiripanhura and Mosley2009). Currently, there is a gradual shift towards more agricultural investments by governments in sub-Saharan Africa, with the support of donor communities and the Comprehensive African Agricultural Development Programme (CAADP) developed by the African Union.
- Macroeconomic policy needs country specificity. Blueprint approaches have been applied with meager success. The World Bank investigated the lack of results in their study on economic growth in the 1990s(World Bank 2005c). This pointed out that even though overall orientation of policy advice was solid, the practical applications failed in terms of responsiveness, phasing and fine-tuning. The lack of policy space that many poor countries experienced since they gained independence has thus undermined the success of the aid provided. Firstin Asia, then in Latin America and now in Africa strong voices advocate against this prescriptive form of assistance despite the political commitment donors have provided through the Paris Declaration and Accra Agenda for Action to allow more policy space and provide more resources through country systems which can then be the focus of domestic prioritization (Moyo 2009). The Netherlands has been an advocate of principles like ownership, harmonization and alignment. These principles, although generic in nature, are in fact promoting context specificity. The Paris principles are thus not another blueprint for development cooperation, leaving flexibility at country level to allow for pragmatic solutions with an aim to increase effectiveness Economic Governance through Private and Public Sector of interventions. Nevertheless, practice should follow principle. Eventhough the Netherlands scored relatively well in the Paris declaration monitoring reports and was praised as a front runner in the firstphase evaluation reports on the Paris Declaration, the use of the Paris Declaration and the subsequent Accra Agenda for Action as an intervention ethic has never gained more than superficial support inparliament (MoFA 2008). At the IV High Level Forum on aid effectiveness in Busan, South Korea(November 2011), the final score will be determined. The Scientific Council on government policies concluded (WRR 2010) that the Netherlands lacks a politically robust framework of intervention ethics, suggesting that the Paris principles have not served as a strict guidance for policy formulation and policy implementation.
Country Context
How far has Dutch development cooperation been sensitive towards country specificity? In 1996 the Dutch government decided to decentralize Dutch development cooperation. Embassies at country level became responsible for implementing bilateral cooperation. The introduction in 1999 of sector-wide approaches (SWAPs) and budget support gave rise to considerable increase in consultations with partner governments. Institutional strengthening became a major topic in bilateral aid programs, eventhough operational innovations to support institutional capacity have been lacking. Generally, the Netherlands has made considerable progress towards ownership and use of country systems as was reported in OECD/DAC monitoring surveys on the Paris declaration (OECD 2006a/2008). It would be fair to conclude that Dutch development cooperation has shown a positive response to the need for country specificity in its organizational and instrumental arrangements.
Public-finance Management
Public-finance management (PFM) concerns the system of government for planning, budgeting, implementing, accounting and auditing. It is the vehicle through which policies are planned, executed and accounted for. Solid public finance management allows governments to become an effective and a reliable partner to other stakeholders in the development process. Building trust is a challenge that moves beyond the budgetary systems as such. It concerns the accountability relations between poor people, policymakers and service providers. As the World Bank showed in its 2004 annual report”Making Services Work for Poor People” (World Bank 2004), most analyses focus in particular on the accountability relationship between poor people and service providers through the long route of accountability, by sending messages to and demanding accountability from policymakers. But poor people do not only have a political voice through political agents that control policymakers. They also have a voice as consumers and clients of services provided through the government system. It is sensible to protect pro-poor orientation of services by bringing provision closer to the final user through decentralized systems of government.
During budget execution the government sets out to allocate funds to its policy priorities. Where as in an ideal world of consensus this could be a rather technical process, in reality it is the political process through which ministers have to fight for their budgets. In reality, sector ministers may request loans to support their budget without engaging with ministers of finance or governors of central banks on the macro economic consequences of such loans. Donors often have overly high expectations of this process of budget implementation. The legitimacy of public-sector activity may not be well grounded in society, client elistic forces may undermine collective efforts and scarcity of funds may put short-term interests higher on the list of priorities than longer-term interests. The process is made complex by the fact that during the budget cycle government continuously interacts with society, elites and the business sector. It is therefore advisable for governments to consider carefully which services to deliver and which are to be left to the market; how to enable consumers to protect the quality of service provided. Often such considerations are not part of government processes. The SWAP approaches by many donors, including the Netherlands, have resulted in an over emphasis on public-sector delivery of (social) services(MoFA 2006b). These are precisely the issues that Pritchett et al. (2010)have raised. A more thorough analysis of possible and feasible institutional arrangements between the four realms of society may produce innovative solutions to a much greater effect.
The lack of proper consultation and locally grounded analysis will often produce unforeseen events that may impact the budget to an extent that plans will never be realized. This test of budget that is done through the World Bank public-expenditure reviews has proven to be a severe one. It is certainly not just an academic question. Many stakeholders in society and the private sector plan their investments and strategies in anticipation of government policies. If in the end government is unreliable in terms of budget execution, expectations of private sector, NGOs, academic institutions and others will prove wrong with potentially great losses. Currently, instruments like public expenditure reviews have been integrated in the Public Economic and Financial Accountability (PEFA) framework, hosted by the World Bank. The PEFA is considered a consistent set of integrated and harmonized approaches to assessment and reform in the field of public expenditure, procurement and financial accountability. This framework has been developed in a partnership between the World Bank, the European Commission, the UK, Switzerland, France, Norway and IMF (World Bank 2001). The programme has produced a continuing search for proper solutions, producing best practices and at the same time providing support to hands-on advice and context-specific searches for solutions. By integrating its work on the advice of IMF, World Bank and EU, a substantial and harmonized strengthening of PFM systems has been achieved. The Netherlands has been a supporter of PEFA and refrained from developing its own PFM interventions. To learn and understand the systems in place much better, support was provided to Dutch embassies to strengthen their capacity as partner in dialogue and cooperation. As such, Dutch PFM support has been well tuned to new aid modalities, allowing more ownership and more focus on political issues than on technical issues. However, integrating accountability relations in the PFM approach has not been strong.
This brings us to the importance of accounting. It is an essential element of public finance enabling governments to become more reliable and effective. But it is not sufficient if this learning stays fully within the realm of the executive branch of government. Auditing is the mechanism to introduce out side scrutiny of government performance as another incentive to learn and improve. By facilitating nongovernmental expertise to assess the budget cycle and present its findings to a wider public (including parliaments), governments can ensure the inclusive nature of public policy. At this juncture, the necessity to look at the transformative effect of the policy choice reemerges. As Pritchett et al. (2010) argue, accountability needs to be a linking pin in establishing solid paths of transformation between polity, society, economy and government.
Rules and Regulations
Most of the poor work in informal employment or self-employment. There are major constraints for people to enter the formal economy. The World Bank's annual Doing Business reports show that in many developing countries too much time and money are needed to set up a business in a formal way, acquire permits, export goods, settle disputes and register property. In Suriname, for example, it takes 694 days for a business to register (World Bank 2009:154). In addition, the perceived levels of public-sector corruption are high in most developing countries, according to the Corruption Perceptions Index (CPI) of Transparency International. De Soto (De Soto2003:4) argues that people in developing countries possess great entrepreneurship and also assets to make success of capitalism (even in the poorest countries, the poor save and own property). The problem is that they are unable to capitalize their assets. They often have no property rights of what they own and cannot borrow money and cannot trade outside the narrow local circle where people know and trust each other. In this way they are hampered in their asset accumulation capacities and therefore their businesses will never grow beyond a certain limit.
We deem it important, therefore, that governments make their formal economies more accessible to the poor and marginalized by not only reducing the costs of becoming formal, but also improving the benefits of formality. Benefits are, for example, secure property ownership, access tothe legal system and easier access to finance. But improving rules and regulations is not enough; poor people have to be supported to make use of the legal system. A stronger legal-aid system and legal empowerment are needed (Zinnes 2009:26). The Netherlands and other donors encourage and support regulatory reforms to improve the business climate.
To give an example of the above, in Mozambique, with support of the Netherlands Embassy, the judicial authorities in seventy-six districts have been trained in environmental and land-rights legislation. In addition, 187 ‘paralegals’—representatives of rural communities who give information and advice on land rights—have been trained. The Netherlands and other donors have established a fund for specific projects enabling communities to register their land rights and draw up land-use plans. The fund operates in three provinces and is used to finance twenty-four ongoing projects. The Netherlands also supports a Mozambican organization which has been helping seventy-one rural communities to formalize their land-use rights since 1977. Forty-one communities have now been issued with ownership certificates, which means that their land-use rights have been entered in the national land registry and the boundaries of their properties are legally recognized (MoFA 2009:22).
These programmes, supported by donors, have in recent years improved the regulatory environment remarkably in many developing countries, as the Doing Business reports of the World Bank over the last five years show. Research has demonstrated that these business environment reforms can reduce informality (Zinnes 2009:39). But academics disagree about the impact of these reforms on economic growth and poverty reduction. Some research done by the World Bank shows that this can create more economic activity and growth (World Bank 2008b). But other research shows that simplifying rules and regulations in itself does not lead to expansion of businesses; other factors seem to have much more of an impact (Altenburg and Drachenfels2007). It probably also depends on the country in question. In middle-income countries like Eastern Europe, the impact can be greater than in really poor countries, for example, in sub-Saharan Africa. “In these countries a profound lack of skills, credit and infrastructure is probably more the problem than weaknesses in the business environment” (Zinnes 2009:2). This brings us to other instruments available to donors to develop the private sector.
12.5 INSTRUMENTS FOR PRIVATE- SECTOR DEVELOPMENT
So far, it has been argued that private-sector development not only entails solid/functional macroeconomic policies and a reliable government. The Netherlandsand other donors also actively stimulate private-sector development. The instruments are explained in the following sections.
Economic Governance throughPrivate and Public SectorFinancial Sector
About four billion people in the world have no access to credit and other financial services such as insurance. A healthy financial sector is necessary for developing countries to stimulate savings and investments. The Netherlands supports the development of the financial sector by improving the institutional framework for a more stable financial sector and through the supply of financial services (MoFA 2008). But a more stable and better functioning financial sector is in itself not enough to improve the livelihoods of the poor. To really reach the poor, the Netherlands uses selective interventions with the aim to increase and deepen the supply of financial services, including access to credit and insurance.
Why are credit and insurance so important for the poor? Elbers et al.(2009) show that risk experienced by rural households in Zimbabwe has a very substantial impact on capital accumulation and hence on poverty. They have estimated, based on a panel of rural households followed more than ten years, that the average expected long-run capital stock is 46 percent lower than it would be in the absence of risk. In other words, households make fewer investment decisions if they cannot get credit or insurance to mitigate the risks and therefore their capital accumulation(through acquiring land, livestock or other productive assets) is muchless than it could be.
Most of the Dutch funds for financial-sector development are aimed at microfinance. Microfinance is an effective instrument to reach the poor and the number of microfinance institutions is growing sharply in developing countries (Forster and Reille 2008). But there is growing consensus amongst practitioners that the middle segment, between microcredit and bigger loans from commercial banks to businesses is particularly poorly served in many countries. That is the reason for the Netherlands to start investing more in local banks and meso-credit programmes.
To give an example, in Rwanda, the Dutch embassy and Rabobank implemented a project to modernize the Banque Populaire de Rwanda atthe request of the Rwandan government. They converted it from a poorly performing group of over 200 cooperative banks into a modern commercial bank with shareholders. Over half a million Rwandan citizens, formerly members of one of the cooperative banks, have become shareholders of the RwandanBank. The Netherlands is contributing some of the technical assistance needed to ensure the bank's viability. Rabobank acquired a 35 percent stake in the bank and is funding 35 percent of the technical assistance (MoFA 2009a).
In terms of national impact, World Bank figures show that between 2000 and 2006 the volume of domestic loans as a percentage of GDP went up in a majority of the partner countries of the Netherlands (MoFA 2009a). Research shows that a 10 percent increase in the ratio of loans to GDP leads to a 2.5 to 3 percent reduction in poverty (Claessens 2005).
Market Access and Capabilities
Because growth is stimulated by trade, entrepreneurs in developing countries need to have access to local, regional and possibly international markets. To address international trade barriers, the Netherlands is committed to new or improved agreements under the WTO and European Partnership Agreements. The Netherlands works towards multilateral agricultural trade liberation, including the abolition of all forms of export support, and a substantial reduction in trade-distorting domestic subsidies. The Netherlands also strives to give developing countries space to exclude (temporarily) certain vital agricultural products from liberalization. This is called asymmetric liberalization (MoFA 2007b).
Market access alone is not enough; entrepreneurs in developing countries also need the capacity to be able to take advantage of market opportunities. But they often have too little knowledge, capital or experience to exploit a larger market. That iswhy the Netherlands and other donors in recent years have invested in value chain development in agriculture to link production and marketing more closely, in an effort to strengthen the full chain of interdependent activities, to improve performances more robustly. To givean example, seven civil society organizations (Cordaid, Fair Trade Original,Hivos, ICCO, Oxfam Novib, SNV and Solidaridad) have used Dutch aid to introduce and improve twenty-eight quality labels in 2007–2008 for sustainable and fair production and trade. Coffee, cotton, cocoa, tea and fruit arekey sectors to have benefited (MoFA 2009a). Another example is the Centrefor the Promotion of Imports from Developing Countries (CBI), which is part of the Ministry of Foreign Affairs. Every year, this center supports over two hundred companies from developing countries to prepare their products for export to Europe. Evaluations found that these companies achieved a combined rise in exports of 160 million euros, leading to an estimated 14,000 extra direct jobs in the period 2007–2008 (MoFA 2009a).
The Netherlands supports capacity development for local businesses through embassy programmes, civil society organizations and five central programmes:
- The Netherlands Management Cooperation Programme (PUM) sends out senior experts from the Netherlands to give specific advice to businesses in developing countries. They provide assistance on managerial and marketing knowledge and skills and new technologies.
- The Private Sector Investment Programme (PSI) gives financial support to foreign and local businesses wanting to establish joint investment projects in developing countries. Only innovative projects are selected. This not only prevents the risk of market distortion, but more importantly the introduction of new technologies, products or production methods can be a catalyst for developing an entire market chain or subsector.
- The Netherlands finances three programmes to support membership organizations for employers (DECP), farmers (FFP) and trade unions(VMP). A highly organized private sector can be instrumental as driver for change in lobbying government, for example, to improve the business climate or working conditions. In addition, membership organizations can assist their members in improving their individual businesses.
The Netherlands supports national and subnational programmes to improve technical and vocational educational training (TVET) mainly through the embassies in developing countries. An example of increasing the level of organization in developing countries is the Farmers Fighting Poverty Programme (FFP). Through this programme, farmers’ organizations in developing countries are given technical assistance by their counter parts in the West. This is a unique approach. Farmers’ organizations in several OECD countries have established specialized agri-agencies to give technical assistance to their counterparts. The Dutch agri-agency Agriterra started the programme in 2007 with support of the Netherlands government. Since then several other donor countries have also given their support. In 2008 approximately 145 farmers organizations were given assistance worldwide; 1.5 million people were directly involved with the programme through their organizations, of which 41 percent were women farmers (Agriterra 2009). The farmers’ organizations were assisted in representing the interests of their members more effectively, for example, in negotiations with suppliers, lobbying for a better business climate and helping farmers improve agricultural production (Agriterra 2009).
The work done by the central membership programmes and civil-society organizations helped a total of 565 business-support organizations, farmers'sss organizations and other membership organizations in developing countries in 2007–2008 (MoFA 2009a:43–44). Together, these initiatives reached millions of farmers, employees and small and medium enterprises helping them to improve their incomes and expand markets. The size of this impact has not been systematically measured, as currently only microlevel studies are available.
Infrastructure
To produce and sell their produce, entrepreneurs need access to roads, transport, electricity, water and telecommunications. Developing countries often lack the means or political interest to invest in and maintain their infrastructure. According to Willoughby, direct effects of investments in infrastructure on poor people can be observed in wages (especially in labor-intensive public works), welfare gains (for example, by reducing time to fetch water and firewood) and growth in productivity (for instance, by reducing transactions costs, fewer power cuts, less need for small capital-intensive generators) (OECD 2004a).
The Netherlands finances infrastructure projects in developing countries mainly through multilateral contributions and by funding a programme called Development-Relevant Infrastructure Development (ORIO). ORIO is one of the major Dutch infrastructure programmes which have succeeded ORET. ORET (Development-Related Export Transaction Programme) was evaluated in 2006 and the main conclusion was that it had been well managed and had generally reached its targets (Berenschot et al. 2006). The projects under ORET involved the construction of roads, bridges, ports, hospitals, water infrastructure and ICT facilities. However, because the projects scored less well in the evaluation on development effects, including poverty reduction, it was decided to replace the programme. A new programme ORIO(Development-Relevant Infrastructure Development) started in 2009. ORIO is more demand-driven; utilizing a new tendering process, proposals now compete more on the basis of development relevance and the involvement of small and medium-sized enterprises, to make infrastructure more pro-poor. Do the investments in infrastructure by local governments with support of the Netherlands and donors have any impact? World Bank statistics show that access to infrastructure has improved in around 75 percent of the partner countries that the Netherlands supports (based on measuring access to electricity and telecommunication particularly) (World Bank 2011b).
12.6 CONCLUSION
We witness a growing shared view in the donor community of the important role the private sector plays in creating economic growth and poverty-reduction. The Dutch Ministry of Foreign Affairs focuses its development cooperation policy on growth and wealth distribution. The ministry gives priority to economic growth as the transformative power in developing countries, in accordance with the theories of change and recommendations of the Dutch Scientific Council (WRR 2010). The ministry strives for broad-based economic growth that minimizes inequality. The Netherlands tries to influence and support governments in developing countries to take measures to improve the general business climate. These measures entail the support to governments to implement effective (macro-) economic policies, public-finance management and improving rules and regulations. In addition, more specific measures are taken to promote private-sector development, with a special focus on agriculture/food security and water.
In summary, when we take a closer look at the programs described in this chapter, do they indeed create economic growth, minimize inequality and reduce poverty? We observed a shift in macroeconomic policies of governments in developing countries supported by the donor communities. The second generation of poverty-reduction strategy papers focus more on economic growth and are established through more intensive consultation processes. Besides, governments and donors like the Netherlands have made large expenditures on social issues, like health and education. Both measures are crucial for strengthening human capital. On the other hand, investments in productive sectors like agriculture have been somewhat neglected in the past. There is a growing consensus that agricultural investments are crucial for inclusive growth. Currently, there is a gradual shift towards more agricultural investments by governments. The Netherlands has also made this shift. Thirdly, the Netherlands is a strong supporter of ownership and country specificity. Governments need policy space to make their own decisions on how to reach economic growth. Good public-finance management is needed to allow governments to become effective in reaching their goals. Donor contributions need to fit in this framework as well. Therefore, part of the contributions of the Netherlands goes through governments systems.
It was furthermore pointed out that better access to finance, knowledge, markets and capacities indeed can lead to growth and poverty reduction. In addition, microfinance is found to have less of an impact on growth but appears an effective instrument for redistribution. Programmes of the Netherlands to improve market access and skills and knowledge have reached many producers (from small farmers to large export-oriented companies), mostly through intermediary organizations. Assistance to producers by improving the whole value chain can lead to extra production and export, generating employment and extra income. More research is needed to assess what the size of the impact is of strengthening intermediary organizations.
Finally, there is a widely shared consensus that investments in infrastructure are very beneficial for an economy. Access to roads, electricity, water and airports can open up new markets. At the same time, how poor people can directly profit from infrastructural projects varies. Good examples of infrastructural projects in combination with redistribution are the labor-intensive public works in, for example, Ethiopia and Rwanda, which offer places on public works to vulnerable people who are unable to secure a year-round income.
Overall, we wish to conclude that the Netherlands development cooperation pursues an inclusive growth strategy in supporting developing countries in their quest for economic growth and poverty reduction. The question remains whether the Millennium Development Goal 1 in halving poverty and hunger in 2015 will be reached. Clearly, more growth cannot do the trick alone. Type of growth matters in particular to the impact on poor people's livelihoods. Therefore, the Ministry of Foreign Affairs signals a need for more research to be done on the relationship between growth and inequality and the type of redistributive mechanisms and arrangements that could render the poverty-reduction ambition of growth more effectively.
NOTES
1. These five countries are Denmark, Luxemburg, the Netherlands, Norway and Sweden.
2. The seven countries include: Ethiopia (8.1), Mozambique (7.7), Tanzania (7.2), Congo (7.0), Ghana (7.0), Zambia (6.9) and Nigeria (6.8). The figures between brackets denote the average annual growth estimation for 2010–2015.
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