V. Shankar: Shaping A New Development Order

As discussions begin on the global development agenda that will succeed the MDGs (which expire in 2015), now is a good time to consider the role of the private sector in development, as well as the international community’s overall approach.

Economic development is the best way – indeed, the only way – to achieve sustainable poverty reduction. It creates a virtuous circle. Growth creates jobs and jobs reduce poverty.

Private-sector capital flows now dwarf traditional public-sector aid flows. For example, of the $200 billion in total US resources dedicated to development in 2010, 87 per cent came from private flows. By contrast, in the 1960s, official overseas development assistance accounted for 70 per cent of capital flows into developing countries.

A similar picture prevails globally. Domestic resource mobilisation, remittances from expatriate workers, private debt and equity flows, and philanthropic contributions exceed official international aid by a wide margin. Private flows are no longer the tail, but the dog that wags the development agenda.

THE PUBLIC AND PRIVATE SECTORS HAVE A SHARED INTEREST

Nonetheless, much of the development- policy community remains stuck in the distant past. For example, policymakers insist on the importance of ‘public-private partnerships’ and argue that the private sector needs ‘to learn to work with the public sector.’

Today’s reality would be better described as ‘private-philanthropic- public partnerships’, or ‘P- 4’. We need to persuade public institutions to focus
on how to work better with their private counterparts, as well as vice versa, because the public and private sectors have a shared interest in accelerating economic development and ensuring that everyone benefits from globalization.

Possibly the biggest prize in aligning private and public sector development efforts lies in the relatively unexplored area of blended finance. We have barely scratched the surface in integrating the efforts of development finance institutions (DFIs) with private and philanthropic initiatives, which could make the whole greater than the sum of its parts.

TARGETS FOR LEVERAGING PRIVATE CAPITAL SHOULD BE ENCOURAGED

A World Economic Forum study estimates that, when aligned, an annual increase of only $36 billion in public sector investment in climate change could be leveraged to 16 times that amount by mobilising USD570 billion of private capital.

In fact, to improve alignment and reflect the new P-4 order, government agencies and DFIs should be encouraged to establish explicit targets for leveraging private capital. Particularly in an age of lean governments and public austerity, success in meeting such targets should become a key performance indicator.

What should the private sector do better? While there are many examples of responsible companies that want to ‘do well by doing good’, sustainability
and development goals are not always integrated into businesses’ core agenda. We need a new standard that requires companies to report not just their financial metrics, but also their performance on social, developmental and environmental issues. For maximum impact, and in order to restore public trust in corporations, the standards must be global, clear and consistent.

DEVELOPMENT FLOWS HAVE BECOME MULTI-DIRECTIONAL

The other reality of the post-MDG world is that development flows have become multi-directional.
But the world order has changed. Emerging markets and developing countries now account for 50 per cent of global GDP and 75 per cent of global growth, and demographics will further accentuate the shift in the centre of economic gravity.

‘Southern’ countries such as Brazil, China and India, to name but a few, are enhancing their contributions to overseas development. Domestic resources and diaspora remittances are increasingly funding development. As countries become less reliant on traditional sources of financing, they are less likely to follow foreign diktats blindly.

A more inclusive approach that reflects local conditions and preferences is essential. The P- 4 approach reflects the new global realities and seeks to leverage the best qualities of the private, philanthropic and public sectors.