|Entrepreneurship in DRC (January 2014)|
The Independent Commission for Aid Impact (ICAI) released last may a report reviewing DFID’s private sector development work. The overall assessment was “amber-red”, meaning that: “The programme performs relatively poorly overall against ICAI’s criteria for effectiveness and value for money” and suggesting that “significant improvements should be made”. While the report recognised that DFID’s approach is ambitious it also stressed that it does not translate into a coherent and joined up country level portfolio. It also outlined a concerning lack of focus, a weak evidence base and a failure to articulate what success could look like and thus supporting an appropriate theory of change. In many ways, ICAI’s report mirrored several NGO’s concerns.
Given that Private Sector Development (PSD) is a top priority for DFID, ICAI’s report should be seen as an urgent call for DFID to put its work on hold, while starting open and constructive discussions with a much wider array of CSOs, businesses and parliamentarian representatives in the UK and abroad. Despite this, there seems to be a big silence among many stakeholders around this major DFID’s aid strategy shift. In addition, if ODA is – and that’s a big ‘if’ - appropriate for PSD as an effective way to produce growth that in turn reduces poverty in developing countries and if the UK government is to lead globally on this approach, then it has the responsibility to ensure aid is used in a way that actually achieves what it is intended for.
Economic growth is a necessary but insufficient condition for poverty reduction. The sustainability and pattern of this dynamism crucially determines its ability to be pro-poor. As such, the private sector, from entrepreneurs to large businesses, but also the rules of the game that determine their behaviour and market outcomes play decisive roles. The debate around whether or not donors like DFID can actually facilitate economic growth with aid has been going on for many years as many other determinants out of donors’ control play a crucial role. As long as DFID is not be able to demonstrate what aid works best or not in this area (it will always depend on every country’s conditions), it must at least ensure that aid is channelled in the most effective way as possible. Is aid best used to that end by promoting the private sector or are there more effective ways to encourage inclusive economic growth in developing countries, like investing in health, education or infrastructure where we can be more confident about its impact?
Until DFID can show greater focus, following evidence of what has worked, it must at least abide by the aid effectiveness principles that it itself has worked so hard to establish.
As regards the aid effectiveness agenda, key concerns about DFID’s strategy so far include:
This new approach in the fight against poverty is not sufficiently evidence based when it comes to deliver results. As already stated, not every growth delivers on poverty reduction and broader economic opportunities. DFID says it wants inclusive growth, but this is relegated to the last and rather hollow looking pillar in its strategy. Among others, this pillar pays scant attention to the quality of the jobs created as well as to how women and youth, often excluded from new economic opportunities will benefit from them. Should they not in fact be the main territory of a development strategy? DFID must clarify how the strategic framework will attain the expected results, on which basis, and develop adequate monitoring indicators to facilitate proper assessment.
Another important issue concerns transparency. In its review, ICAI highlights how difficult it is to know exactly how much money is being devoted to this tranche of work. By this, any attempt to establish proper impact assessments becomes a daunting task, weakening also democratic accountability mechanisms. In addition, this new approach suggests that some aid is not directly targeted to the poor, but to businesses, and then… how do we ensure their use of aid is transparent?
A final concern is about country ownership. In some parts of the strategic framework DFID seems to be much more worried about UK businesses and not about recipient countries´ own priorities which are surely to build enterprises that bring most benefit to their countries and economies. Jobs and taxes are two of the most important dimensions linking the private sector, economic growth and poverty reduction. As such, targeting this aid to domestic businesses, helping them to achieve a bigger size so as to take advantage of economies of scale and facilitating the movement towards the formal economy should arguably be central. In order to make this approach properly led by recipient countries, DFID must support national economic development priorities and use the current national systems already in place, enabling recipient countries to experiment and decide on how better achieve inclusive economic development. Foreign Direct Investment (FDI), as it is argued in the strategy, is another important source of external finance, also playing a crucial role in sparking and supporting the private sector. However, FDI flows tend to be volatile and less accessible to the poorest countries. This kind of investment prioritises large companies operating mainly in already tradable markets. Given its expertise and experience in promoting development, DFID should support the establishment of clear social, environmental and corporate standards to ensure all UK FDI flows to developing countries have the most positive impact on the growth and welfare of the host economy. But all this should be country led and aid only used where clear impacts, in terms of generating additional positive development impact.
The private sector is just one key ingredient to achieve inclusive economic growth. This relies on many other elements; education, health, a solid institutional framework (just to name a few) that also play a crucial role. However, while many of the ingredients are known, far less is known about the recipe on how to best combine them all. And yet, as the recent economic crisis has surely taught us, the level of inclusiveness of growth, i.e. the capacity of growth to include those left behind will crucially depend on this mix.
DFID has to make sure it knows what it is looking to achieve, and focus its aid on where it can have greatest impact for developing countries. And while the UK aid has reached the 0.7% of GNI target, it is still a precious resource. DFID should ensure it is spent in the most effective way. Framing this new framework within the guidelines set up by the aid effectiveness agenda would be a good start.