Private sector development: A lasting approach

"Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime." The adage cited precisely sums up the notion of private sector development in a nutshell.
Private Sector Development - What is it and why it works: We all might remember Adam Smith's celebrated theory, "the invisible hand of the market." To help us refresh our memories - it is a metaphor that describes how, in a free market, if individual players work towards maximizing their own profits, the society as a whole would end up enjoying more benefits than it otherwise would have, if help was specifically directed towards the disadvantaged. And thus, the maximum benefit for society at large can be achieved if each individual tries to maximize their own profit.
Almost counterintuitive to the idea of helping the poor or disadvantaged, the "invisible hand" theory triumphs on the premise of interdependence of market players on each other in a free market with its natural demand and supply. Closely tied to this theory is the concept of private sector development or PSD.
The PSD approach builds on the logic that in any market, there are various actors, which include even the poor who are active players of the market. So if one actor within a market takes an action, it would inevitably create a ripple-effect on the other actors across the same value chain as well as other interconnected value chains. And as all market players within a market would try to maximize profit for themselves, they would reach their utmost efficiency, thereby causing all the interdependent players across the value chain to benefit accordingly.
In this sphere of development, instead of trying to help the poor directly, the development practitioners work with the market system in which the poor operate. The private sector development approach is also popularly known as the market development approach, which deals with the idea that all markets have certain underlying constraints due to which people, who are actors within it, suffer. This suffering is just a symptom of the problem- the cause being those underlying constraints leading to the problems. Private sector development tries to fix these underlying constraints, which once resolved will make the market self-sufficient and operational.
In order to eliminate these underlying constraints from the source, the development practitioners of the market development approach engage with the various private enterprises that are a part of the market, and provide them with incentives so that they take up certain initiatives that are designed to reduce or eliminate these existing market constraints so that the poor - also actors within the market and the intended beneficiaries of the development practitioners - ultimately benefit. These initiatives are designed in such a way that in the process of executing them, the private entities enjoy some kind of benefit to these themselves. This ingrained benefit is the incentive offered to the private enterprises that motivates them to bring about certain changes in the market so that they can benefit themselves and also help the poor market actors by introducing these changes in the market. These private enterprises are often referred to as private partners in the context of the development practice, since it is with their help that the development practitioners carry out their business. This model may appear incongruous with the idea of bottom-up approach- where the benefit is offered directly to the poor, without involving any third party intermediaries in order to prevent any loss of benefit through trickledown effect. However, this is where the sustainability angle of private sector development comes in. It is true that if one offers direct help to the poor - the ultimate beneficiaries- they would benefit more directly and perhaps more quickly. However, that would entail offering help to the poor on a continuous basis; because once the help stops, the benefit stops as well. This would essentially mean treating the "symptoms" and not the "underlying causes" of the market constraints.
Moreover, not only would this approach make the poor dependent on external help, but this model of help would also not be sustainable in the long run since no individual or development organization can keep offering help to someone forever. So the key is to involve private entities - who operate with a profit-motive and are themselves players within the market- who will take up the new initiatives designed to address the market constraints and continue to provide these new products or services in the market for as long as it continues to have some inherent profit in it for them as well.
Therefore essentially, the private sector development approach does not treat any entity as the giver or as a receiver within the development model, but considers everyone as players within a market, be it big private companies or small individual actors, each of whom must have a profit or benefit motive in order to operate in the market. If a new product or service is launched in a market, it would automatically have some interested buyers and sellers. If, for example, a low-cost growth vitamin for cattle is introduced in the market, it would involve both the big and small individual players pertinent to this product, e.g. cattle-rearers, pharmaceuticals producing these vitamins, companies selling these vitamins, and so on.
While the poor cattle farmers would find this low-cost vitamin affordable and therefore want to buy it for their cows, the companies who sell these vitamins would have an incentive to sell them at the reduced price, given there is a clear demand among the poor farmers. Therefore, by introducing such ideas or products as low-cost vitamins in the market - which have a clear demand and able suppliers for them - the development practitioners would ensure that the market can operate on its own without any outside support. Therefore, it is by offering the private partners with an incentive in their model of development that the PSD practitioners ensure sustained running of the new initiative that is introduced.
This means that even when the development project has stopped its operations, the change induced becomes permanent, and the market is reshaped in a way such that it continues to provide the new service independently and without any external support. Therefore, the poor who operate in this market continue to benefit even beyond the life-span of the project. Furthermore, a single development enterprise can cater to only a limited number of poor beneficiaries on its own, whereas, when private players are involved, beneficiaries can be reached nationwide, since such players have their outlets/branches spread across various parts of the nation, some even having a nationwide outreach. So the plus sides of private sector development are manifold.
It takes time before the initiatives taken through the private sector development approach can reach and benefit all its targeted poor stakeholders in any given market. However, as already explained, the various incentives intrinsic to the initiatives of this market development approach available to all actors across the value chain of a market ensures that the intended benefit reaches the poor actors who are also an active part of this chain. And for that reason, even if it does not provide an immediate solution, private sector development approach is one of the most effective means of empowering the poor and attaining sustainable development.
The writer is Senior Business Consultant, Monitoring & Results Measurement, Swisscontact Katalyst. Email: [email protected]