Private sector development when institutions are weak

(extracts from pp. 181-2)
“Chapter 10 focuses on three familiar pillars of private sector development, and explores for each alternative ways forward – focusing on the potential and limits of multistakeholder approaches which support islands of private sector effectiveness within a broader sea of dysfunction in the business environment.

The first pillar comprises the challenge of providing the credible commitment necessary to attract private investment. Credible commitment matters because an investment is a bet on the future. In part, it is an entrepreneurial bet that the activity being pursued has the potential to yield a lucrative stream of profits over time. But it is also an institutional and political bet that the rules of the game will remain stable. The standard prescription for providing credible commitment is to have a strong, impartial judiciary, capable of protecting property rights and mediating disputes between firms. But what if the justice system and other formal checks and balances institutions are weak?

“Second is the challenge of providing the support services needed by private business… For manufacturing, the notion of an active role has been more controversial – though it is broadly understood that manufacturing firms cluster in groups, with strong inter-firm spillovers, joint gains from shared, quasi-public-good facilities and services and thus, at least in principle some role for collective support systems. But regardless of ones a priori view as to the desirability of public provision of these support systems, in settings where governance is weak there is little likelihood that the support systems can be provided effectively via top-down, long route mechanisms. The second section of chapter 10 explores the potential for providing proactive support via collective arrangements anchored within the private sector.

“Third is the challenge of aligning private and social benefits and costs. In the conventional approach to private sector development this is the domain of economic regulations (and law more broadly) which govern the environmental, labor, social and ethical practices of firms – and of fiscal policy (including an efficient corporate tax regime) which ensures that an ‘appropriate’ share of profits is used for achieving social goals. But what if neither regulation or fiscal policy are effective? The third section of chapter 10 explored the potential for filling this gap via multistakeholder initiatives to forge new global rules, led by global civil society and corporate actors.”

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