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Market Development at the Nexus between Public and Private Sectors

| 4 Minute Read
Economic Growth and Trade | Financial Services and Access to Finance | Public Financial Management | Business Enabling Environment
Private Sector Engagement

How can we work to ensure "decent work for all?" Chemonics' Director John Thissen explores how the public and private sectors can work together to spur sustainable market development.

The Sustainable Development Goals established an agenda for transforming the world in which we live. SDG1 sets for the ultimate objective for the global community: to end poverty in all of its forms by 2030. The remaining 16 SDGs identify critically interlinked objectives which are both necessary and sufficient to achieve this objective. They clearly illustrate that economic growth initiates should be viewed through the lens of a larger, more complex development problem – one that requires the simultaneous resolution of development constraints ranging from health care, education, social equality, and ecology.

SDG8, the creation of “decent work for all,” requires economic growth. Unfortunately, economic growth is simply a necessary, not a sufficient, condition. To achieve SDG8, there must also be sustainable development across markets and social services, as well as the existence of legal protections provided by the rule of law and public sector transparency. In recognition of the complex nature of private sector development, USAID’s vision for supporting private sector development has evolved beyond the 10-year-old value chain development approach into a broader, more encompassing Framework for Inclusive Market Systems. The framework explicitly recognizes that support for inclusive, sustainable, resilient market development must address opportunities and constraints existing outside of any given value chain. In essence, it envisions a broader focus: more growth can be achieved through greater balance in economic development programming.

Value chain development is a very attractive concept. It provides a framework for both development and measurement. Within the context of a value chain, an increase in production in any industry will affect both up-stream suppliers, who will have the opportunity to increase their production of goods to be used as inputs, and down-stream firms, who will have access to a greater base of inputs to drive their own value-added processes. These up-stream and down-stream effects can either be measured directly by following the contracts, or estimated using established numerical techniques similar to those employed by the Bureau of Labor and Statistics. As a result, one can measure both the direct benefits received by the beneficiary producers, as well as the indirect benefits realized up-stream and down-stream. The value chain approach does not, however, provide a mechanism for measuring interactions cross-stream, meaning that the spillover of technologies and income from one value chain into another is outside the realm of measurement. The Framework for Inclusive Market Systems explicitly recognizes that there are complex relationships that extend beyond a single value chain. These relationships extend into other value chains, into the labor market, and into the market for social services. This more comprehensive vision of inter-relationships will be seen driving USAID economic development programs going forward.

In parallel to this evolving vision for market development, the OECD has been cataloging market-focused approaches applied to promote development objectives. Under the initiative Making Markets Work for the Poor (M4P), approaches and case studies can be found that evaluate market solutions for growth and poverty reduction, basic and social service delivery, and the ability to scale solutions from pilot to sustainable implementation. Reviewing these materials one could leap to the conclusion that there is a market-based solution for every known problem, which is far from realistic.

In 1983, Michigan State University Professor James Shaffer wrote that the market is always an instrument of the political system. The promotion of broad-scale inclusive economic growth is subject to constraint by market rigidity imposed by competing incentives, inflexible institutions, and capacity constraints. Such institutional resistance can be found in either the private or public sectors. Where wealth is concentrated in the hands of a few, the rise of an affluent middle class threatens both political influence and economic dominance. In such an environment, access to local resources in the name of equitable growth will face many challenges. Similar constraints are frequently encountered within the public sector, as government officials that do not embrace internationally proven practices in market development can effectively undermine all market-based initiatives designed to broaden a country’s economic base by imposing regulatory environments that effectively throttle private sector growth. In cases where constraints exist and effectively inhibit inclusive development, market development becomes contingent on realized success in other development arenas, most notably the recognized rule of law and the elevation of national priorities consistent with private sector development and poverty reduction.

That said, it would be a mistake to assume that government policies and practices will always be at odds with inclusive development. In fact, both the private and public sectors have specific roles to play in alleviating poverty. Stated in the most simplistic way, the role of the private sector is to capitalize on existing incentives to grow and create jobs, while the role of the public sector is to facilitate the private sector by supporting a business environment that guarantees rule of law and recognizes the legitimacy of returns on investment without undue risk. This dichotomy of roles brings us to the nexus between the public and private sectors – a space ripe for innovation where role reversals can facilitate market development.

While there are many proven examples of public-private partnerships (PPPs) where service delivery typically associated with the public sector is shifted to a private sector provider (transportation infrastructure, sanitation, and educational services, to name a few), there are also examples where the public sector has effectively stepped into the role of private sector to promote economic growth. As an example, consider the use of guarantee funds in the Kyrgyz Republic.

About 5 years ago, Chemonics partnered with USAID to introduce municipal guarantee funds through the Local Development Project (LDP). Municipal guarantee funds, based on a proven model deployed in Bulgaria and elsewhere, addressed a specific market imperfection that limited the access of small and medium businesses to loans because they were unable to meet existing collateral requirements. By guaranteeing a portion of the loan, municipalities were able to promote the development of SME’s within their jurisdiction by facilitating access to finance. From the small number of municipal pilots supported by LDP, guarantee funds gained the support of the national government, which adopted the Law on the Guarantee Fund, and set aside part of the State budget for fund capitalization. These guarantee funds position the public sector as a financial sector participant to effectively manage financial sector risk and promote the growth of local businesses.

The SDGs have raised the bar in what the development community is trying to achieve. Sustainable jobs development and decent work for all as envisioned by SDG8 will require that all development professionals contribute their efforts and expertise with an eye to a big picture comprised of complex relationships and competing incentives. We have found that that how we address these complex relationships between economic sectors will determine our success in raising standards of living. We have also found that innovative solutions can address the unique needs found in different places around the world. And now, we have found that public sector support for, and participation in, economic development is required, and can take non-traditional forms.

About John Thissen

John Thissen is a public finance management specialist with more than 20 years of experience in tax policy, revenue estimation, and forecasting, and impact analysis. He is currently a director in the Europe and Eurasia region and manages the USAID Public Financial Management IQC. John has developed the capacity of the public sector to support…