Strong growth and private sector are keys to stability

By Maggie Farrand

March 28, 2014

With 80 percent of overseas spending now coming from foreign direct investment, the role of private sector in driving economic development is no longer optional, said former U.S. Ambassador James Michel at the March 26 Making Markets Work event, hosted by Creative Associates International.

“Private sector engagement has become so important in part because of the shift in development finance,” he said. To private sector businesses, developing countries are becoming increasingly attractive investment destinations.

Michel emphasized that not just any private sector involvement will do. “Private business needs to integrate with national plans,” he said. “The consideration of the local environment is just essential, and they have to bring in the abilities of domestic resources.”

Michel joined U.S. Ambassador Robin Raphel and John Sullivan on a panel titled “Governance and the Evolving Role of Private Sector in Market Stabilization and International Development,” moderated by Creative’s Deborah Kimble. It was one of three panel presentations at the event, which marks the one-year anniversary of Creative’s Economic Growth Division.

“Economic growth in development is so critical,” said Charito Kruvant, President & CEO of Creative during her panel presentation. “It helps people get out of poverty, and that is our mission at Creative.”

Re-examining Private Sector’s role

Raphel, former U.S. Ambassador to Tunisia and now Senior Advisor at the State Department, found Michel’s emphasis on effective development and private sector engagement inspiring.

“We don’t spend enough time thinking about the very things we’re talking about today,” she said.

Raphel agreed that practitioners and private sector alike must understand the local environment. But in her work in Pakistan and Afghanistan, she knows it’s not always easy.

“While we know in our minds we should go micro and understand the local context, security constraints make it much harder to do that,” she said.

Sullivan, Executive Director at the Center for International Private Enterprise, advocated for the use of a new phrase to ensure practitioners always think local: “public private dialogue” instead of “public private partnerships.”

“The subject keeps drifting back to how do we get multinational organizations to give us money,” he said, “but when you start with a dialogue, you begin thinking of how you create a really effective enabling environment.”

His advice: “Be informed by what works around the world, but first understand why things work the way they do.”

During the search for local partners in Pakistan, Sullivan said his team could find no women in any business association. They asked the Minster of Commerce why, and they were told it was illegal for women to participate in business associations. So they worked with the Ministry to overhaul trade ordinances prohibiting women; today, women may become officers of boards and can start their own associations.

“It was a game changer,” he said. “It shows that when you don’t ask ‘why do things work the way they do,’ it’ll be a wall you’re going to hit.”

The shift in foreign assistance

Africa is home to five of the top 12 fasting growing economies. According to Matthew McLean of Endsight Consulting, the continent has made a subtle but very important transition: “It’s gone from poverty, famine and corruption to a place of opportunity, investment and a place to put money,” he said during the “Social Innovation in Market Stabilization and Community Development” panel, chaired by Creative’s J. Wright.

“Africa has finally come to that long-awaited tipping point.”

Today, African countries are ripe for investment. And the demand for infrastructure development is expanding. With other donors present – China, India, Korea, Brazil – the United States has competition.

Nonetheless, McLean believes the U.S. is also well-positioned to support Africa and individual countries’ needs. “U.S. government tools have huge advantages,” he said, “including transparency, emphasizing local partners, offering training and the high quality of implementation.”

It is now up to the countries themselves to create an environment where private business will want to invest.

Diaspora involvement is key, explained Lange Schermerhorn, former U.S. Ambassador to Djibouti.

“They play an important role in financing,” she said. “They need to be brought into the mix.”

Charito Kruvant, the featured speaker on the panel, agreed, noting that diaspora have real commitment to their home countries. She also stressed good governance as a way to foster foreign investment.

To Kruvant, it’s ultimately about coming together to find innovative ways to raise people out of poverty.

“We want to give them opportunities and the chance to get out of poverty,” she said. “Today, we need to build a community of practice, to share, to learn, and hopefully solve the problems we see in the world.”

Indicators for economies in crisis

The economic sector has been the core driver in stabilization and recovery in fragile states, said Pauline Baker, President Emeritus of Fund for Peace, during the “Navigating Economies in Crisis and Recovery” panel, moderated by Pablo Maldonado, Chief Operating Officer at Creative.

According to her recently released report, “Exploring the Correlates of Economic Growth and Inequality in Conflict Affected Environments: Fault Lines and Routes of Recovery,” state legitimacy is also an important early warning sign for conflict.

“If there’s a canary in the coal mine, this is the one,” she said.

The report studied 90 “alert” or “warning” states from the Fund for Peace’s Failed States Index. She studied relevant indicators, analyzed other data sources and identified countries for further analysis. The resulting report is based on specific quantitative research.

Besides state legitimacy, there are two key economic factors at play: macro-economic performance and inequality. Baker’s study also documented how gender equality is correlated with conflict risk – even more so than income inequality.

“This research on gender is critical,” said panelist Johanna Mendelson Forman, consultant at Creative. “It proves that the way a country treats its women is an indicator of if it will succeed.”

Baker’s report identifies loss of state legitimacy and poor macro-economic policies as indicators for decline; better public services, reduced inequality, good macro-economic policies and improved human rights were all cited as key in order for countries to recover.

“This shows that states can fail a lot quicker and for a lot fewer reasons than they can recover,” she said.

Just as Baker believes in focusing on fragile states to alleviate extreme poverty, panelist Tyler Holt, Director of USAID’s Office of Middle East Programs, confirms that economic growth in those fragile states is the answer to the elimination of extreme poverty.

“It’s almost impossible to dramatically reduce poverty without strong economic growth,” said Holt. “I think we can all agree that that debate is largely over.”

Mendelson Forman sees Baker’s report as a guide for the future: “It’s a microcosm of research affirming and giving us a path ahead.”

And while change will not take place immediately, having the research and a common understanding will help form a community focused on solving these issues.

“We don’t have an easy answer,” Kruvant reminded the audience, “but we do have the commitment and working together, we will reach our goal.”