Spurring pri­vate in­vest­ment for devel­op­ment

Financial Mirror (Cyprus) - - FRONT PAGE -

Suc­cess­ful eco­nomic devel­op­ment has hewed to a well­known pat­tern. Lift­ing a coun­try out of poverty and plac­ing it on a path of sus­tain­able growth re­quires hard work, the cre­ation of a ro­bust sys­tem of prop­erty rights, and – cru­cially – pri­vate in­vest­ment.

This method is not spe­cific to a par­tic­u­lar re­gion or peo­ple. As Asia’s spec­tac­u­lar growth has demon­strated, it is trans­fer­able across cul­tures. So it is a shame that devel­op­ment econ­o­mists and the world’s mul­ti­lat­eral in­sti­tu­tions are fail­ing to apply it sys­tem­at­i­cally in the de­vel­op­ing world.

Bil­lions of dol­lars of aid has been poured into de­vel­op­ing coun­tries, but it has not been enough, and the re­sults have been dis­ap­point­ing. The World Bank es­ti­mates that one bil­lion peo­ple still live on less than $1.25 a day, while more than 800 mil­lion do not have enough to eat. The Mil­len­nium Devel­op­ment Goals at­tempted to apply a com­pre­hen­sive ap­proach to re­duc­ing poverty, but the MDGs failed to ad­dress its un­der­ly­ing causes.

On pa­per, at least, the United Na­tion’s new Sus­tain­able Devel­op­ment Goals, put in place last year, are an im­prove­ment. The trou­ble is that lofty am­bi­tions come with a high price tag, and there re­mains a fund­ing gap of around $2.5 tril­lion if all 17 goals are to be met. A chasm this big can­not be bridged by cash-strapped gov­ern­ments and tax­pay­ers alone.

That is why a re­cent de­ci­sion by the Euro­pean Par­lia­ment to back my re­port call­ing for the mo­bil­i­sa­tion of pri­vate cap­i­tal in the fight against global poverty is so im­por­tant. For the first time in the par­lia­ment’s his­tory, its mem­bers ac­knowl­edged the pri­vate sec­tor as a key part­ner in wealth cre­ation in the de­vel­op­ing world. Given that the Euro­pean Union is one of the big­gest providers of devel­op­ment aid, the de­ci­sion could be highly sig­nif­i­cant.

To be sure, win­ning a vote, while never straight­for­ward, is the easy part. The chal­lenge will be trans­lat­ing words into ac­tion.

The early signs are heart­en­ing. Mar­i­anne Thyssen, the EU’s em­ploy­ment and labour com­mis­sioner, wants work on im­ple­ment­ing the re­port to be­gin im­me­di­ately. She has promised that the Euro­pean Com­mis­sion will in­vest more than EUR 2 bil­lion to sup­port the pri­vate sec­tor in the de­vel­op­ing world by 2020. She ex­pects that EUR 4.8 bil­lion in EU grants would lever­age at least EUR 66 bil­lion in in­vest­ment in Sub-Sa­ha­ran Africa, Asia, and Latin Amer­ica by fi­nan­cial in­sti­tu­tions and pri­vate firms.

If the EU’s en­tire devel­op­ment bud­get was sim­i­larly max­imised, we could mo­bilise about EUR 300 bil­lion of cap­i­tal, which, if spent on ac­quir­ing equip­ment, plant, and tech­nol­ogy from Europe, could give an enor­mous boost to the cur­rent slug­gish growth of the Euro­pean economies.

An im­por­tant early task in achiev­ing the de­sired im­pact will be to cre­ate an en­vi­ron­ment in which pri­vate ini­tia­tives can flour­ish. Cur­rently, mi­cro, small, and medium-size en­ter­prises ac­count for some 60% of the de­vel­op­ing world’s em­ploy­ment. And yet 70% of these busi­nesses re­ceive no help from fi­nan­cial in­sti­tu­tions, even though in­vest­ment would en­able them to grow and cre­ate jobs.

We must be­gin to change this by pro­vid­ing the fi­nan­cial and tech­ni­cal as­sis­tance coun­tries need to es­tab­lish re­li­able bank­ing sys­tems and tax ad­min­is­tra­tions. Ad­her­ence to in­ter­na­tional ac­count­ing stan­dards should be en­cour­aged. Trans­parency must be im­proved, and cor­rup­tion must be rooted out. And in many coun­tries, the sys­tem of land reg­is­tra­tion and prop­erty rights needs to be for­malised, so that in­di­vid­u­als and com­pa­nies gain eq­uity against which they can bor­row to in­vest in their busi­nesses.

The ef­fect will be to in­crease the num­ber of bank­able projects in which both lo­cal busi­nesses and in­ter­na­tional firms can in­vest. Po­ten­tial for pub­lic-pri­vate part­ner­ships ex­ist in en­ergy and telecom­mu­ni­ca­tions projects, in wells and ir­ri­ga­tion, in the con­struc­tion sec­tor, in in­fra­struc­ture such as roads, air­ports, and har­bours, and in pro­cess­ing plants for agro in­dus­tries, meat, fruit, and veg­eta­bles.

Of course, strin­gent safe­guards must be put in place. Pri­vate in­vestors will need to agree to bind­ing rules pro­tect­ing so­cial, en­vi­ron­men­tal, hu­man, and gen­der rights. To build trust, EU-level fo­rums should be cre­ated, in which the pri­vate sec­tor, NGOs, think tanks, and gov­ern­ments can dis­cuss devel­op­ment op­por­tu­ni­ties.

Help­ing de­vel­op­ing coun­tries grow will stim­u­late in­vest­ment op­por­tu­ni­ties for EU com­pa­nies and open new mar­kets for their goods. The re­sult will be a vir­tu­ous cy­cle of devel­op­ment that ben­e­fits ev­ery­one – and that moves the world sig­nif­i­cantly closer to achiev­ing the am­bi­tious goals that it has adopted.

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