Document(s) 4 of 13

Speech given by Nissim Ezekiel, Executive Director of the UN Development Programme's Commission on the Private Sector and Development, at the Conference of Montréal's CIDA / IDRC International Forum Bringing the Best of the Private Sector to Development, on June 7, 2004.

"Mr Greenhill, Minister Bannerman, Mr Cameron, Distinguished Speakers on today’s panel, Ladies and Gentlemen:

"It is my pleasure to have the opportunity to speak to you today on this exciting theme of Bringing the Best of the Private Sector to Development. I am particularly glad to have the opportunity to make this presentation on the 10^th anniversary of the Conference of Montréal. There is an extremely impressive list of speakers and panelists that the organizers of the Conference have assembled over the next four days, and I appreciate the opportunity to be here on the first day to help begin what I am certain is going to be a very productive exchange of ideas between the speakers and the participants in the Conference. I would particularly like to thank CIDA and IDRC for hosting the forum today.

"The issue of the role of the private sector in economic development and in poverty alleviation is today at the center-stage of the development debate as the enormity of the challenge of meeting the Millennium Development Goals becomes increasingly clear. Just tomorrow, for example, the G8 Economic Summit that begins in Sea Island, Georgia, should be focusing a fair bit of its attention on how the G8 may encourage and support national policies that promote private sector led development to help alleviate poverty in developing countries.

"I have had the opportunity, over the past year, of working very closely with the Commission on the Private Sector and Development as its members finalized their report Unleashing Entrepreneurship: Making Business Work for the Poor. As you know, Prime Minister Martin and former President Ernesto Zedillo of Mexico were the co-Chairs of the Commission, and the Prime Minister’s office announced this past Saturday that he will be using the occasion of his participation in the G8 Summit to discuss many of the issues and recommendations contained in the Commission’s report. Given the traction that this report is beginning to have, I would like to use the results of that work in framing my comments to you today.

"Before I get to the details, I would like to point out that the Commission was not just a commission on private sector development but rather a commission on the private sector AND development. As a result, the Commission set out to answer not one but TWO main questions:

"1. How can the potential of the private sector and entrepreneurship be unleashed in developing countries?

"2. How can the existing private sector be engaged in meeting that challenge?

"The first of these questions led the Commission to examine the more traditional — and very important — set of questions on the constraints to private sector development. The second question allowed the Commission to address the broader issue of the capabilities that reside in the private sector which could be used more effectively in meeting the development challenge. It is the second of these elements of the work that is most relevant to our theme of Bringing the Best of the Private Sector to Development — though it is also very clear that one cannot get to the second issue without being able to satisfactorily address the first set of constraints.

"The report’s core message is simple and powerful: we will not achieve the Millennium Development Goals without engaging the private sector and unleashing the power of entrepreneurship. This message is grounded in the reality that the bulk of the poor live in the private sector and indeed they are the private sector. In countries with GDP per capita of less than $500, micro-enterprises and small- and medium-sized enterprises represent over 75% of employment.

"The poor in developing countries have less access to public services than citizens of developed countries. The poor often pay more for goods and services in shanty towns and slums than do residents living in middle-class neighborhoods. The overall size of the challenge posed by the Millennium Development Goals is beyond the public sector. Meeting the MDGs target of improving access to clean water for example, will require connecting 275,000 people a day over the next 12 years.

"The vitality of the private sector is thus critical to the lives of the poor-and it can alleviate poverty by:

• "Contributing to economic growth; and,
• "empowering the poor by providing them with services and consumer products, thus increasing choices and reducing costs and prices.

"The first of these effects creates employment and income growth. The second improves the quality of life for the poor. And the greater interaction between those at the base of the economic pyramid and the private sector creates opportunities for direct involvement in the market economy.

"The Commission’s report analyzes the constraints impeding business from growing and identifies a number of key factors required to unleash entrepreneurship. To that end, the report outlines what governments, development agencies, civil society, and the private sector itself need to do to help unlock local entrepreneurial energies and help provide the jobs, services, and income needed to overcome excess poverty and achieve the MDGs.

"Some of the elements identified in the report are not new. However, I would like to highlight an element from the early deliberations of the Commission that I believe is very relevant to our discussions at the Forum today. Many Commission members noted that for too long the development debate as it related to the role of the private sector had been framed in a very counter productive way, i.e. we have talked about the public sector versus the private sector, foreign direct investment versus local companies, large companies versus small- and medium-sized companies, the private sector versus civil society, and so on. I do not believe these approaches are very useful.

"Rather, the Commission focused very quickly on finding ways in which these various elements could maintain their traditional identity and roles, but yet work together towards common goals. We were able to identify many examples where the wide range of stakeholders in the development process were working together to bring the best of the private sector to development. I’d like to keep coming back to this theme during my presentation this morning — because I believe each of the stakeholders in the broad development coalition are in the audience today.

"Several overriding concepts helped share the Commission’s work:

"1. Strong expansion in sustainable private sector investment is the main driver of accelerated economic growth, essential for reducing poverty and making rapid progress towards the Millennium Development Goals.

"2. Domestic private investment and entrepreneurship, particularly within the small and informal sectors, have enormous potential — but they are trapped in disabling environments.

"3. Governments need to create an enabling environment for a competitive private sector to develop. For domestic and foreign players to thrive, a strong rule of law and a level playing field are required.

"4. Private initiative — driven by market — based incentives have the demonstrated capacity to contribute to important development goals. The private sector properly enabled can do substantially more by developing and replicating successful models.

"5. To ensure progress towards the MDGs, all stakeholders — governments, development institutions, the private sector, and civil society — need to collaborate more effectively and expand the use of private sector capabilities in meeting development objectives.

"In understanding the relevance of these conclusions, I would like to introduce the concept of the quadrants of development interventions which we used repeatedly in the report both as an analytic tool and as a basis for framing the final recommendations. Let me put this graphic up on the screen." (See PowerPoint slide # 3.)

"What this graphic seeks to point out is that activities in support of private sector development emanate from public and private sector players, and the recipients of these services are in turn both the public sector and the private sector. The bulk of development activities have tended to cluster in the lower left quadrant where major public sector development players — both governments and major development institutions — provide technical assistance and finance to developing country recipient governments and public institutions.

"This is an important quadrant of development activity. Instinctively, that’s where much of the attention is focused when one speaks of private sector development initiatives specifically, and development issues more broadly. The players in the lower left quadrant have the responsibility to address development issues, the bulk of the resources that are being deployed in the effort, and the visibility and convening power that accompanies the responsibility and resources.

"However, in the context of our discussion today, there is a tremendous amount taking place in the outer quadrants — involving a greater role for private players as providers and recipients. These private players include the corporate sector, civil society organizations, foundations, academic institutions, labor organizations, and groups of private individuals. They are involved, for example, in creating business linkages and partnerships, making direct investments, providing mentorship for entrepreneurs, setting corporate standards, lobbying for policy change, and regulatory reform — and myriad other activities. In effect, these activities involve using the managerial, financial, organizational, and technological innovation that resides in the private sector to improve the lives of the poor.

"Because of their lack of central visibility — unlike the case for many activities in the lower left of the quadrant — these private sector driven interventions often fall under the radar screen of development and — I believe — our challenge is to find the ways and means to ensure that the successful examples there can be replicated and built upon.

"As part of framing our discussion today, I think it is also useful to visualize the private sector in an economy and see it as an ecosystem, as is simply illustrated in the graphic I will put up on the screen. (See PowerPoint slide # 4.) This is because the private sector includes as much the often informal microenterprise sector as it does multinational companies and large local companies. Moreover, each component of the private sector needs to develop stronger links with others to build on their strengths and begin to address their weaknesses.

"As Professor C.K. Prahalad, a member of the Commission, has pointed out in his work, the private sector has to be seen as an ecosystem in which disparate economic interests function smoothly and symbiotically with each other.

"In many developing countries, however, there are constraints that affect each of these components of the private sector:

"1. There is a lack of competitive pressure, particularly on the larger companies.

"2. There are few competitive small- and medium-sized companies. And,

"3. widespread informality is very common.

"Commission member Hernando de Soto has carried out pioneering work on the informal sector, starting with his book The Mystery of Capital. He has stressed that private sector efforts should be driven mainly by the incentives of expanding markets and new business opportunities. He emphasizes the need to keep in mind the size of the assets in the base of the pyramid markets citing recent work in Egypt. The country has a large and vibrant extra-legal or informal sector that employs over 8 million people — about 40% of the workforce — and Hernando estimates that it has assets of almost $250 billion — about 30 times the market value of all companies registered on the Cairo Stock Exchange.

"Addressing the issue of informality, and of the barriers to efficient growth of SMEs is critical because the data from the World Bank has been unambiguous in its conclusions, i.e. that SMEs become more important and informal activity shrinks noticeably as country GDP increases — as this graphic clearly illustrates. (See PowerPoint slide # 5.)

"But how does one go about ensuring this transformation, and allowing us to bring the best of the private sector to development?

"In analyzing the determinants of the enabling environment, the Commission concluded that the foundations of the private sector were not yet fully in place in many developing countries — as illustrated in this final graphic that I would like to use today. (See PowerPoint slide # 6.) These foundations included:

"1. A facilitating global macro-economic environment.

"2. A stable and supportive domestic macro and policy environment.

"3. Adequate physical and social infrastructure. And,

"4. strong rule of law.

"But, built on these foundations were the often missing pillars of entrepreneurship, and this means:

"1. The absence of a level playing field.

"2. Limited access to appropriate financing, particularly for SMEs. And,

"3. difficulty in accessing skills and knowledge.

"Actions to alleviate these constraints are basically the responsibility of governments and public players — the lower left in the quadrant I had elaborated upon before. As an example, the data from the World Bank’s pioneering work on Doing Business 2004 is clear:

"1. Entrepreneurs in lower income countries faces significantly higher regulatory and licensing hurdles just to begin to operate. And,

"2. this creates a significantly greater incentive to remain in the informal sector, where productivity has traditionally been the lowest.

"It is essentially governments and public development institutions that have to address these policy and regulatory constraints. The Commission’s report addresses this is detail and I will not cover that ground here again.

"Rather, our focus today is on engaging the private sector in development — in bringing the best of the private sector to development. For that I would like to restate one of the guiding principles I used earlier:

• "Private initiative driven by market-based incentives has the demonstrated capacity to contribute to important development goals. The private sector, properly enabled, can do substantially more by developing and replicating successful models.

"I believe that in engaging the private sector in development, it is important to look far beyond the contributions of the private sector that take the form of Corporate Social Responsibility alone — however important and welcome that will always be. In fact, we have a session that follows this one which will focus solely on the topic of CSR.

"Rather, the Commission focused its interest on pioneering private sector approaches that resulted from the traditional play of market forces and which were in the normal line of business. The objective should be to create the conditions for a properly enabled private sector that could do substantially more by developing and replicating successful market driven models.

"As I have pointed out before, when I introduced the quadrant, there are major private sector players that are engaged in a number of development activities and bring along with them significant resources, that are under the radar screen of development.

"While public intervention in the lower left quadrant attracts a fair bit of attention and resources, the disparate activities of the vast number of private players in the outer quadrants remain often unconnected with no particular convening authority to look for common themes and to encourage faster replication and scaling up.

"Let me highlight for you some of the broad categories of activities that we have noted from the main non-public players.

"When we look at private companies, we find:

• "Large corporations leading private ecosystems to strengthen local SMEs and micro enterprises.
• "Financial institutions developing innovative approaches and technologies to improve access to credit for SMEs, and for the poor.
• "Individual companies, both MNCs and local ones, launching targeted CSR programs to address specific needs. And,
• "local companies broadening their strategy to informing the local development process, as well as setting governance and industry standards using global benchmarks.

"When we look at associations and foundations, we find:

• "International private sector associations influencing the developmental agenda and local associations participating in national economic planning. And,
• "private foundations engaging in development efforts with an enhanced focus on accountability and results.

"When we look at academic institutions, we find, for example:

• "Universities, and increasingly business schools, focusing more on private sector and economic development issues. And,
• "leading business schools developing programs in Africa for management training of local public officials as well as managers of private sector companies, particularly those in the small and medium enterprise sector.

"When we look at networks of private individuals, we see:

• "Individuals — including retired senior executives, financial sector experts, and business students — who are contributing know how and services to development initiatives.
• "Expatriate MNC executives mentoring local entrepreneurs and teaching in local business schools. And,
• "diaspora members supporting entrepreneurs in developing countries through remittances, informal financing of micro and SMEs, and business advice and mentoring.

"What is the one common factor that seems to run through the examples that I have quoted above? It is that the bulk of the activities are the result of voluntary actions by various private players — from companies to individuals — that have the effect of contributing to development, one action at a time.

"Let me mention just a few things that some companies are doing:

• "Serving markets at the bottom of the pyramid.
• "Forming ecosystems and building networks.
• "Fostering public-private partnerships for sustainable development.
• "Improving corporate governance. And,
• "advancing responsible business practices and corporate social responsibility standards.

"For example, let me just share with you a few examples that illustrate what I am talking about in relation to Bottom-Of-Pyramid markets:

• "ICICI Bank in India is using technology and relationships with civil society to improve access to banking services at the bottom of the pyramid, and enhancing its capacity to expand the provision of microfinance as well as commercial-based support to the SME sector.
• "Casas Bahia, the largest retailer in Brazil, has developed a sustainable business model focused entirely on consumers at the bottom of the pyramid, based on providing credit that they are unable to access from the formal financial markets.
• "Cemex in Mexico has focused its efforts on lower income clients in the country who could access micro-credits to complete small do-it-yourself home improvements, and efficiently tapped the resources of the diaspora community for the use of poorer family members back home. And,
• "Grameen Phone in Bangladesh and Vodafon in South Africa work with local entrepreneurs who acquire cellular phones and resell phone services within their villages. Grameen, by the way, combines this activity with micro credit and focuses mainly on women entrepreneurs.

"But there are other examples too:

• "Companies are beginning to set standards with reference to industry norms and corporate governance that then become country or industry wide norms. Or, companies are beginning to bring their expertise to the broader development effort and helping to reform the process of technology of government. The efforts of Infosys Technologies based in Bangalore, India, offers an excellent example of such activities. Infosys began as a modest software consulting firm in 1981, and has become over the years a large public company that conforms to internationally benchmarked standards of corporate governance. Its adoption of best practices in corporate governance and transparency (including the adoption of US Generally Accepted Accounting Principles) has made many companies look at their practices and has also led to the adoption of Infosys standards as guidelines by the Securities Board of India. Because of its good governance practices and its leadership in diffusing such practices within the Indian corporate community, Infosys has earned a reputation as the best managed company in India.
• "Allow me to share with you one more example, before I move to my concluding comments. One of the most effective ways to bring the best of the private sector to development is by helping firms succeed by increasing the power of the linkages and networks they are part of. Many such ecosystems can bypass poor regulatory environments by creating private capacity to govern the rules and enforcement with the network, not in the public sphere. This capacity can enhance the ability to enforce contracts, thus building trust in the system.

"Such networks can bring many benefits by:

• "Enabling the transfer of skills, technology and quality.
• "Ensuring that foreign direct investment has positive spillover effects.
• "Bringing companies into the formal sector.
• "Creating the capacity to govern transactions through commercial contracts.
• "Opening markets and the supply of inputs to smaller firms through networks of larger partners.
• "Improving the ability of small and medium enterprises in such networks to get easier access to finance and on affordable commercial terms.
• "Increasing the wages, employment standards, and productivity of local companies. And,
• "increasing the choice and lowering the prices for poor consumers by bringing a greater variety of goods to market.

"An important example of a private ecosystem at work is that of Hindustan Lever Ltd. — a major producer of personal care and food products in India. Its ecosystem includes:

• "80 manufacturing facilities.
• "150 SME suppliers employing upto 40,000 people.
• "7250 exclusive stockists.
• "12,000 wholesalers and small retailers and 300,000 shop owners, either SMEs or micro-enterprises. And,
• "150,000 individual entrepreneurs in remote villages who sell its products, a number likely to grow to as much as 1 million on current expectations.

"HLL is leveraging the ecosystem to target the potential of over 200 million consumers in rural areas, by working with women entrepreneurs in the villages. These informal business women learn about products, prices and returns, and advise customers in their villages about the products they sell. In turn, HLL has the potential to reach more than 200 million customers it could not effectively reach otherwise through normal distribution channels. This market-based ecosystem is a source of informing the poor about the benefits of transparency in transactions and the need to respect contracts — be they explicit or implicit with the company. Most importantly, they empower women entrepreneurs and reduce their reliance on local moneylenders or slumlords.

"So, in closing, where does all this take us in our effort at bringing the best of the private sector to development?

"To ensure progress towards the MDGs, all stakeholders — governments, development institutions, the private sector, and civil society — need to collaborate more effectively and expand the use of private sector capabilities in meeting development objectives.

"How is that to be done?

• "First, in the public sphere there has to be a clear commitment to promoting reforms of laws, regulations, and other barriers to growth. This is a necessary condition.
• "Second, in the public-private sphere it is vital to facilitate cooperation and partnerships between public and private players to enhance access to such key factors as financing, skills, and basic services.
• "Third, in the private sphere it is essential to encourage the development of business models that can be scaled up and copied and that are commercially sustainable.

"As part of my closing, I would like to elaborate a bit on these three categories of actions that are needed to allow us to bring the best of the private sector to development.

"The actions in the public sphere have one overriding objective — the creation of an enabling environment for sustainable private sector development that involves steps to reduce the share of the informal sector in an economy.

"Developing country governments need to reform regulations and strengthen the rule of law.

"1. This will require a strong and unambiguous policy commitment to the role of the private sector — and will need to be combined with a genuine commitment to reform the regulatory environment by eliminating artificial and policy induced constraints to strong economic growth.

"2. There needs to be specific focus on creating the conditions to reduce informality and change the composition of the private sector ecosystem over time.

"3. The private sector needs to be engaged in the policy reform process. Governments need to create a real partnership with representatives of the domestic private sector to implement changes and ensure that the voices of the private sector include small and medium enterprises and micro entrepreneurs.

"Needless to say, developed country governments have a critical facilitating role:

"1. They will need to foster a conducive international macroeconomic environment and trade regime. Increasing the flow of development aid and reforming the global trading system to provide fair economic opportunities to producers from developing countries is essential for promoting rapid growth in domestic private investment.

"2. They will need to redirect the operational strategies of multilateral and bilateral development institutions and agencies. The collective actions of these agencies will have to be better coordinated — to improve their efficiency and to reduce the pressures on the administrative capacity of developing countries.

"3. Changes in the administrative rules controlling tied funds would permit more effective use and delivery of technical assistance to stimulate private sector development.

"Multilateral development institutions will continue to be central players in the task of private sector development and unleashing entrepreneurship.

"1. They need to apply the broad Monterrey Conference recommendations of specialization and partnership to their private sector development activities and ensure that any counter-productive overlapping activities are addressed.

"2. They need to address more centrally the issue of informality in developing countries. Some pioneering work is already underway to map the structure of the informal sector — some of it being undertaken by Hernando de Soto and his Institute for Liberty and Democracy based in Lima, Peru. A global effort to expand the coverage of this work, with the active involvement of the MDBs, is likely to yield significant benefits.

"When we move to look at potential actions in the joint public-private sphere, they need to be guided by the principles of partnership and innovation.

"1. There is clear need to facilitate access to broader financing options, involving continuing development of domestic financial markets coupled with skill-building for regulators and private financial institutions.

"2. There is need for assisting in skills and knowledge development. These activities could range from programs for top public and private leaders, to training micro entrepreneurs, to joint efforts with public authorities, and unions to improve workforce skills.

"3. It is vital to make possible sustainable delivery of basic services, particularly energy and water. The Commission particularly saw the need for developing innovative models of partnerships of government service providers, multinational companies, and local companies.

"Finally, actions in the private sphere will need to mobilize capabilities and resources.

"1. The private sector has tremendous potential to contribute to development through its knowledge, expertise, resources, and relationships.

"2. There is a clear opportunity to develop the linkages between multinational and large domestic companies to nurture smaller companies — and to provide an effective channel for the smaller companies to gain access to markets, financing, skills, and know-how.

"3. Recognizing the needs of bottom-of-the-pyramid markets and creating innovative solutions to meet these needs are other vital actions required from the private sector, both domestic and foreign. The many examples used in this presentation reflect the work of Commission member C.K. Prahalad. His forthcoming new book, The Fortune at the Bottom of the Pyramid: Alleviating Poverty through Profit, builds further on these themes.

"4. The private sector needs to make a genuine commitment to sustainable development — with a sharp focus on corporate governance and transparency.

"Finally, civil society organizations have to continue as critical observers of the development agenda — and as facilitators and supporters of innovative approaches for meeting the Millennium Development Goals.

"1. They need to continue their focus on increasing accountability in the system. This is a core part of the work of civil society organizations, as is their leadership in pushing forward the concept of sustainable development. This work needs to be strengthened.

"2. They can also develop new partnerships and relationships to achieve common objectives. Civil society organizations are closest to the bottom of the pyramid. They can often act as proxies for experimenting with new technologies for solving problems.

"In closing, the ideas that I have outlined in this presentation today, and which are elaborated upon in the report of the Commission on the Private Sector and Development, draw upon actual examples of good practice in the development marketplace. Many of the private sector examples I have used reflect the actions of path-breaking management teams using market and profit driven models to make a significant impact on developmental outcomes.

"Corporate Social Responsibility is an integral part of these actions, but it is far from the only element. The opportunity exists now for the broadly defined private sector to take up the challenge of building on the outstanding examples of contributions by individual corporations to creating a broad based response capacity amongst the private sector at large.

"It is clear to me that the ideas that are emerging from the work of the Commission will be drawing the kind of support that is necessary to convert them from simply recommendations in a report, to real actions being taken on the ground. Many of these actions will need to facilitate the transfer of practical lessons of experience from developing countries to others. A South-South flow of ideas and experiences is essential. As I said earlier, we should know in just the next few days, the specific outcome from the deliberations of the G8 as they relate to actions to support the growth of domestic entrepreneurship in developing countries.

"But that is hardly all. Developing countries have already been taking strong policy actions in this direction. UNDP country offices — in partnership with local governments — are in the process of launching the Commission report in a range of developing countries. Just a few days ago, at the World Economic Forum Africa Summit in Maputo, Prime Minister Luisa Diogo of Mozambique — a member of the Commission — indicated her strong support for application of the key recommendations in her country. The same effort at launching the report and creating domestic coalitions for implementation is underway in Albania, Bulgaria, Macedonia, Rwanda, and in Brazil at the UNCTAD XI meeting beginning next week — and in many more countries to follow.

"It is here that the private sector itself needs to seize the opportunity provided by this platform to play a leadership role. This can be done globally by individual companies or by working through existing groups such as chambers of commerce and other similar partnerships. Private foundations can do the same to examine their willingness to support the various initiatives that could follow — working through groups such as the European Foundations Center in Brussels which is currently reviewing the possibilities.

"At the launch of the Commission’s report in New York on March 1, Secretary General Kofi Annan issued a Call to Action to all stakeholders to join his Coalition for Development. I would like to take this occasion today to repeat that Call to Action. It is only through this combination of actions by all stakeholders will we be able to bring the best of the private sector to development.

"Thank you very much."

Document(s) 4 of 13