Private sector development

Private Sector Development (PSD) is a term in the international development industry to refer to a range of strategies for promoting economic growth and reducing poverty in developing countries by building private enterprises. This could be through working with firms directly, with membership organisations to represent them, or through a range of areas of policy and regulation to promote functioning, competitive markets.

Supporters argue that PSD is an important part of poverty reduction. Whether as workers, subsistence farmers or entrepreneurs, most poor people already participate in markets. Strengthening these markets in ways that secure higher incomes for the poor is therefore seen by PSD advocates as a fair and efficient way to fight poverty. Earning a decent income in the private sector, it is argued, is also more dignifying than relying on hand-outs.

As with all development interventions, PSD programmes are under pressure to measure and report their achievements, monitoring and evaluating their work in ways that are both credible and cost-effective. One source of further information about methodologies for measuring the results of PSD, including the approaches currently used by different donors, is the Donor Committee for Enterprise Development.

An April 2013 EPS PEAKS paper found a strong and well-established case for donors to intervene in private markets to deliver subsidies for development purposes. The researcher found that the theoretical reasons for intervention were well established by the economics literature, but that the practical approaches and frameworks for delivering subsidies to private sector entities are more complex and less understood.

The approaches that do exist vary widely and not just in one dimension. The researcher identified some key criteria that can be used to evaluate different approaches and instruments and gave examples of their usage by different donor institutions. In practical terms, they said that thoroughly-researched cost benefit analyses should be used to assess project impact and that it was vital that donors recognise that by actively distorting a market outcome, there might be significant consequences to be understood and analysed.

Where entrepreneurship and markets are stifled by inappropriate regulation, excessive taxation, lack of fair competition, lack of voice or an unstable policy environment, growth and poverty reduction are likely to suffer. Typically, donors first fund business environment analyses, such as the World Bank's Doing Business Reports, identifying the major constraints to business growth. They then work with government and other stakeholders to implement reforms.

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