Private Sector Development: Definitions & Conceptual Issues

This section provides an overview of some of the key terms associated with private sector development and the conceptual framework that underlies these definitions. The section begins with terms associated with the broad conception of private sector before focusing on national and internationally relevant bodies and mechanisms.

Private sector/ Private enterprise

Economists do not necessarily agree on the definitions of the private sector and private enterprise. The Asian Development Bank comments, "There are many concepts relating to 'private,' including individual business, private enterprise, private sector, private economy...and the privately operated economy. However, it seems that none of these concepts have a clear definition, and there has been a heated debate among economists on what comprises 'private enterprise.'"1

The United Nations Development Programme (UNDP), states that a mixed economy, also called a "dual economy," is one in which the means of production are shared by both public and private sector.2 However, the public-private divide is not simple or neat. Scholar Paul Starr notes that there are multiple axes along which an organization may exhibit varying degrees of "private-ness" and "public-ness," including ownership, management/ administration, regulation, funding/ revenue generation, and function.3

A minimalist definition of private organizations might simply include those that are majority "private" in all respects, which would include only for-profit, privately-held and managed corporations (and households). A maximalist definition might only require one majority "private" axis (most often ownership), to include potentially non-profits, state-run enterprises, and state-funded and regulated organizations (e.g., the BBC in Britain).

"Some experts see private enterprises as equivalent to either the private sector or the private economy. Some experts classify enterprises into state-owned and private enterprises, using ownership as criteria. Some with a broader perspective insist that foreign-invested enterprises and non-public shareholding companies not controlled by the government should be included within the private sector."4

According to the Organisation for Economic Co-operation and Development (OECD), "The private sector comprises private corporations, households and non-profit institutions serving households (NPISHs)."5 The latter are independent, non-state, non-profit institutions which operate from private funding sources to provide services or assets to families for no charge or at a reduced rate.6 Private corporations are described as "resident corporations and quasi corporations" that are autonomous from government control.7

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Private sector development (PSD)

Private sector development (PSD) typically refers to supporting the expansion of the market-oriented private sector. It is particularly crucial to post-conflict countries, where both foreign and domestic companies may be reluctant to invest if they feel the residual levels of risk require unattainable returns on investment. Its initiatives may bolster entrepreneurial activities, craft business-friendly regulatory structures or encourage reforms in economic institutions.8 The wide acceptance of the concept of private sector development is perhaps in part the result of the vagueness of the term; alone, it does not imply specific policies, which are generally more contentious.

Others see the key to PSD in the large corporations with economies of scale and scope, though there is disagreement over whether these might more beneficially take the form of foreign9 or domestic10 companies. In addition, national governments, international financial institutions, and other stakeholders, broadly support private sector development as a means of alleviating poverty, creating economic growth and expanding the tax base needed for public investment11, though Alice Amsden stresses that these ends are first and foremost served by employment generation.12

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Small and medium enterprises (SMEs)

Small and medium-sized enterprises (SMEs) operate with staff sizes ranging from 10-250, and are often very competitive as an innovative force within most developed economies. In developing economies they absorb large numbers of the labor force and explore new areas of potential growth; however, this is often because small market sizes restrict firms from growing much larger, and is not necessarily an ideal scenario.

SME's role in driving innovation in developing countries is contested, especially in postwar nations. In wars occurring in developing countries, the technological innovation is normally minimal, as opposed to SMEs in developed countries, where wartime spending may spur military research and development spending. However, it is true that a certain amount of product experimentation may go on as supply chains shift and demand new ways of coping.13 Developing country SMEs also typically struggle with inadequate financial capital and thus restricted access to supply chain inputs in poorly regulated business climates.14

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Local business in conflict

As Nick Killick et al. have underscored, no formal definition for local business exists. However, the authors do identify local business as "all private economic actors (including related business associations and chambers of commerce) originating from and based in a country in conflict."15 This section uses this definition. In developing countries, these are often SMEs, operating either in the formal or informal economy.

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Market liberalization

As defined by the Economic Freedom of the World Ranking and Annual Report, market liberalization, a familiar model to western capital economies, promotes voluntary exchange coordinated by markets to allow for free competition.16 The Report defines market liberalization as a fundamental component for a country to achieve prosperity, economic growth, and poverty reduction.17

Deriving from neo-liberal economic growth strategies of western IFIs, market liberalization involves the removal of official controls that act to regulate market access and functioning, whereby the state relinquishes some, but not necessarily all, power (such as wage limits, taxation or tariffs) in order to encourage more robust 'free' market activity.

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No consensus exists on a standard definition of globalization. For the purpose of this analysis it will refer to the dramatic increase in the flow of goods and services, as well as capital, people and information across national boundaries.18 This process has been tremendously influenced by a revolution in technological advances and an increased mobility of capital.19 Nonetheless, it is often pointed out that the tacit knowledge required to increase productivity dramatically and create an industrial "pole" does not typically flow freely like capital and, to a lesser extent, labor. Rather, it is "sticky" in space, and tends to be generated and transmitted in locations where a critical mass has already formed - most often in developed countries.20

Issues of globalization spawn heated debates. Some view its benefits to economic growth as indisputable, particularly in encouraging small business sector growth and foreign direct investment (FDI) in developing countries. Critics hold that its impacts are profoundly more negative, resulting in inequitable distribution of economic gains, predatory multi-national corporation (MNC) investment, and as a consequence risk perpetuating poverty, tempting risk factors for conflict.21 Debates flourish on new global trends such as the uninterrupted access to goods and services from around the world and highly mobile labor markets. The effects are not always predictable: periods of 'jobless growth', brisk rise in informal or 'shadow' economies and marked expansion in opportunities for highly-skilled workers. Gains from globalization may often fail to create new opportunities for less skilled workers or families living in conditions of poverty.22

Critically for this private sector discussion, globalization exposes local markets to rising world demand for natural resources. In countries with limited production capacity, this can dramatically decrease the ratio of an export's value-added to its total value. Such a decrease may incentivize more predation internal to the local economy. Moreover, the price of such goods on international markets has been, and will likely continue to be, squeezed upward as the economies of late-industrializers grow rapidly.

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Multinational Corporation (MNCs) and Transnational Corporations (TNCs)

Multinational corporations (MNCs) are "large companies that conduct their business operations in several states."23

Transnational corporations (TNCs) are commonly thought to be synonymous with MNCs. They are, however, different in several regards. As highlighted by the UN Committee on Trade and Development, "The primary defining factor is that they keep their financial headquarters offshore to protect them from taxes. Thereby, they lack financial accountability to the states in which they conduct their primary operations."24

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Foreign direct investment (FDI)

This deceptively self-evident term refers classically to the establishment of a local enterprise by a foreign parent, but can be expanded to include foreign investments which simply acquire a "lasting interest" in a local enterprise over which it exerts some control. The term negotiates between two primary definitions among international financial institutions. According to the OECD: "FDI is defined as a cross-border investment in which a resident in one economy (thedirect investor) acquires a lasting interest in an enterprise in another economy (the direct investment enterprise)."25 The World Bank defines it as: "Foreign investment that establishes a lasting interest in or effective management control over an enterprise. [It] can include buying shares of an enterprise in another country, reinvesting earnings of a foreign- owned enterprise in the country where it is located, and parent firms extending loans to their foreign affiliates." International Monetary Fund (IMF) guidelines further stipulate that to be counted as FDI, an investment must carry least 10 percent of the investing firm's shares, although this figure is higher in many countries in order to create the conditions for effective management control and reassure long-term interest.26 These varied concepts are important as they help to frame discussions around the impact of private sector investment (and it implications for post-conflict prospects for peace) on economic growth and associated measures for livelihoods, access to markets or improved infrastructure that each indicate improvements in daily life for local populations.

A key debate in the scholarship on FDI centers on how and under what conditions FDI transfers industrial knowledge to local companies and staff. While strictly speaking a "development" debate, this question is also key to building conflict-sensitive industries, as technology spillovers generally do not occur naturally in the absence of national institutions that disseminate industrial knowledge. With low skills and high-value products, the risk of further conflict rises.

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Corporate Social Responsibility (CSR)

Corporate social responsibility (CSR) can be a rather nebulous term that captures any number of activities a firm organizes under the auspices of seeking to generate a positive societal impact in its work, or at least, an intention to do no harm. For example, a firm may simply advise staff to conduct volunteer work or may channel funds to a corporate foundation for humanitarian or relief purposes. It many also practice vigilance in safeguarding the rights and benefits of foreign employees under this program.27

In complex global supply chains, the prototypical model is for large corporate buyers (usually rich world, and often hoping to defend their brand reputation) to enforce international labor and environmental standards among their (usually developing country) suppliers by use of audits and threat of discontinued future business. These voluntarily self-enforced standards normally exceed the strict legal minimum compliance regulations associated with operating in host countries.28 It should be noted that though CSR is industry controlled, its origins lay with civil society and its continued development is linked to influence of and pressure from these groups.

The "core theme" of CSR models that forge mutually beneficial partnerships between companies and local communities (stakeholders) may (1) improve the local public perception of the firm's operations, (2) open channels of communication to engage local stakeholders in a participatory manner, and (3) increase the value of the firm's reputation capital within and beyond national borders. For the host community and state, the firm assumes an active role as a responsible citizen, sharing its (financial, human resource or physical) assets to serve the public interest.

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Terms of trade

The terms of trade refers to the ratio of export prices to import prices. A higher ratio reflects a healthy economy in which the country can afford a larger ratio of imports by selling a small amount of exports. If terms of trade worsen, the country needs to sell more exports to buy the same amount of imports.29

The terms of trade can either be entirely set by the international market demand and supply under 'free trade' conditions or can be changed due to government interventions such as subsidies or tariffs imposed for a variety of reasons. When trade is "free," it is expected that goods or services will be exchanged between countries or regions without the interference of expensive taxes, tariffs or other restrictions.30

Many anti-free trade arguments (e.g., those stemming from Dependency Theory) have argued that developing countries with small or nonexistent industrial manufacturing bases suffer from a secular decline in the terms of trade. This is because the elasticity of demand for the raw materials they export is quite low, while the elasticity of demand for industrial products is high. In other words, demand for agricultural exports will not rise quickly in response to the general growth world incomes, while demand for rich-world industrial products will.31 The implication is that less developed countries may become trapped in a global division of labor. The neoclassical counter-argument is that even if the terms of trade are declining, this process will naturally cause the economy to shift toward those products in which it has a comparative advantage.32

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1. Asian Development Bank Institute, "The Growing Role of Private Sector: 3.1 Concept of the Private Sector," ADBI.
2. United Nations Development Program, "Governance for Sustainable Human Development: Glossary of Key Terms," UNDP.
3. Paul Starr, "The Meaning of Privatization," Yale Law and Policy Review 6 (1988).
4. Asian Development Bank Institute, "The Growing Role of Private Sector".
5. Organisation for Co-operation and Development, "Private Sector," OECD Glossary of Statistical Terms, Last updated 20 November 2001.
6. Organisation for Co-operation and Development, "Non-Profit Institutions Serving Households (NPISHS)." OECD Glossary of Statistical Terms, Last updated 15 November 2001.
7. Organisation for Co-operation and Development, "Non-Financial and Financial Private Corporations," OECD Glossary of Statistical Terms, Last updated 21 December 2005.
8. Naoise Mac Sweeney, Private Sector Development in Post-Conflict Countries: A Review of Current Literature and Practice, (Cambridge, UK: The Donor Committee for Enterprise Development, August 2008), 11.
9. Collier, Paul. "Post-conflict Recovery: How Should Policies Be Distinctive?" Oxford: Centre for the Study of African Economies, Oxford University, May 2007.
10. Amsden, Alice, The Rise of the Rest: Challenges to the West from Late-Industrializing Economies (New York, Oxford University Press, 2001).
11. Asian Development Bank, "Private Sector Development and Finance," ADB.
12. Amsden, Alice, "Make Jobs with Aid," in Advice to President Obama (Cambridge, MIT Center for International Studies, 2009).
13. Macartan Humphreys, "Economics and Violent Conflict," Harvard Program on Humanitarian Policy and Conflict Research.
14. Anthony J. Ody, "Beyond Microfinance: Getting Capital to Small and Medium Enterprises to Fuel Faster Development," Brookings Policy Brief Series, Number 159, (March 2007).
15. Nick Killick et al., "The Role of Local Business in Peacebuilding," (Berlin: Berghof Research Center for Constructive Conflict Management, February 2005), 5.
16. This definition was endorsed by the Fraser Institute and is used by several international organizations, such as the International Monetary Fund, the World Bank and the World Economic Forum.
17. James Gwartney and Robert Lawson, "Economic Freedom of the World: 2008 Annual Report," Economic Freedom Network, 2008.
18. United Kingdom Department of Trade and Industry, Liberalisation and Globalisation: Maximising the Benefits of International Trade Investment, DTI Economic Papers Number 10 (July 2004), 10.
19. United Kingdom Department for International Development, "Glossary and Acronyms," DFID.
20. Krugman, Paul, "Increasing Returns and Economic Geography," The Journal of Political Economy 99, no. 3 (1991).
21. Veena Thadani, "Globalization and Its Contradictions: Democracy and Development in the Sub-Continent," (New York: New York University, December 2006).
22. James Heintz, "Globalization, Economic Policy and Employment: Poverty and Gender Implication," International Labor Organization Employment Strategy Papers (International Labour Organisation, March 2006.
23. Michael S. Common and Sigrid Stagl, Ecological Economics: An Introduction, Cambridge: Cambridge University Press, 2005, p. 472.
24. United Nations Committee on Trade and Development, "Multinational Corporations (MNCs) in Least Developed Countries (LDCs)," United Nations, 2002.
25. Organisation for Economic Co-operation and Development, "OECD Benchmark Definition of Foreign Direct Investment," OECD, 1996.
26. World Bank, "Beyond Economic Growth Student Book," World Bank,
27. Dale Lawton, "Corporate Social Responsibility and Peacebuilding: A Case for Action in Israel and the Palestinian Territories," (white paper, Rockland, Maine: Institute for Global Ethics), 1,
28. Switzer and Ward, "Enabling Corporate Investment in Peace."
29. World Bank, "Beyond Economic Growth Student Book"
30. Organisation for Economic Co-operation and Development, "Free Trade," OECD Glossary of Statistical Terms, Last updated 26 August 2004.
31. Raul Prebisch, "Commercial Policy in the Underdeveloped Countries," American Economic Review 49 (1959): 257-269.
32. H. J. Bruton,"A Reconsideration of Import Substitution," Journal of Economic Literature 36 (1998), 903-936.

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