The impact of the global economic downturn on private sector led development

[Business Action for Africa]

Alison Evans
Director, ODI

Karen Ellis
Business & Development Programme Leader, ODI

Business plays a crucial and fundamental role in development, as it drives the economic growth that is needed to alleviate poverty. The private sector creates jobs and wealth, and is responsible for most of the investment, innovation and technological progress that underpins economic growth.

However the global economic downturn is having a major impact on private sector activity in developing countries, both through reduced volumes of trade and financial flows, and by changing the way that business engages in developing countries.

A recent ODI consultation of businesses has shown that different sectors are affected in different ways, but most of them are feeling the effects of reduced demand and the downward pressure on prices. This has led to reduced demand for some developing country goods, and has generated significant pressure to reduce costs, which is being passed down the supply chain to producers. With weaker businesses failing, consolidation in some sectors is likely. This may hurt small and local businesses most, though it presents opportunities for stronger businesses to increase their market share.

The consultation also indicates that new investments are being postponed, that there is a reduced appetite for risk, and that innovation is suffering. Businesses expressed a greater need at this time for risk sharing partnerships with donors, which can make it easier for them to maintain innovation, for example in new, inclusive products and business models that meet the needs of the poor.

CSR and ethical business practices seem to be suffering where they are seen as optional add-ons, but are being maintained where they are fully embedded and seen as crucial to the firm’s core business. Where consumer demand in developed countries for ethical produce holds up, business will have stronger incentives to maintain standards, but shifts in demand towards cheaper goods and a desire to ‘Buy Local’ to protect domestic jobs, may jeopardize this. Protection, subsidisation and incentives for increased lending to business at home, while patriotic in nature, may also create unfair competition to business in the developing world, to the detriment of the poorest producers.
As the effects of the downturn are transmitted to the developing world through business operations, this is straining relationships with host country governments, with possible contract renegotiations, policies preventing the repatriation of profits by multinationals, and even talk of renationalisation in some cases.

The state clearly has an important role in tackling the downturn, but a move away from market-led approaches and towards policies such as protection and renationalisation – in the developed or the developing world – could have long term repercussions for growth and development, distorting incentives and worsening the already poor investment climate for business. Although markets are frequently seen – rightly or wrongly - as the cause of the world’s current woes, they are also clearly a big part of the solution. Efforts to tackle the downturn should not undermine the resurgence of private sector-led development, and the jobs and incomes it generates, which is so urgently needed.

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