Private Sector Development: Policies, Practices and Problems

World Development Vol. 30, No. 1, pp. 1±15, 2002 Ó 2001 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0305-750X/01/$ - see front matter

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Private Sector Development: Policies, Practices and Problems LAU SCHULPEN Centre for International Development, Issues Nijmegen (CIDIN), Denmark and PETER GIBBON * Centre for Development Research, Copenhagen, Denmark Summary. Ð Private Sector Development (PSD) has become a central concern of most donors' development cooperation e€orts during the last decade. This paper is a critical review of policies in the area. Donors' work with concepts of PSD which are highly abstract, treat developing countries' private sectors as tabula rasa, and focus mainly on macro level preconditions. In practice, however, concrete PSD policies are mostly micro level ones. The paper argues that they are shaped mostly by the nature and interests of private sectors in donor country themselves, incorporate a high proportion of tied aid, and fail basic tests of coherence. Ó 2001 Elsevier Science Ltd. All rights reserved. Key words Ð private sector development, development cooperation, sub-Saharan Africa, bilateral aid

been earlier classi®ed under other headings. 2 This paper takes a critical look at the PSD policies and programs of bilateral OECD donors. Bilateral rather than multilateral donors have been chosen as the subject of this study for two reasons. First, this is simply in order to make more manageable a review of the by now large array of policies and programs in this ®eld, and second, because the bilaterals' programs generally have had a stronger focus on developing country private sectors themselves. The multilaterals' programs, by contrast, have focused more on structural reforms. The paper starts by presenting the main levels and elements of PSD according to the donor consensus on the subject (hereafter called ``the Consensus''). In the second part, aspects of ``real'' processes of development in sub-Saharan Africa's (SSA's) private sector are highlighted, in order to draw attention to certain practical issues that adequate PSD policies need to address. The third part returns to

1. INTRODUCTION Over the years, development thinking has seen many paradigms, ranging from an emphasis on technical solutions to ``basic needs,'' and from integrated development programs to structural adjustment. Although perhaps not a paradigm as such, the development of the private sector 1 in developing countries is nowadays regarded as of major consequence. Particularly in the 1980s, when the multilaterals' development thinking moved away from the central role of the state, the private sector (and thus market forces and competition) increasingly became seen as more ecient, more productive and more conducive to economic dynamism. Privatization of stateowned enterprises, strengthening market forces, increasing competition and refocusing the role of the state became the catchwords. Bilateral donors could not ignore this private economic development model. An increasing number of them therefore either adopted (new) programs, reworked/strengthened existing programs aimed at Private Sector Development (PSD), or redesignated activity as PSD-related which had

* 1

Final revision accepted: 27 August 2001.

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donor policies and provides an overview of existing programs and modalities. The fourth part examines a number of evaluation studies of the PSD programs of selected bilateral donors, in order to explore in more detail certain of the potential problems identi®ed in earlier sections. The paper ends by identifying ®ve issues for donors in (re-)designing PSD policies and interventions. It should be noted that the paper's objectives do not include a comparison between bilateral donors' PSD programs or an attempt to explain any di€erences that such a comparison might identify. At this very preliminary stage in the academic discussion of PSD it is more relevant to identify some of the common emergent issues and the problems that they raise. Hopefully, this may serve as a point of departure for later comparisons. 2. THE CONSENSUS The general Consensus in development thinking and cooperation reached at the end of the 1990s follows a relatively simple logic: (a) poverty reduction is the main objective of development (cooperation); (b) central to development is economic growth; (c) economic growth is best achieved through the private sector; and (d) government has a role to play in making the private sector ¯ourish and ensuring that growth contributes to poverty reduction. Central to this logic are historically rede®ned roles for the state and the private sector. Thinking concerning the appropriate nature of these roles has dominated development thinking over the last decades and has moved from a view of the state as the prime mover of economic development in the 1960s and 1970s, via the neoliberal resurgence in the 1980s when the state as an economic agent was regarded with ``major disillusionment'' (Killick, 1989, pp. 9, 16±19) to a search for a new synthesis in the 1990s, where both entities are considered to have distinctive but complementary roles to play (see, for instance, Smillie & Helmich, 1994, p. 7; World Bank, 1991, 1997). In essence, the current Consensus prescribes that the private sector ensures economic growth while the state provides the background conditions for this to occur, and at the same time makes sure that growth contributes to poverty reduction, does not contribute to environmental degradation and pays attention to gender equality. The state thus has to

perform ``enabling'' and even regulatory tasks. Meanwhile, this line of thinking also makes clear that the state should refrain from tasks or interventions which either jeopardize the functioning of the private sector or which ``crowd it out'' (see, for instance, EC, 1998, p. 9). Thus, donors explicitly assume that developing countries will predominantly be market economies [and thus that] their development prospects depend on making full use of opportunities for export growth, inward investment and improved competitiveness of companies, including their ability to integrate innovation and to acquire knowledge and know-how (EC, 1998, p. 8).

This perspective is today embraced by bilateral and multilateral donors almost without exception. Corresponding to the adoption of this model of PSD with a speci®c role for government, certain donors have undertaken a more detailed elaboration of the subject. In understanding this, it is useful to make some distinctions between what donors see as the di€erent levels or preconditions for PSD. One can distinguish ®rst of all between elements or preconditions at national and at international levels. At the international level (i.e., the international enabling environment), preconditions for (or elements of) PSD include trade regimes, levels of debt and access to foreign investment. At the level of the national enabling environment, a distinction can be made between the macro and the meso levels. The macro level covers broadly macroeconomic, physical infrastructure, human capital and ``good governance'' preconditions. The meso (or branch) level refers to the institutional infrastructure and covers those elements that relate to possibilities for dialogue between social partners (government, enterprises or employers organizations, labor unions) and which could enhance policy ownership among these social partners. Second, it is necessary to distinguish between elements that relate primarily to government and those that relate primarily to the private sector (e.g., ®rms) itself. In general, international and macro level elements relate in the ®rst instance to government as they either refer to preconditions for which the government is the main responsible entity and/or which are the (possible) outcome of international governmental negotiations. The meso level

Table 1. Levels and elements of private sector development Enabling environment

Level

Elements

International

Macro

Meso

Micro

Countries

State

Branch

Company

ÐFree and rule governed international Macroeconomic policies trade ÐAccess to international markets ÐTrade policy ÐDebt reduction ÐPrivatization

ÐChamber of commerce ÐEmployers organization

ÐExchange rate and monetary policies ÐLabor unions ÐPublic budgets ÐIntermediary ®nancial institutions ÐLabor market policy ÐR&D institutions ÐObservance of labor standards ÐTraining institutions ÐFiscal policy (tax) ÐSector-level market institutions ÐIn¯ation reduction ÐFinancial institutions (capital market) ÐBalance of payments regulation Physical infrastructure and human capital ÐEducation and skill training ÐHealth ÐRoads, railways, harbors, electricity, telecommunication, etc. ÐIntellectual capital ÐSocial security and pension schemes

ÐAccess to technology, expertise and capital ÐManpower ÐManagement and entrepreneurship ÐMarket access and information

PRIVATE SECTOR DEVELOPMENT

ÐDonor policies and practices (including coordination)

Institutional infrastructure

Good governance ÐFight against corruption ÐTransparency ÐLegal system Source: Adapted from Dalmeijer and Schulpen (1999, p. 15).

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relates both to government and the private sector and to institutions that bridge them. The elements relating directly (and only) to the private sector itself can be described as located at the micro level. This level then refers to, among other things, access to technology, capital and management knowledge for individual (or groups of) ®rms. Table 1 lists some of the most important elements under the international, macro , meso and micro level for PSD. The most obvious observations that can be made in relation to this understanding of PSD's preconditions are that it is all-embracing, unselective and suggestive of a virtually endless list of ambitious interventions. The list is composed without reference to a clear sequence of priorities, meaning that it is not a practical aid to policy development. Furthermore, it can be noted that its broad nature poses potentially major coherence requirements. These arise from its inclusion not only of mainstream development policy concerns, but also those usually involved in trade policy and agricultural policy. A second observation is that PSD's preconditions are formulated in the most abstract and general ways conceivable and on the implicit basis of an idealized model of the private sector (one where enterprises are actively engaged in foreign trade, technologically innovative, employ highly quali®ed workforces, possess a well-functioning relation to credit institutions, are presided over by responsible employers' organizations, etc.). The relevance, and indeed realizability, of such an idealized model in developing countries may be questioned. An account of existing private sectors in developing countries is very likely to generate a quite di€erent list of preconditions for further development, and a narrower and more realistic list of possible supportive interventions.

3. ``REAL'' PSD IN SSA: PROCESSES AND PROBLEMS In this section, attention is drawn to some key aspects of ``real'' contemporary PSD in sub-Sahara Africa (SSA). The purpose is to indicate the nature of an agenda for future PSD that takes as a starting point the real properties of existing capitalisms, rather than treating the private sectors of developing countries as tabula rasa. SSA is used as an example because a

majority of bilateral donors' concentration countries are found there. (a) Key aspects of ``real'' contemporary PSD in Africa SSA is characterized by a mass of private business activity, but the overwhelming majority of it comprises micro and small enterprises (MSEs) engaged in the provision of trade and services. Recent surveys summarized in Pedersen (2001) give MSE density levels of 84±93 enterprises per 1,000 inhabitants (rural and urban Zimbabwe, 1993) and provide considerable evidence of geographic ``clustering.'' But despite this, these enterprises display little division of labor, very low levels of technical capability and productivity and few or no linkages with larger, more dynamic enterprises (McCormick, 1998). Despite two decades of structural adjustment, locally-owned larger enterprises have mainly retained their traditional pro®le of capital-intensity, import-dependence and concentration in mainly declining sectors such as production of apparel, furniture, cooking oils, plastics, soaps/toiletries and building materials for the domestic market. Most enterprises self-provision for producer services and there remains a lack of cross- and even intrasectoral linkages. Levels of supplier credit, working capital and capacity utilization are all typically low as, according to Biggs and Srivastava (1996), are also production capabilities, technical eciency and internal learning. Absolute levels of FDI are increasing (from US$2.9 bn./year in 1985±90 to US$8.3 bn./year in 1996±99), but SSA's share of all developing country FDI remains below 5%. A clear majority of the main SSA FDI destinations are mineral producers and over 40% of total SSA FDI stock is in ``extractive industries'' (all data from UNCTAD, 2000). Other recently favored sectors are power generation, telecoms, tourism and some agro-industries (especially sugar). FDI in telecoms has been boosted by privatization; the latter accounted for 14% of all SSA FDI in 1998 (UNCTAD, 2000). Investment in power has been linked mainly not to privatization but to the commissioning of additional capacity on the basis of long-term operating agreements between foreign investors and local public utilities. In both Tanzania and Zimbabwe large Malaysian investments of this kind have been surrounded by controversy, with accusations of bribery, political interference

PRIVATE SECTOR DEVELOPMENT

and operating agreements that are economically unsustainable for recipient countries. Overall, much FDI clearly remains in capitalintensive ``enclave'' sectors, and with the exception of telecoms it is generally hard to see its contribution to broadly-based local PSD, or to signi®cant employment generation. Availability of banking or public credit, particularly for capital investments, seems to be improving. In Zimbabwe the proportion of MSEs that had obtained loans from banks or nongovermental organizations (NGOs) increased during the 1990s from a negligible level to 2.5%, which in Kenya 3.5% of MSEs had obtained institutional loans by 1995 (Pedersen, 2001). According to Biggs and Srivastava (1996), in four out of ®ve SSA surveyed more than 60% of large ®rms had received a bank loan in the previous ®ve years. On the other hand, broad-based programs of public or private support in the sphere of non®nancial inputs (management and workforce training, technological capacity and

5

market information and development) appear almost totally absent. In most countries there are examples of dynamic growth by larger locally-owned enterprises in so-called nontraditional export (NTE) sectors. These tend to share a common base in nonmineral natural resources or agriculture (fresh produce, cut ¯owers, ®sh, timber, etc.) and common (niche-type) developed country markets. Mostly they involve only very basic local processing. Within this group of sectors two quite di€erent patterns of PSD are evident. One is of a broadly-based, labor-intensive kind, linking smallholder or artisanal producers to exporters on the basis of ``contract farming''-type relations (Gibbon, 2001 on the Lake Victoria Nile Perch industry). The other is a capital-intensive kind, whereby large-scale commercial farmers or their equivalent produce for export on their own account (Dolan & Humphrey, 2000). Emerging private and public product standards in developing countries increasingly tend to favor the latter production

Table 2. Donors' PSD programsÐa compendium Instrument

Short description

Instruments of non-®nancial aid/technical assistance/business development services ÐTechnical aid Technical assistance at macro level (legislation, privatization, good governance, etc.) ÐTechnical aid Technical assistance at meso and micro level ÐVocational and technical aid Either in developing country or in the donor country by training consultants from the donor country ÐExport training Training about production, quality control, and regulations for export ÐInformation provision e.g., about markets, regulations, etc., marketing studies, quality control ÐManagement provision Helping in ®nding and recruiting capable management, including expert programs and training programs ÐInvestment advice Investment related advisory services ÐConsultant Trust Funds Providing own consultants for multilateral donor programs supporting private sector ÐStudy grants Feasibility studies, normally in the start-up phase of a joint venture, followed by training, advice and study-visits Instruments of ®nancial aid ÐGrants or loans ÐLoans and equity ®nancing ÐRisk-capital ÐGuarantees ÐMix of loans, grants and ®nancing ÐMixed credits/concessionary credits ÐLines of credit ÐMicroloan programs

Financial support at macro level (infrastructure, health, education) for local enterprises (often through intermediaries) and/or for own private enterprises (e.g., FDI, joint ventures) Providing capital directly to commercial projects A sort of insurance in case of trade or investment Combination of di€erent instruments in one programЮnancial packages Export-credits, tied to imports of goods and services from the donor country Credit to local ®nancing institution for on-lending to small and medium size enterprises Financial systems serving the microenterprises

Sources: DAC (1995, pp. 31±110), van den Bosch (1998), DGIS (2000), NORAD (1999), NZODA (1991), CIDA (1999), Sida (1999), DAC (1997b,c), AusAID (2000), Danida (1999), Pietila (2000), and Schulpen (2000).

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forms over the former (Henson, Loader, Swinbank, Bredahl, & Lux, 2000) This poses a need for much more demanding and imaginative public regulative interventions in developing countries, if more broadly-based NTE sectors are to survive. (b) Implications for a PSD agenda Several policy issues recur in di€erent parts of the above account, while others featuring large on the ocial agenda appear less relevant. Among those recurring are the apparently related tendencies for local enterprises of all sizes to have low technical and learning capabilities; for links between local (and external) enterprises of all forms and sizes to be weak and tenuous; and for dynamic instances of development to take or revert to an enclave form. These issues appear to point less toward a need for further structural reforms or for enhanced individual enterprise access to capital, technology and expertise, and more toward a need for broadly-based institutional interventions aimed at supplying common goods such as training, technological capabilities and quality assurance. They point also to a need for regulative interventions encouraging larger local and foreign enterprises to adopt more socially inclusive patterns of sourcing and subcontracting. 4. DONOR'S POLICIES AND PROGRAMS Given the content of the Consensus, it should not come as a surprise that DAC donors have similar PSD programs and interventions, covering most of the levels distinguished earlier (although often paying less attention to the international one). On the other hand, most of direct interventions they promote are at the micro level and often of a rather traditional kind. Thus, the DAC has itself concluded on the basis of a review of these programs that there is not only a ``heightened donor interest and commitment to support PSD'' and that ``programme and project diversi®cation and innovation are increasingly gaining ground,'' but also that ``mutual bene®cial trade and investment promotion continue to be an integral part of donor PSD support, motivated in part by foreign policy and commercial interests'' (DAC, 1995, p. 31). In trying to provide a clearer picture of actual donor interventions in the ®eld of PSD,

it is necessary to bring these together under speci®c headings. One existing attempt to do so starts out from a distinction between ®nancial and non®nancial (or technical) aid programs (the latter includes the micro interventions grouped under ``Business Development Services'') (Pietil a, 2000, p. 2). Using this distinction, Table 2 attempts to provide an overview of PSD-related interventions and programs. This compendium is not exhaustive. It can still be used, however, as a basis for generalizing about donors' choices of priorities and programs. A discussion of this will be followed by a review of the role of donors' own private sectors in their PSD programs and by a consideration of the relation between PSD programs and poverty reduction. (a) Priority and program selection As might be expected from the all-embracing nature of their understanding of the preconditions for PSD, only in a few cases do donor programs give clear intellectual precedence to speci®c levels or elements of PSD. Some, including the United States, express priority for macroeconomic policy reform and structural adjustment policies, a priority shared by ItalyÐ a donor that ``is convinced that the whole range of activities to support PSD can be fruitful only if conducted in an enabling environment'' (DAC, 1995, p. 71). The DAC (1994) recommended the avoidance of ``direct private sector development assistance where a hostile policy environment renders such assistance ine€ective,'' in order to prevent incoherence. One way of overcoming the possibility that interventions at a lower level will have no (or hardly any) impact on PSD because of failures at the ``enabling environment'' level is to focus assistance only on those developing countries where an ``enabling environment'' exists. In this light it is interesting to note that PSD interventions are not only aimed at those developing countries that can be regarded as the concentration countries of donors. This does not necessarily mean, however, that the presence of an ``enabling environment'' has ®gured as the main criterion for country selection. It may mean only that the latter has been based instead on commercial interests. 3 The attention to the enabling environment at macro level falls within the mainstream of contemporary development thinking, both academic and policy-related. Nonetheless, few bilateral donors concern themselves with

PRIVATE SECTOR DEVELOPMENT

providing detailed discussions of the macro level conditions for PSD, and there are equally few signs that most donors have kept abreast of recent trends in the literature, for example, toward the re-emphasis on issues of market institutions and regulation. 4 Moreover, even when one moves away from macroeconomic policy and toward speci®c programs at meso and micro level, intellectual justi®cations remain weak. On the one hand, there seems to be a high level of convergence with respect to selection of types of programs. On the other hand, the rationales for such selection are typically thin and sometimesÐin development research termsÐoutdated. This latter problem is, for instance, exempli®ed at the meso level by the frequent attention given to promoting existing local business associations and/or Chambers of Commerce as bases, not only for representing entrepreneurs vis-a-vis government, but also for broader business services development purposes including training. Typically, the critical points raised in the academic literature with regard to these organizations in Africa and other developing regions (see, for instance, Angell, 1994; Heilman & Lucas, 1997; Moore & Hamalai, 1993) as well as the literature on the East Asian experience, which emphasizes successful experiences with business service provision through publicly- or public±privately owned institutions, are overlooked. Likewise, discovery by donors of the importance of geographical proximity and horizontal linkages as a pathway for MSE meso level upgrading has coincided with a shift in the academic literature toward a emphasis on the limitations of clustering and on the much broader range of institutions (including intermediate ®nancial ones) which have to be in place before transitions between formal and informal, and between small and large enterprises are possible, as well as on the importance of vertical as opposed to horizontal links (see Section 3, Collier & Gunning, 1999; Schmitz & Nadvi, 1999). A third example relates to the strong focus in bilateral donor programs directed at the micro level toward transfers of technology/expertise between enterprises from recipient and donor countries which are ``twinned'' by donors themselves. The recent academic literature on ®rm-level technology transfer suggests that e€ective transfers of technology/expertise usually arise out of long-term relations between speci®c enterprises and a few key suppliers and customersÐin the case of customers, mostly

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where these are internationally important ®rms. There is little evidence that they arise out of relations between enterprises that lack this type of organic connection. More broadly, the literature suggests that the presence of what Lundvall (1992) calls ``national systems of innovation,'' a term which denotes a complex of nationally-grounded and interlinked research institutions and business networks, is the most important precondition for broadbased technological development. It is true that there is some movement by a few bilateral donors away from their traditional emphasis on ``twinning,'' but the reasons provided for this are based not upon addressing the relevant knowledge base, but rather on the grounds that support for individual enterprises may lead to market distortions. In sum: underlying most of these interventions seems to be a preference for organization- (or ®rm-)building over institution-building. Until this preference is questioned, program selection appears to be doomed to continue to lag behind the academic state-of-the-art. (b) Donor countries' own private sectors and tied aid The practical concentration of donor PSD initiatives on micro level programs focused around twinning donor country ®rms and business associations with counterpart organizations in developing countries, while not easily justi®ed intellectually, is explicable in terms of the enhanced role which it allows for developed countries' own private sectors. Indeed, the most striking feature of donors' activity at the micro level is the fact that the private sectors of the donor countries play an important part in it and that all donors have speci®c PSD interventions that are closely linked to their own private sector. Donors such as Canada (CIDA, 1999), Denmark (Danida, 1997), New Zealand (NZODA, 1998), the Netherlands (DGIS, 2000) and Sweden (Sida, 1999) all subscribe to Norway's assertion that ``in view of the priority given by developing countries to private sector development, the expertise and experience of [their own] commerce and industry is especially relevant'' (NORAD, 1999). Donors give several reasons for providing a strong role for their own private sectors in PSD in developing countries. First, by encouraging their own private sectors to have a more global presence they contribute to the openness of the world economy. Second, it is regarded as

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bene®cial to developing countries also. Developing countries receive sources of investment, technology and know-how through donor country companies which might have been otherwise absent. In addition, employment creation is mentioned as well as contributions to training and infrastructure. Furthermore, it is sometimes claimed that the involvement of donor countries' own private sectors demonstrates the values of private initiative to developing countries and that these ®rms raise awareness on social issues, ranging from labor standards to environmental measures, through their codes of conduct. But perhaps the most compelling reason is to support their own (foreign and domestic) economic interests vis- avis those of other countries (and other donor countries in particular). Within the broad range of donor PSD interventions which give a special role to donor countries' own private sectors, investment and trade interventions still form a very important part. Table 3, providing some major examples of donor programs, clearly shows that investment promotion (whether through studies, technical assistance and/or ®nancial assistance) is still more important than export promotion. It is necessary to point out, however, that there

are many other trade (import-export) related interventions by donors, which are not necessarily connected to the (direct) involvement of the donor's own private enterprises but are more geared to exports by developing countries themselves (e.g., the European Trade Development Programmes, the Danish (and Finnish) Import Promotion Oce, the French PROMEX-PMA agency, the German Protrade, the Dutch CBI, the Norwegian NORIMPOD, the Swedish EPOPA, and the Swiss OSEC (DAC, 1997a)). 5 Donor countries' own export promotion programs, i.e. export credit programs as well as guarantee and insurance schemes used to expedite exports to developing countries, particularly need to be considered in relation to the debate on aid tying. 6 Aid tying in general is agreed by donors to have negative consequences such as reducing aid e€ectiveness (DAC, 1999a, p. 74). Yet, aid tying is a major way in which the private sectors of donor countries are linked to PSD programs, even for those of donors publicly concerned about tied aid's general (negative) e€ects. Considering the fact that tied aid is in principle contrary to the workings of a free market (whose promotion is supposed to be the cornerstone of PSD interventions), it is

Table 3. Trade- and investment-related PSD programs involving donor country enterprises (some examplesÐmid1990s) Donor Belgium Canada Denmark Finland France Germany The Netherlands

New Zealand Norway Sweden United States

Program PSOP CRPSM CPB Egypt PSD PSD program IFU Investment guarantee FEC Ltd. RPE ARIA DEG ORET/MILIEV RHI (former WHI) POPM IBO IBTA PSOM PIIDS DAF NORFUND GIEK SwedFund TIP

Sources: DAC (1995), and van den Bosch (1998).

Short description Studies, training and insurance for investments Joint ventures between Costa Rican and Canadian ®rms Joint ventures and investment promotion Collaboration between Egyptian and Canadian ®rms Studies, technical assistance and set-up costs for joint ventures Pre-investment studies and share capital for joint ventures Scheme in connection with Danish companies investments Export credits Export promotion (export credits) Venture capital insurance Funds-in-trust for investment promotion Export promotion for Dutch capital goods and services Investment insurance scheme for non-commercial risks Investment insurance scheme for commercial risks Investment protection agreements with several developing countries Investment promotion and technical assistance Studies into investment and trade possibilities Studies and capital set-up costs for investment promotion Pre-investment studies Investment promotion Export credits Risk capital for joint ventures Trade and Investment promotion with focus on long-term private enterprise ties

PRIVATE SECTOR DEVELOPMENT

noteworthy that donors have moved so slowly to reduce or abolish tying of aid. By 1978, DAC donors reached an agreement with regard to export credits and other export-promoting interventions (e.g., guarantee and insurance schemes). This agreement was substantially revised in 1991 (DAC, 1998a). It is still questionable, however, whether donors are in practice really reducing their level of tied aid. Table 4 shows that the battle for untied aid is certainly not won. Over 1990±98, tied aid percentages ¯uctuated substantially and there was a tendency for some donors (e.g., Canada, Finland, the Netherlands and Switzerland) to (substantially) increase their proportion of tied aid. It should be kept in mind that technical cooperation funds are excluded from these data. If they had been included, then Japan's ®gure for 1990 would have been 14.8% instead of 1.4%, while tied French bilateral aid would have been 38.2% in 1994 instead of 14.0%. This is signi®cant particularly because technical aid forms an important element in PSD. Moreover, partially tied aid (i.e., contributions available for procurement from donor and substantially all developing countries) has not been taken into account here and would in some cases further diminish the percentage of truly untied aid. (c) (In)coherence The issue of tying raises the more general issue of coherence (or better, incoherence)

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which, particularly in more recent years, has been at the forefront of discussions on development cooperation. Incoherence refers to the question of ``consistency of policy objectives and instruments applied by OECD governments, individually or collectively, in the light of their combined e€ects on developing countries'' (DAC Informal Network on Poverty Reduction, 2000). In respect of PSD, two levels of (in)coherence can be distinguished: the internal and the external. Internal (in)coherence is restricted to development cooperation as such and refers to whether the PSD-related activities of donors are consistent with their overall objective for giving aid (i.e., poverty reduction): are donors really active in this ®eld with the objective of contributing to poverty reduction? van den Bosch (1998, p. 19) argues strongly that this link is missing: ``the development of a new PSD policy is in general disappointing [mainly because] activities in this ®eld are seldom worked out and incorporated in a broader vision on poverty reduction and employment creation.'' This is perhaps harsh. Most of the donors that have worked out a clear PSD policy have tried also to intellectually link their PSD activities with the objective of poverty reduction. But, this link is, not surprisingly, seen almost exclusively in terms of (``propoor'') economic growth, which is regarded as a necessary background condition for poverty reduction.

Table 4. Tying status of ODA bilateral commitments (excluding technical cooperation and administrative costs) Tied aid (in % bilateral aid) Australia Austria Belgium Canada Denmark Finland France Germany Ireland Italy Japan

1990

1994

1998

26.7 51.4 51.7a 33.4 n.a. 53.2 20.8b 25.8 n.a. 57.5 1.4b

27.6 75.0c n.a. 19.4 38.7g 14.4 14.0 24.3 n.a. 28.2 0.2

7.2 31.4 30.0d ;f 65.5 18.6 21.4 21.4e 13.5 n.a. 36.1 0.0

Tied aid (in % bilateral aid) Luxembourg Netherlands New Zealand Norway Portugal Spain Sweden Switzerland United Kingdom United States

1990

1994

1998

n.a. 5.1b 0.0 39.0 7.5a n.a. 10.8b 14.7 36.5a ;b 15.1b

n.a. 2.8 n.a. 7.8 4.6 100.0c 16.3 2.3 9.8 n.a.

6.0 12.1 n.a. 10.2 17.4 73.9 11.6 28.3 20.4f 71.6g

Source: (own calculations based on) DAC (1992), DAC (1996), and DAC (1999c). a 1991 data. b Including forgiveness of non-ODA debt. c 1995 data. d Includes technical cooperation and administrative costs. e 1997 data. f Gross disbursements. g 1996 data.

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While the importance of support for general macroeconomic policies which promote poverty reduction is undeniable, it is still worthwhile asking whether donor policy coherence does not demand a stronger and more direct link between other aspects of PSD policy and poverty reduction. Good macroeconomic policies should have an unambiguous anti-poverty dimension, but support for private enterprise and privatization may be e€ective in their own terms without having any such dimension at all. In other words: not all wealth and employment created through the development of the private sector contributes to poverty reduction, not all funds saved as an outcome of privatization of public enterprises are used for funding social, political or economic empowerment of poor people, and not all exports ®nanced in the name of PSD contribute to improving the lives of the poor and downtrodden (see also Schulpen, 2000, pp. 98±100). Meanwhile, the close link between PSD policy and donor country private sectors raises this coherence issue in a broader context. One may question the sincerity of donors that claim to be working toward PSD in developing countries, but whose instruments in the main center on promotion of exports and investments by their own private sectors. While the involvement of donor countries' private sectors should not be condemned by de®nition, it is still facile to claim that investments and exports by de®nition contribute to recipient country PSD, let alone to poverty reduction. In this light, it is important to review whether di€erent donors attach criteria to these programs which signal intentions of ensuring that these programs indeed contribute to development and (perhaps) poverty reduction. Some of the criteria used by Denmark for the selection of suitable PSD projects could, for example, be viewed as (more directly) poverty related. This holds, for example, for those related to the creation of long-term employment, contributions to the environment and contributions to women's living standards (Danida, 1998). The same types of criteria are also applied in one of the most important Dutch PSD programs, the ORET/Miliev program (DGIS, 2000). But the fact that neither set of programs has poverty reduction as an overall objective shows the need for mainstreaming. The involvement of donor countries' own private sectors in PSD programs is at the same time part of the second type of (in)coherence

identi®ed here. External (in)coherence refers to the question whether broader donor country policy concerns with a bearing on developing countries, and not simply those which form the basis of bilateral development cooperation, are consistent with PSD in these countries. Or, to pose the question in a di€erent form: does donor insistence that recipient countries open up their markets, integrate with the world market and increase exports goes hand in hand with striving toward fully opening their own markets to developing country exports? Recent reviews by the DAC show that donor performance is rather mixed as far as external policy coherence is concerned. Norway (DAC, 1999b) is judged as having a ``strong awareness on the necessity of coherent policies'' based on the fact that the Norwegian Generalized System of Preferences (GSP) is one of the most comprehensive and generous among DAC members, that active support is provided to partner countries in international discussions on trade, development and global public goods, and that aid-funded procurement is largely untied. Moreover, there are consultative fora to ensure greater cooperation between di€erent ministries involved in foreign policies. Japan's performance is less laudable. Although market access policies are ``characterised by gradual, though sometimes uneven, progress towards reducing border barriers and reforming the regulatory framework [. . .] progress has tended to lag in sectors of special interest to lower income developing countries.'' Simultaneously, the bene®ts of the GSP are limited for least developed countries in particular ``as a number of [the] products [in which they have a comparative advantage] continue to be excluded from GSP bene®ts or are subject to binding ceiling quotas,'' with the result that ``the possibilities for developing countries to attain an export-led growth and be integrated in to the world economy [are] constrained'' (DAC, 1999d, pp. 53, 55, 57). In the European Union aid review, much attention is understandably given to the Common Agricultural Policy (CAP), its impact on world supply and prices of agricultural products and speci®c examples of incoherence with regard to ®sheries, beef and milk. Although a ``trend [. . .] towards greater liberalisation and simpli®cation of its trade regime'' is signaled, the GSP of the EU ``ranks low in the pyramid of preferences'' (DAC, 1998b). In addition, the US GSP excludes particularly labor-intensive products such as textiles, clothing and footwear, which are of

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special importance to less developed countries (LDCs) (DAC, 1998c). The DAC review might also have covered donor countries' use of the WTO to promote the patenting of ``intellectual property,'' and the universalization of increasingly exacting sanitary, phytosanitary and packaging standards. All in all, these examples show that preaching PSD and integration into the world economy in developing countries is one thing, while changing donor's own trade policies is quite another. For these problems to be overcome, it is not sucient to state that poverty reduction considerations must be taken into account in designing and appraising all ODA activities. It requires that clear guidelines and criteria for ministerial coordination be drawn up, that closer integration be achieved between di€erent implementing agencies and desks, and that a thorough review of PSD instruments be undertaken. Up to now, little evidence can be found of donors taking the need for mainstreaming very seriously, or taking organizational measures to ensure that PSD related activities are an integral part of their programs. 5. THE EVALUATION OF PSD INTERVENTIONS This section examines a number of evaluations of bilateral donors' concrete PSD interventions. These have been selected from ®ve of the ``like-minded'' group of donors (Norway, Finland, Sweden, Denmark and the Netherlands), who tend to have made public more evaluations than other groups of donors, and from the United States, because USAID has been very active in PSD. Two or three evaluations were selected from each of the countries concerned to re¯ect a cross-section of di€erent kinds of PSD interventions, from mixed (or export credits), through cooperation between chambers of commerce, to technology transfer. The overall number of these studies is not high, mainly because most donors have only recently begun to formulate PSD intervention-speci®c objectives and expected results, and on this basis conduct rigorous evaluations. On the other hand, there are many evaluations that have been written over the years relating to interventions that donors today regard as central to PSD. These studies have also been drawn upon. Against the background of the earlier discussion, these evaluations were examined in

11

relation to three sets of issues. First, to what extent the interventions concerned were consistent with other donor objectives. Second, given the likely involvement of donors' own private sectors in the administration of these interventions, did the latter's implementation re¯ect donor organizations' ``best practice.'' Last, the extent to which the interventions were relevant to the particular circumstances of partner countries? Evaluations of a selection of Swedish projects (Hellgren & Roland, 1999; Lindahl, Broden, & Westermark, 1999; Winai & Hesselmark, 1998) underline achievements in the area of technical assistance, but problems concerning relations with (private) implementing agencies and with overall issues of program monitoring and ownership. Evaluations of a long-established Dutch mixed credit schemes (IOB, 1999; IOV, 1991) indicate achievements in respect of Dutch export promotion and improvements over time concerning coherence of selection of targeted sectors. But they also found ongoing problems concerning selection of countries, the attainment of technologytransfer, institutional goals and in-program monitoring. Evaluations of a series of Finnish enterprise and export ®nance schemes (van der Windt, Ruotsi, & van Doorn, 1992a; van der Windt, Ruotsi, & de la Rive Box, 1992b; Kyrklund, Suksalainen, & Kirjasniemi, 1996) indicated few achievements of any kind, but stressed problems with regard to integration with Finnish aid activities, objectives and monitoring procedures generally, as well as with country selection. Evaluation of two Norwegian projects (Lavoie, Razanadrakoto, & Tvedten, 1999; ODIN, 1998) highlight the success of some technical transfers, but point out problems regarding NORAD's own capacity in PSD-related activities, the absence of clear guidelines in certain strategic areas, and a general confusion of organizational and institutional development issues. Evaluations of a number of Danish projects (Danida, 1996, 1999; Nordic Consulting Group, 1996) indicate some positive indirect outcomes, but few direct ones. Problems are indicated with regard to the integration of activities with mainstream Danida objectives and procedures, and with the capacities of selected intermediary agencies, and underline a tendency to focus on technical rather than institutional issues. A 1999 general review of Danida PSD work concluded that few of these problems were (any longer) visible, although it

12

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did not explain how they had been avoided. Evaluation of US projects again indicates few positive direct outcomes (Fox, 1996, 2000). Problems are once again cited with regard to agencies' lack of focused expectations with regard to particular interventions, with regard to their diculties in monitoring complex and novel interventions, with regard to the capacities of intermediary agencies and with a lack of ``®t'' between project design and local realities. Some general lessons can be drawn from these evaluation studies, corresponding to the three general issues mentioned in the beginning of this section. First, donor PSD-related interventions frequently lack a clear set of objectives, particularly ones which could be considered to be consistent with broad donor goals such as poverty alleviation and gender equality. This is re¯ected in a general lack of guidelines and selection criteria. Second, the lack of clear objectives and/or their detachment from central donor goals may not be simply an oversight, but may relate to a more fundamental issue. This concerns the real level of ``ownership'' of PSD-related work by donor agencies. Some donor agencies still appear relatively uncomfortable with having to take on board PSD, and government departments formerly responsible for PSD-type work often seem to have been poorly absorbed. Among other consequences, this contributes to diculties in satisfactory monitoring. A related problem is matching the objectives and capacities of those private intermediaries that are used to implement speci®c interventions, with those of donors. The greater the extent to which these intermediaries are usedÐand their use appears to be broadly encouragedÐthe more acute this problem appears to be. Furthermore, intermediaries often su€er from weak capacity to carry out their expected functions, while selection of target ®rms and even countries of operation, sometimes su€ers from lack of transparency. In general there is an excessive focus on simple, hardware or training package-related transfers, and a lack of focus on institutions and institution building. This is strengthened by the tendency for PSDrelated interventions to have a strong tied-aid component. Third, most PSD-related interventions seem to lack a point of departure in the real capacities, modes of operation and internal relations found in private sectors in developing countries, and their ®rms and institutions. Instead, interventions are usually based upon

models of business development derived from developed countries. 6. KEY QUESTIONS FOR DONORS From the above analysis a series of key questions emerge which donors should take into account in re-designing existing PSD interventions or in initiating new generations of PSD policies and interventions. (a) Clari®cation of PSD objectives and mainstreaming into them of donors agencies' core objectives: While a link between PSD and poverty reduction has been established by donors at the most abstract theoretical level, neither this nor other core bilateral donor objectives have been mainstreamed into speci®c PSD programs. This requires donors to think through more systematically how they can operationalize ideas like social inclusion/exclusion in terms of private economic activity, and how then to translate these operationalizations within PSD interventions. In turn, this suggests a need for donors to develop their analytical capacity. (b) Integrating specialized sub-agencies currently responsible for bilateral donors' PSD programs: Much of the incoherence of PSD-related aspects of donor activity appears to derive from the ongoing freestanding status of the subagencies and authorities directly responsible for PSD. These agencies need to be integrated into the organizational, cultural and procedural routines of agency head oces. Both this issue and the previous one point to the importance of training, and of the elaboration of shared guidelines for program formulation, selection and implementation. (c) Phasing-out tied aid's currently key role in PSD interventions: The general reasons why tied aid is undesirable are well-known and do not require rehearsal. In the case of PSD programs, its presence appears to lead toÐamong other thingsÐa skewing of activity from low- to middle-income countries and from sectors and local partners which are strategic for recipient countries to ones which are strategic for donor ones. (d) Reorienting PSD programs away from transfers of hardware and ®nance, and toward institutional development: At the center of most PSD programs today are transfers of hardware-oriented technical assistance

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and/or ®nance. Not only is it unclear whether these should play such a central role within PSD-related activity generally, but it seems also unlikely that they correspond to forms of assistance which donors are (or should be) best at. Forms of assistance which donors are currently neglecting, but in which they should have a comparative advantage, include developing institutional capacity and capacity to regulate private sector activity in ways promoting social inclusion. (e) Basing country PSD programs on a clear analysis of the strengths, weaknesses and

13

dynamics of local private sectors: Most PSD programs today are of a ``one size ®ts all'' kind, founded upon the idea of supplying a series of key standardized inputs which will help make developing country private sectors more like the private sectors of developed countries. In the process, structures and processes of real local economic activity are addressed neither in terms of the speci®c challenges which they pose, nor the opportunities they present. This issue again points to the importance of a greater emphasis on developing donor agency analytical capacity.

NOTES 1. The DAC (1994, p. 4) de®nes the private sector as ``a basic organizing principle for economic activity where private ownership is an important factor, where markets and competition drive production and where private initiative and risk-taking set activities in motion.'' It is added that this private sector principle can be ``applied in all economic activities,'' including the delivery of public services. Thus the private sector fact is conceptualized as a basic organizing principle for ordering society, and is not simply con®ned to ®rms and enterprises. 2. It should be recognized that not all donors have yet formulated an explicit PSD policy. By 2000, and following van den Bosch (1998), donors that had formulated an active policy and developed speci®c programs in the ®eld of PSD included Canada, Denmark, Germany, New Zealand, the United States, the United Kingdom, the European Union, the Netherlands, Norway, and Australia. A second group had not yet formulated an explicit PSD policy but at the same time had substantial programs aimed at the private sector. This included Sweden, Belgium, France, and Austria. A ®nal group comprised those donors (Finland, Greece, Ireland, Italy, Portugal and Spain), which hardly paid attention to PSD, although some of them had programs that bene®ted the private sector. 3. Norway, for instance, has stated that the ``support arrangements for economic cooperation between the

productive sector in Norway and counterparts in developing countries are not speci®cally aimed at Norway's main recipient countries but may be used in most low- and middle income developing countries.'' The Netherlands, which provides a list of 22 concentration countries, has at the same time issued a separate list of countries eligible for private sector support, which includes China, Nigeria, C^ ote d'Ivoire and Thailand. Its private sector support is said to be provided to those countries ``that take measures to stimulate employment in the private sector and where possibilities exist for cooperation with Dutch companies.'' 4. An exception should be made for France, which has emphasized regulation continuously since bilateral donors ®rst began to concern themselves with macroeconomic questions. 5. In general, these types of programs cover such issues as trade information provision, organization of trade fairs, technical assistance, training in marketing, and also sometimes ®nancial assistance. 6. Tied aid, according to the de®nition of the DAC, refers to ``ocial grants or loans where procurement of the goods and services involved is limited to the donor country or to a group of countries which does not include substantially all recipient countries.''

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