Previous sections of this report have argued that:

• Private sector actors are often underutilized as development actors. There remains significant room to enhance the international community’s efforts to achieve its development objectives by identifying development interests that coincide with core business operations and by harnessing private sector expertise, technology, scale, supply chains and manufacturing capabilities, and delivery mechanisms.
• Private sector wealth, job and business generation is the key driver of economic growth. But, linking that growth to actual poverty reduction and other development objectives requires robust public institutions and policies.

The goal of this report is therefore not to suggest the replacement of all development activities currently performed by public authorities with private sector actors. Rather, it is to recognize how the private sector is already and could contribute to development through its core activities and competencies. It is also intended to increase the focus on the comparative advantages of the private and the public sectors to ensure that each is complementing the strengths brought by the other so as to enhance the efficiency and effectiveness of development initiatives. As Ross Gallinger, Executive Director of the Prospectors and Developers Association of Canada (PDAC), told the Committee: “Only through a group effort by the private sector, civil society, and government can we learn from our challenges and strengthen our combined quest for poverty reduction.”[102] Similarly, the Aga Khan Foundation Canada wrote to the Committee that “development requires the cooperation of governments, civil society and the private sector — no sector alone is a sufficient engine for the development process.” The Foundation argues, therefore, that “Creative collaboration across sectors, rather than a rigid focus on any single sector, is required.”[103]

An approach that seeks to identify these comparative advantages allows for public resources (official development assistance), increasingly under strain in the current global economic climate, to be freed up to focus on the select activities where the public sector, and in many ways only the public sector, can make a critical difference in the quest to reduce global poverty and improve opportunities for better quality of life. Furthermore, public sector resources could catalyze further private investment in a sustainable way, for example, through regulatory reform in the financial sector, allowing for foreign direct investment.

A key area where development assistance can play an important role is the strengthening of public institutions, which are of critical importance to sustained development. Economic prosperity cannot be drawn from a vacuum. As the divergence in economic growth rates and quality of life indices between fragile states and stable ones indicates, prosperity is unlikely to result from a society that is plagued by insecurity, corruption, and underdeveloped human capital. As Jane Nelson, a senior fellow and director of the Corporate Social Responsibility Initiative at Harvard University’s Kennedy School of Government, has argued, “even the most profitable, responsible, and innovative business practices can achieve little in tackling global poverty in the absence of good government, underpinned by political will and public interest.”[104]

Thus, while the previous section of this report outlined the role of the private sector in development, the following likewise outlines roles and responsibilities that must be fulfilled by the public sector to unlock countries’ potential for economic growth.

Public Goods and Public Accountability

A society’s economic potential is a function of its assets, human and capital. Myriad internal and external factors inevitably shape a country’s economic trajectory. However, there is overwhelming evidence that sustained economic growth is aided considerably by the presence of a healthy and educated workforce, security, appropriate transportation and communications infrastructure, and a justice system that is impartial and capable of adjudicating disputes, upholding rights, and enforcing contracts. These factors all dramatically increase the chances both that investment will occur in a country and that its citizens and businesses will be able to benefit from that investment. Jean-François Tardif emphasized that given the private sector's profit motive, the public sector is best placed to provide such public goods.[105]

Related to this issue, some witnesses argued that governments, and not companies, must be at the forefront of providing core social services. For example, with respect to natural resource companies, Karin Lissakers, Director of the U.S.-based Revenue Watch Institute, said that “Governments should be building the schools and providing the health clinics — not mining companies; it’s not their business.” Ms. Lissakers acknowledged that the provision of such services by companies can be beneficial. However, in the long-term, their doing so can have negative consequences for local accountability relationships and local governance and service delivery capacity since “…it takes the load off the governments.”[106] Professor Bonnie Campbell also highlighted the problematic consequences for accountability relationships that can result when mining companies in particular provide social services — including “service delivery, clinics, schools, roads, security, or rule-setting implementation” — in the areas in which they operate. She argued:

This sidestepping of the state, by suggesting companies can gain better social licence or legitimacy for their operations by offering social services, runs the risk of undermining — and this is a key point — a precondition for building responsible governments and the basis for democratic practices; that is, the need for governments to offer social services to their populations and to be held accountable by their populations.[107]

These witnesses emphasized the need for strong accountability relationships between governing authorities and citizens, and between governing authorities and the private enterprises that operate within their jurisdiction.

Nevertheless, there is a critical accompanying point to this analysis: public goods require public resources. Governments need to have access to the necessary domestic resources that can enable them to provide these very services to their citizens. As was noted previously in relation to illicit flows of money from developing countries, the first step is the actual payment of taxes in accordance with a functional domestic tax system. The second key step is for the revenues received by governments to be managed and spent accountably and effectively, including through investment in public goods.

Enhanced transparency with respect to resource revenue flows and company payments to governments are an important aspect of strengthened fiscal capacity and, consequently, the provision of public goods. As is discussed later in this report, several initiatives at the international level and within national jurisdictions have been put in place with the aim of enhancing transparency. Such initiatives also empower citizens and civil society to monitor governments' use of collected revenues.

Witnesses emphasized that public sector aid agencies like CIDA can play an important role in providing capacity-building support in this area. As is discussed next, there is significant need in developing countries for assistance with programs ranging from those targeting the strengthening of the ability of parliaments to oversee the executive branch, to programs assisting governments with the creation of new royalty regimes, regulations, and tax codes.

Capacity and Institutions

Weak governance is a key impediment to development. Jack Mintz, the Palmer Chair in Public Policy at the University of Calgary’s School of Policy Studies, framed his overall conclusion on the Committee’s study topic as follows: “…the real success in where the private sector can help contribute to growth and prosperity in a country depends very much on the strength of the public institutions and public policy in those countries.”[108] This view was reinforced by other witnesses.

Ross Gallinger of PDAC told the Committee that “The biggest obstacle to development is capacity building.” He added that, “The areas where the mining companies go have very little government oversight.”[109] Professor Anthony Bebbington from the Graduate School of Geography at Clark University mentioned an example of such capacity limitations and “institutional constraints” in a developing country that has significant natural resources. He said that “El Salvador’s office to regulate mining, for instance, only has three professionals to regulate the whole sector, and none are trained in environmental or mining sciences.”[110] The negotiation of deals that are beneficial for the jurisdiction in question requires government institutions that are capable of managing interactions with companies.

The importance of local capacity was also underlined by industry leaders. Brent Bergeron, the Vice-President of Corporate Affairs at Goldcorp Inc., told the Committee:

Our challenges often deal with the lack of capacity of local governments and businesses, the lack of capacity of national governments to provide essential services that are necessary for the social and economic benefit of local communities, and the lack of adequate skills and labour to provide services to the mining operation.[111]

Mr. Bergeron explained that mining companies like his own have significant technical expertise in infrastructure development which can benefit areas near their project sites. However, he also said:

Where we lack the skills and knowledge is in the training of the human capital and resources needed to actually manage and deliver the services within the clinics and the schools that we build, and manage the funds that we directly transfer to communities.[112]

Overall, witnesses agreed that public sector aid agencies must take the lead in this critical capacity-building assistance. This is true because of the expertise that they bring to bear, but also because of the need to ensure the legitimacy of the work. Companies are for-profit enterprises; the profits and costs associated with their projects are directly related to the regulations and legislation put in place by host government institutions. For this reason, Dr. Sabine Luning, a professor in cultural anthropology and development sociology at Leiden University, argued that capacity-building initiatives in newly resource-rich countries like Burkina Faso “should be centre stage.” She also pointed out, however, that “mining companies that have to be authorized and monitored by that same state cannot do this.”[113] Referring to the example of Guatemala, Mr. Bergeron stated:

Can I go as Goldcorp and start training the Ministry of Energy and Mines? I can't do that. The credibility behind that is not right. However, I think it makes a lot of sense to have a government institution come in to take our experience here in Canada — Natural Resources Canada in terms of their experience — and bring that experience to Guatemala. That's why we're looking to partner with other organizations.[114]

With these issues in mind, Dr. Luning argued that capacity-building related to institutional development should be pursued through “bilateral public-public partnerships.”[115]

Another witness, Dr. Paul Romer, professor at the Stern School of Business at New York University, is so convinced of the central importance of institutions — or more precisely the “set of rules that structure how people interact with each other” — that he is working on initiatives that would see the creation of what could be described as enclaves of effective institutions in developing societies. Such “special zones” are envisioned as providing the rules and norms that are necessary to facilitate the economic advancement of individuals, but which may not at the time be sufficiently developed or protected in the wider society. A project along these lines is being proposed in Honduras:

The government has amended their constitution and passed a law to create the potential for what they’re calling a reform zone, where in that zone, foreigners could come in and undertake some of these key conditions — create these key conditions that help establish trust and safety and help evolve the norms of honesty.[116]

In a letter to the Committee, the President of Honduras, Porfirio Lobo Sosa, indicated that “a stable environment with transparent rules and solid institutions” is necessary to enable the country “to create jobs to reduce social inequalities, provide the population with education, health, and public safety services, as well as with the infrastructure necessary for a real improvement in the living conditions of all Hondurans.”[117]

The proposed zone is, for example, intended to have its own courts, and in this case will be served by the Supreme Court of Mauritius as the court of appeal. This is the type of assistance that Dr. Romer envisions countries like Canada could provide. Similarly, the Honduran President wrote to the Committee that, “The international prestige of Canadian institutions makes them the ideal candidate to help our government to establish the [Special Development Regions].” Dr. Romer emphasized the intention that Honduran citizens will be “free to go operate in this new environment, but it’s not forced on anyone.”[118] In moving from the abstract theory to the actual implementation of these ideas, it seems that some of the many issues that will need to be resolved include how the special regions will interact from a practical and legal perspective with the rest of the country, and how political legitimacy and accountability relationships will be built between those who choose to work in the special region and the various institutional arrangements that may be put in place as described above.[119]

The Enabling Environment for Private Sector Activity

A country’s policy, legislative, regulatory and governance conditions have a tremendous bearing on its ability to attract investment, facilitate business starts and expansion, and transform those activities into economic growth. The 2005 World Development Report states that:

A good investment climate provides opportunities and incentives for firms — from microenterprises to multinationals — to invest productively, create jobs, and expand. It thus plays a central role in growth and poverty reduction.[120]

The report also noted, however, that:

A good investment climate is not just about generating profits for firms — if that were the goal, the focus could be limited to minimizing costs and risks. A good investment climate improves outcomes for society as a whole. That means that some costs and risks are properly borne by firms.[121]

It is precisely for this reason that the wider system of governance that underpins a country's system of rules and regulations for private sector activity is just as important, if not more so, than the rules and regulations themselves.

At the highest level, witnesses emphasized that a proper enabling environment for private sector activity is predicated on the rule of law. John Sullivan of the Center for International Private Enterprise said that “Reducing poverty comes down to the policy reforms that expand access to opportunity and instill confidence in these market institutions.”[122] Citing Nobel Laureate Douglass North, Dr. Sullivan noted the importance of a society transitioning from having its economic dealings dominated by personal relationships to one where there is sufficient trust in the system that people will do business with any other member of society without the need for personal contacts. Hernando de Soto similarly described an economy governed by the rule of law for the Committee as follows: “In the end, the rule of law means that you are going to replace various little fragments of systems that could be called anarchic with one law. That’s the rule of law: when there is one system and there’s one standard for the whole nation.”[123] The transition to such a standard requires sound institutions like a fair, impartial and effective court system.

As part of building the rule of law, Hernando de Soto’s work singles out one key enabling factor for economic prosperity and poverty alleviation: property rights. He argues that property is the leverage — often as collateral — needed to access capital. Without this ability, the poor remain poor and outside of the legal economy, and the potential of their property, savings, and entrepreneurial initiatives to contribute to economic growth go unrealized.[124] As part of its broader work, the Committee has heard examples of weak systems of property law in countries like Haiti, where the lack of certainty and the confusion associated with the land tenure system has complicated plans for reconstruction.

More recently, Hernando de Soto has linked the events surrounding the outbreak of the Arab Spring to the persistence of large informal economies in countries like Tunisia and Egypt, corruption, weak enforcement of property rights, and prohibitive costs associated with accessing such rights. He wrote that:

In the wake of the overthrow of three autocrats, not enough credit has been given to the mighty consensus that triggered the uprising — the desire of a vast, underclass of people to work in a legal market economy. In the culturally diverse Middle East and [n]orth Africa, the one common thread is its informal economy. This is the key to future growth and indeed stability.[125]

The young vendor, Tarek Mohamed Bouazizi, who had set himself on fire in Tunisia in December 2010, thus triggering the mass protests that would follow against the Ben Ali regime, had been working in the informal economy. His various crates of fruit and vegetables and electronic weight scale, in effect his livelihood, had been seized by a policewoman and two municipal officers. As de Soto told the Committee:

Worst of all, the right for him to have a stall — that would be his property right for work — was taken away, and any red tape he had initiated to title his house for use as collateral in order to get credit to buy a pickup truck that would get him closer to the agricultural market was cancelled.

When you add it all up in terms of his life and his obligations, he had been bankrupted. He had been expropriated. He was ruined.[126]

Overall, Mr. de Soto argued that just as the key impediments to economic prosperity in many developing countries are not technological issues, secure property rights cannot be thought of as simple land issues. These impediments are political issues.

Large informal economic sectors are a feature of many developing countries. The persistence of informal economic activity and the unwillingness of individuals to move into the formal sector reflect the absence of key enabling factors, or put another way, the presence of structural impediments. Dr. Sullivan highlighted some of the possible impediments that can exist using the example of Egypt:

In Egypt, for example, small businesses have to sign 26 post-dated cheques. The banks force them to do that. Why do they do that? Well, because the bankruptcy legislation is so bad that it can take half a year to get the collateral back. You can put up collateral; you just can’t get it through the court system, whereas if you bounce that bad cheque, you’re going to jail. So there’s a real incentive to keep your loans paid up, or not take any out, but it has the effect of inhibiting people from moving into the formal sector or the formal sector firms getting any access to credit.[127]

These types of structural impediments are captured by the World Bank’s annual ranking of countries for ease of doing business, which tracks “key aspects” of a society’s “set of rules affecting entrepreneurial behavior.”[128] In 2012, Egypt places 110th out of 183 countries. For example, it typically requires 7 procedures over a period of 72 days to register property. Some 29 tax payments are required annually.[129]

Such structural issues serve as disincentives for individuals to move from the informal to the formal economy, while simultaneously impeding business growth and productivity in the formal sector. One of the six recommendations put to the Committee by Wendy Hannam of Scotiabank was that CIDA should “directly engage in building basic financial infrastructure: property rights, secure transaction laws, collateral rights, credit bureaus, small and medium enterprise tool kits, financial literacy, regional regulatory harmonization, and financial regulation.”[130] She went on to explain why these pieces of the enabling environment for business and economic development are so important from her perspective. She said: “we in the lending business need to rely on property rights. We need to be able to rely on collateral. Where this doesn't exist, we can't make loans. When we can't make loans, we can't fund those business owners who are trying to make a living for their families and grow their businesses.”[131]

A number of witnesses emphasized that public sector development assistance can play a key role in helping to create an enabling environment for private sector activity in developing countries. Dr. O’Neill of USAID told the Committee: “We are huge believers in one of the values that official development assistance — and probably only official development assistance — can do; that is, to help strengthen the enabling environment for businesses to grow, whether it’s small businesses or it’s large businesses.”[132] Similarly, in response to a question from a Committee member about the limitations of the role that private companies can play in development, Raymond Baker, Director of Global Financial Integrity, responded with the following:

…I don’t know how private corporations can contribute very much to the development of the legal structure within a country. Yes, they can encourage the development of the legal structure. But in the final analysis, it’s not their function; it is the function of government-to-government exchanges.[133]

However, as Dr. Sullivan pointed out, imposing reforms from the outside is not a quick or effective solution to these challenges. He told the Committee:

We’ve also found that top-down reforms tend not to work. We found something we called the reality gap. When fly-in experts come to a country, help create these institutions or write the laws, they then get translated into the local languages and passed by Parliament. They sit there like a hovercraft on water, never really touching it. … It’s the gap between what the law says on paper and what the real practices are.[134]

Therefore, while capacity-building support from external sources is critical to efforts aimed at instilling the institutional conditions that can stimulate economic growth in developing countries, it must be tailored as just that — support. The international consensus on the principles of aid effectiveness, articulated in Paris in 2005, in Accra in 2008 and in Busan in 2011 emphasize the importance of national ownership of and responsibility for the development process. Development assistance targeting economic governance is no different than assistance directed towards strengthening a country’s health system. It is much more likely to become self-sustaining if it is designed to align with plans and priorities that are established locally.

Start-up Financing

In certain cases, public financing can be critical in the early stages of a development initiative, enabling it to get off the ground and then be expanded upon by the private sector. This was true in the case of microfinance, a topic that is explored in greater detail in this report’s case study on financial services. To summarize the key point briefly here, Larry Reed, the Director of the Microcredit Summit Campaign, described the history of the microfinance industry from the 1990s to the present day. In so doing, he explained how the industry grew from an asset base of around $400 million a decade ago — based on funding from government sources and private donations — to “a combined asset base of over $8 billion” today based on an infusion of private money. Government was needed to provide the initial lead role and to build the industry to the point where social and financial returns would be possible. He told the Committee:

When we started, no major bank was making loans to poor people, so the non-governmental sector had to get involved. It was motivated by wanting to help people in poverty move out of poverty. In doing that, they developed techniques and systems that for-profit organizations were able to apply, and then they found that this could make money, so they began to get involved.[135]

To Mr. Reed, the lesson that should be drawn from the microfinance industry is that “government funding can be used to leverage private funding so that the overall impact is much greater than either the private sector or the government could do on their own.”[136]

He thus argued that by working together, governments and the private sector “can create a market where none existed before, or where none existed at a scale the private sector could involve itself in.”[137] Microfinance is not the only example where such a partnership can be effective in catalyzing activities that are intended specifically to address the needs of the poor. The public sector’s role in guaranteeing a market for vaccines in developing countries as part of GAVI’s Pneumococcal Advanced Market Commitment was mentioned in a previous section of this report.[138] Mr. Reed also cautioned, however, that the formation of a new market should not be seen as the end of the public sector’s involvement. With respect to the specific case of microfinance, he sees an important role for the public sector in strengthening the rules of behaviour in the industry and in establishing “metrics for the social side of the investment” to ensure that the public good intended from the investment actually results.[139]

Concluding Remarks on the Role of the Public Sector

Building on the report’s previous section on the role of the private sector in development, this section has emphasized the following key points about the role of the public sector:

• There is a critical role for the public sector — including governments in developing countries and bilateral development agencies in countries like Canada — to play in unlocking a country’s potential for economic growth.
• In broad terms, the public sector should provide public goods and put in place an enabling environment that allows business activity to flourish, while also ensuring that economic growth contributes to the public interest.
• Governments in developing countries will not be able to provide public goods to their citizens unless they are able to generate tax revenues from economic activity, which requires: a private sector that is not stifled; institutions that are capable of negotiating contracts and other issues with private firms and putting in place the necessary policies, legislation and regulations to govern key economic sectors (including an effective tax system); the fair and full payment of taxes and other royalties by firms; and, accountable and transparent public use of the domestic revenues that are generated.
• While it is ultimately the responsibility of local authorities to establish and uphold the rules that govern economic activity within their borders, international aid agencies like CIDA can provide critical support for capacity-building that targets economic governance and institutional development.

The Committee is aware that implementing these steps is a difficult and long-term endeavour. It also understands that this formula does not guarantee success. Not all governments and institutional actors have the best interests of citizens in mind. Not all businesses are efficient, capable of seizing opportunities that are created, or looking to include the poor in their operations. However, it seems that an approach that seeks to maximize the comparative advantages of public and private sector actors, as part of one overarching strategy, could in most cases present an effective path to the achievement of international development objectives.