This article introduces the concept of the private sector and private sector development. It answers the questions: What is the private sector? What is private sector development? This topic is important, not only for economic development and job creation, but also because it is increasingly used to deliver social services.
Private sector development encompasses a broad area of development programming. Thus, it is the first topic in this series of explainer articles. Other articles in this series deal with more specific topics within this broad development theme.
What is the private sector?
The private sector is the part of the economy run for private profit and not owned by the state.
It is a basic organising principle for economic activity in a market-based economy where physical and financial capital is generally privately owned.
Markets, competition and profits drive production and distribution. Within the private sector, private initiative and measured risk-taking impel economic growth.
The private sector covers a range of commercial enterprises. It includes small and medium-sized enterprises (SMEs) and micro and family enterprises. Also included are large multinational corporations whose local enterprises are part of their worldwide operations, as well as joint ventures between foreign-owned companies and local counterparts such as large locally owned businesses.
The private sector covers all industry sectors, from agriculture, to trade, to manufacturing, and services. It can also include enterprises resulting from the privatisation of state-owned enterprises, such as utilities and telecommunications.
While private ownership is a defining feature, the private sector may include social enterprises and cooperative enterprises, which are not strictly considered privately owned. While these enterprises can be owned by community groups and oriented towards social benefit, they compete in a market economy and seek to generate profits, which maybe distributed for social or community benefit.
Beyond the functioning and organising aspects of the private sector, this sector is important because, in a free market economy, it creates jobs and provides goods and services. For example, the private sector provides 90 per cent of the jobs in the developing world.
What is Private Sector Development?
The development of the private sector, or “private sector development” (PSD), has become a major thrust in most countries for the provision of goods and services, as well as the creation of wealth and employment.
Private sector development covers a range of activities designed to help markets function more vibrantly and fairly, providing economic opportunities to poor people at scale.
Importantly, private sector development is not synonymous with business development. While business or enterprise development may be an area of focus, PSD goes beyond any single enterprise (i.e., business, firm, or economic unit) and deals with the private sector as a whole and the markets enterprises operate in.
Governments and development agencies support private sector development because it promotes economic growth and poverty reduction, while helping to improve the quality of life.
PSD is critical for poverty reduction in two major ways.
First, private markets drive productivity growth. Competitive markets urge business owners and managers to create more productive jobs and higher incomes.
Second, complementary to government roles in regulation, funding and service provision, private initiatives help provide basic services that empower the poor by improving infrastructure, health and education.
What is the role of government in private sector development?
PSD can be seen as a neo-liberal approach to development because it focuses on markets. Open markets provide an efficient way for the production and distribution of resources in the economy. Businesses compete in the market to provide goods, services and jobs. However, this does not mean governments cannot or should not intervene in markets or have a role in society.
Indeed, unfettered markets are bad. They are bad for society (contributing to inequality), bad for the environment (exploiting and polluting the environment), bad for workers (who may be unprotected, unrepresented and underpaid), and bad for consumers (who may not be protected). Thus, governments have an essential role to play in regulating markets to ensure desirable economic, social and environmental outcomes are achieved.
This highlights the need for regulatory best practice.
Beyond regulating markets, governments can also stimulate growth in underdeveloped markets, sectors and sub-sectors. They can also support the development of specific kinds of enterprises. For example, governments may provide support packages for small and medium-sized enterprises (SMEs) or women-owned enterprises. Governments also support local economic development to support private sector development in disadvantaged or lagging localities.
Government support for private sector development draws on a range of tools and subsidies. This includes tax breaks, grant schemes, specific development services (e.g., financial services, training, mentor and coaching support, market information), as well as institutional mechanism (e.g., SME development agencies).
Supporting private sector development
Many government and non-government development agencies provide support to private sector development to ensure the benefits of a dynamic, competitive and innovative private sector are realised in developing countries. Support to private sector development involves interventions that are aimed at developing factors crucial to the development of a well-functioning private sector.
PSD improves the functioning of the private sector so that it is better able to contribute to the social and economic development. Development programming address the factors that constrain or enable the private sector to function effectively and contribute to economic growth and poverty reduction.
The Donor Committee for Enterprise Development (DCED) has established an Evidence Framework. This organises robust research on results in private sector development based on the logic by which programmes typically expect to achieve pro-poor impacts.
The role of systems
Private sector development focuses on the role of two systems businesses operate within.
The first is the market system. A market system is the network of buyers, sellers and other actors that come together to trade in a given product or service. A market system can be specific to a product (e.g., coffee, mangoes, dairy) or a cross-cutting sector (e.g., finance, labour, business development services). A market system’s strength depends on how well the participants obtain financing, launch businesses and adopt new technologies and best practices. Market systems development aims to understand the market system in which the poor operate locally, and to identify ways to improve that system for the poor.
“a complex of policy, legal, institutional, and regulatory conditions that govern business activities.”
The business environment comprises a system of governance in which government interacts with the private sector and governs the activities of commercial enterprises.
Market and governance systems influence the behaviour of domestic and foreign investors.
Private sector development encompasses a broad area of development programming. It presents a major starting point for governments and donor and development agencies wishing to support economic growth, more and better jobs for women and men, and the provision of goods and services in a free market economy.