The private sector is being sought by the development community as a partner for a number of reasons, including its expertise, market-based approaches and technological innovation. However, various development agencies are also increasing their engagement with the private sector because of their growing awareness that it already is a major force in development. In previous decades, transfers of public resources — primarily official development assistance (ODA) — played a dominant role in the developed world’s relationship with many countries in the developing world. Today, however, those public resources have been significantly exceeded by private flows, including in particular foreign direct investment (FDI) and remittances. According to several witnesses who appeared before the Committee, the ratio has flipped. Carlo Dade described this shift as follows:

If you look at 2008, at the difference between private flows for development and the remittances — this is money sent back home by immigrants and migrants to their communities of origin — and foreign direct investment, these were collectively about six times higher than all forms of official development assistance. This has been going on since back in the mid-nineties. So for over a decade now, the private sector has been the largest funder of development activities, broadly defined.[32]

In the specific case of Haiti, Mr. Dade explained that even after the devastating 2010 earthquake, which triggered significant increases in ODA, “remittances are still a larger source of income in Haiti.”[33]

Daniel Runde of the U.S-based Center for Strategic and International Studies (CSIS) also described this change in the composition of resource flows using Canada as an example. He told the Committee that in 2009, Canada’s ODA budget was around $5 billion, while it was at the same time the source of $12 billion in remittances and $120 billion in total foreign direct investment in developing countries. As he said, when looking at these numbers, “You get a sense of this massive shift.”[34] USAID's Maura O’Neill provided a similar analysis of international money flows from a U.S. perspective. According to Dr. O’Neill,

In the 1960s, U.S. resource flows to the developing world totaled collectively about $5.1 billion, with 71% of that coming from the public sector and 29% sourced from the private sector. We’ve now seen those numbers completely flip around, where official development assistance is only about 17%, and the private capital flows are 83%.[35]

In the particular case of the United States, even private philanthropy from U.S. sources to the developing world (estimated at US$39 billion) exceeded the U.S. government’s official aid budget (estimated at US$30.4 billion) in 2010.[36]

The implications of this shift for international development policy are significant. Noting that global remittances exceeded $300 billion in 2009, Dr. O’Neill wrote to the Committee that, in her opinion, “if we can partner to direct these flows toward development we can accomplish more, faster and improve cost-effectiveness.”[37] Daniel Runde similarly argued that the significance of private flows of money must be taken into account when policies towards developing countries are being crafted. As he put it to the Committee:

ODA is critical. ODA is important. But we have to think about ODA in the context of these much bigger forces going on in the world, and we have to be thinking about how we use ODA in this changed landscape. In other words, development agencies, with official development flows, have become minority shareholders in the business of development.

It’s still critical, and ODA can do things that other resource flows can’t. So I’m not saying we’re privatizing assistance. I’m not saying we should get out of the development business. We need ODA, but we need to think about how we use it in the context of this changed world.[38]

These changes are occurring at a time when flows of development assistance appear to be levelling off as the fiscal pressures generated by the effects of the global economic downturn that began in 2008 continue to be felt. Earlier in 2012, the OECD reported that development assistance from major donor countries to developing countries — totaling US$133.5 billion — fell by 2.7% in 2011 compared to 2010, the first such drop since 1997. In fact, if debt relief grants and humanitarian aid are excluded, “aid for core bilateral projects and programmes” fell by 4.5% in that period.[39]

Nevertheless, the increased aggregate volume of private financial flows to the developing world does not in itself ensure that development challenges are being addressed. This is particularly the case where FDI is concerned. A considerable proportion of FDI is directed at a select group of emerging economies and at specific economic sectors, including areas like natural resource development.[40] An ongoing task for those concerned with addressing development challenges is, therefore, harnessing the potential of private resource flows for broad-based poverty alleviation and inclusive economic growth. With that in mind, the following section examines the relationship between private sector activity, inclusive economic growth, and poverty reduction.