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Leave It to the Private Sector: Business-Led Developmentalism

November 18, 2012

The private sector is often criticized and ostracized in the development arena because it is driven by profit: they do not care about poor people, one is told. Supporters of  a business-led development argue however that these criticisms miss the point: private companies sell products to make a profit, but these products (such as soap) can make a lot of good to poor people. And in most of the cases private companies are much better than governments or aid agencies at delivering these goods. If a big private company is not producing any goods which is socially valuable (apparel is not going to change people’s lives as much as soap does), it can still however offer dramatic benefits. How? Firstly, private enterprises create thousands of jobs and arguably this is the single best determinant of standards of living improvement. Secondly, by investing in one sector a firm can transfer valuable knowledge to countries which need it most: other from the host country can take this knowledge and run on their own.

USAID’s move to partner with big food corporations like Wal-Mart and Monsanto epitomizes this shift towards a business-led idea of development and is posited on these two spillovers. USAID’s administrator Rajiv Shah puts it clearly why linking up big businesses to small farmers is a win-win solution: farmers who were connected to Wal-Mart in Guatemala received training and preparation by the company and they were able to double or triple their income by selling potatoes and onions to Wal-Mart. The US too would benefit from such move as they would strengthen their trade ties with those countries where American enterprises penetrate.

Learning from the Past? Leveraging the private sector is not however a new idea. Exactly, it is as old as the idea of development as formulated by president Truman in 1949 in his inaugural speech. Truman explained that the development of poor countries cannot hinge upon material resources of the rich countries because these resources are limited. Development is more about  US businesses sharing “the imponderable resources in technical knowledge” with least developed countries, Truman argued. Such private sector developmentalism would benefit poor people in those countries while US would benefit from the growing commerce with industrializing and economically expanding countries. The rationale and goals of Truman’s business-led development have striking similarities with today private sector-led development formulation. So what went wrong at the time? Why the idea was dropped later on? And why today ideas about private sector are more likely to be successful?

Private Sector, Politics and… Security. The US tried out this idea for the first time in Iran between 1947 and 1951. The goal in Iran was to “adapt the US free enterprise system  to changing world conditions”.  This idea was spearheaded by a figure, Max Thornburg, who was the most visible representative of the American private sector in Iran and who came to articulate this radical approach on the basis of his long-lasting experience in a key private sector industry: oil. So how has the private sector to be involved in changing Iran’s conditions? According to Thornburg, oil companies should not behave as enclave enterprises and part of the oil money should stay in the host producing country in the form of development project. By so doing, the American economic sector would penetrate in the Iran economy and local free enterprises would develop under the umbrella of large foreign investment firms. This implied one thing: the US should prioritize economic change over political stability and discipline. The economic sector penetration would be revolutionary in the short term but would ensure long lasting relationships between US and Iran by tying them up with economic links. The penetration of the US firms was however contingent on the government being able to negotiate higher royalties for its oil. This meant re-writing the contract with the English company which was extracting its oil. Why the business-led development idea was later dropped? The Iranian government was unable to renegotiate oil royalties and for that reason to implement those reform (recommended by a US consultancy firm) to facilitate the penetration of US firms. Instead of private sector development the US faced oil nationalization. The private sector mantra was a catalyst for change which in Iran took the form of oil nationalization.

Private sector developmentalism had let loose the energies of a people. The price of a competitive, diplomatically uncontrolled American private sector abroad, engaged in development, proved to be an economic nationalism that led to nationalization. Inevitably, the United States perceive such nationalistic pressures and the instability that resulted as threats to national security.

Today business-led development differs in some ways. In Iran the US private sector’s involvement took the form of a US consultancy firm advising the government on the type of reform to open up to foreign private investment. Today, the model seems to focus more on getting private firms already in the country to benefit poor people. Some lessons from the past however apply today. Private sector developmentalism failed in the sense that it fostered outcomes which did not square well with one of US’s priority: security. It is not clear why today business-led developmentalism would not prompt such outcomes and why the US (or other rich countries) would be willing to sacrifice their security for the blossoming of a lively private sector.

Even if private sector supporters are not able to answer to this query they would be still able to make a strong case for the private sector model. Next post will look at the two postulates (i.e. creation of jobs and transfer of knowledge) on which the business-led development mantra is built upon and sketch out the weaknesses of such thesis.

4 Comments leave one →
  1. Bart Doorneweert permalink
    November 20, 2012 7:09 pm

    I see that you focus your definition of private sector development on “western” business activity in developing countries. But there are also other types of project that stimulate local enterprise and entrepreneurship for national or international markets. That latches on to a growing culture of innovations which are conditioned to scarcity. Those might well provide the new products and services that could spread across the globe. I would ask you to also consider that part of private sector development, and maybe compare it with big corp penetration in developing countries type of activity.

    Aside from that, there are also Chinese corporations doing really well in servicing African markets. They don’t have a development agenda, but do have an impact by providing products and services that people would care to pay for. How do you see that type of activity? Start of a great discussion in any case. Thanks!

    • November 22, 2012 4:48 pm

      Hi Bart,

      Thanks for your comment and observations. I use the term business-led developmentalism to define an approach which prescribes how rich countries should engage with least developed countries. As far as I see it, the current emphasis on the private sector mantra posits the necessity to move away from exclusively working with governments and to partner with private sectors firms to spur economic development. If this thesis has its strengths I try to point out its potential weaknesses: whether strengths will prevail over weaknesses will depend on the context.

      As for local enterprises, I agree with you that the fundamental driver of wealth creation is local enterprises which produce goods and sell them to other countries: it’s industrialization and this is what makes countries rich. Whether the development of a domestic private sector is spurred by the penetration of foreign enterprises depends in my view on the conditions of such engagement. The example of Wal Mat or Lesotho in the new post proves this point and also applies to the Chinese corporations investing in Africa.

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  1. Private-Led Developmentalism: Jobs for What? « Do No Harm

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