UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK for the POOR I Photo: Somalia Green/UNDP Laurence Sonya

Commission on the Private Sec t o r Dev&el o p m e n t

R E P O R T TO THE SECRETA RY - G E N E R AL OF THE UNITED NA T I O N S

UNLEASHING EN T R E P R E N E U R S H I P

MAKING BUSINESS WORK FOR THE POOR Commission on the Private Sector Development&

REPORT TO THE SECRETARY-GENERAL OF THE UNITED NATIONS

UNLEASHING ENTREPRENEURSHIP MAKING BUSINESS WORK FOR THE POOR 1 March 2004

The analysis and policy recommendations of this Report do not necessarily reflect the views of the United Nations Development Programme, its Executive Board or the United Nations Member States. The Report is an independent publication by UNDP and reflects the views of the members of the Commission on the Private Sector and Development.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form by any means, electronic, mechanical, photocopying or otherwise, without prior permission of UNDP. COMMISSION MEMBERS

CO-CHAIRS The Right Honourable Paul Martin Prime Minister, Canada Ernesto Zedillo Director,Yale University Center for the Study of Globalization Former President, Mexico

MEMBERS Eduardo Aninat (Chile) Alan Patricof (United States) Former Deputy Managing Director, Vice-Chairman and Founder, Apax Partners International Monetary Fund Kwame Pianim (Ghana) Jorge Castañeda (Mexico) CEO, New World Investments Former Minister of Foreign Affairs, Mexico C.K. Prahalad (United States) Distinguished Professor of Politics & Harvey C. Fruehauf Professor of Business Latin American Studies, New York University Administration, University of Michigan Luisa Diogo (Mozambique) Business School Minister of Planning and Finance, Mozambique Robert Rubin (United States) Carleton Fiorina (United States) Director and Chairman, President and CEO, Hewlett-Packard Company Executive Committee, Citigroup Former Secretary of the Treasury, United States Rajat Gupta (India) Senior Partner Worldwide, Miko Rwayitare (South Africa) McKinsey & Company President and Executive Chairman, Telecel International Anne Lauvergeon (France) Owner Mont Rochelle Winery Chairman of the Executive Board, Areva Group President and CEO, Cogema Juan Somavia (Chile) Director-General, Jannik Lindbaek (Norway) International Labour Organization Chairman, Statoil ASA Hernando de Soto (Peru) Peter McPherson (United States) President, Institute for Liberty President, Michigan State University and Democracy, Peru

EX-OFFICIO MEMBERS Maurice Strong (Canada) Special Adviser to the Commission Mark Malloch Brown (United Kingdom) Administrator, United Nations Development Programme

ALTERNATES Debra Dunn for Carleton Fiorina (United States) Senior Vice President of Corporate Affairs, Hewlett-Packard Company Michael Froman for Robert Rubin (United States) President and CEO, CitiInsurance

COMMISSION SECRETARIAT Executive Director: Nissim Ezekiel Core Team: Jan Krutzinna, Naheed Nenshi,Yann Risz and Sahba Sobhani UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR i Photo: Somalia Green/UNDP Laurence Sonya

FOREWORD

nding poverty, the aspiration of the Millennium Development Goals, is the overriding developmental objective of the 21st century. Despite great progress E in the past 50 years, 1.2 billion people—one-fifth of the people on Earth—live on less than US $1 a day, without access to many of the social services basic to a decent human life. Their plight requires a global response making full use of all the financial, intellectual and organizational resources that we can muster. It is against this urgent background that Secretary-General Kofi Annan asked us to convene the Commission on the Private Sector and Development to answer two questions. How can the potential of the private sector and entrepreneurship be unleashed in developing countries? And how can the existing private sector be engaged in meeting that challenge? This report is our responses to these questions. The report offers recommendations on how the major actors—governments, public development institutions, the private sector and civil society organizations— can modify their actions and approaches to significantly enhance the ability of the private sector to advance the development process. The objective of ii UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR poverty alleviation leads us to focus based individuals as much as it does believe that it is critical to develop on developing businesses that create that of the managers and innovators a set of pilot actions and initiatives domestic employment and wealth— in multinational corporations and that would test the main observations by unleashing the capacity of large local companies. It is their voices and conclusions of our work— local entrepreneurs. that we have heard the loudest. so that their relevance to the real world of development could be We set an ambitious time limit for The Commission has also demonstrated on the ground. That our work, which has been completed attempted to highlight a broad is why the report ends with an in a little more than half a year since range of good practices that show illustrative portfolio of actions that our first meeting in June 2003. Our how the capabilities of the private will be developed in greater detail intention was not to carry out basic sector can best be harnessed for the over the next few months—actions research. Much work on the subject cause of development and poverty that could be implemented on a is already under way, and major alleviation. The cases include pilot basis shortly thereafter. Some development agencies, private successful approaches that originate of them could be driven by the UN foundations and academic institutions with the traditional development system, and some by other partners are already focusing their energies players, such as the multilateral and stakeholders. on the private sector’s contributions development institutions and to development. Instead, our approach bilateral aid agencies. But more These initiatives are far from has been to understand and assimilate often they include lesser known but enough. We put them out to all of the work already carried out by all innovative approaches implemented you as indicative of the types of parts of the development coalition, by the private sector—both by actions that we believe can and including business, civil society and companies and civil society should be replicated for the widest labour organizations, and to integrate organizations. Those approaches possible impact. Nor do we believe that thinking in the framework rely on market mechanisms and that each of them is a perfect model. presented here. private sector incentives and thus Country differences require modifying lend themselves much more to the the initiatives—as well as some of The Commission’s work has been replicability and scalability that our overall recommendations—to heavily influenced by the voices of we believe needed. One of our key fit particular circumstances. Our entrepreneurs, expressed through observations is the lack of knowledge ideas and conclusions are presented their actions and through their about best practices and the great as directional, to elicit reaction and responses to wide-ranging surveys need for more sustained research constructive dialogue. The intent is launched to understand what most and analysis of what works and to catalyze a renewed coalition of affects their ability to be productive the major stakeholders—focused what doesn’t. and to grow. It is the capacity, drive more clearly on the challenges and innovation of entrepreneurs We concluded at the outset that outlined here. Such a coalition is that increase the impact of a it would not be enough for this essential to unleashing the capacity broadly constituted private sector. Commission to produce a traditional of the private sector, to achieving Entrepreneurship encompasses the report voicing opinions and urging the Millennium Development actions of small, informal, village- others to take action. Instead, we Goals and to alleviating poverty.

Paul Martin Ernesto Zedillo Co-Chair Co-Chair Photo: Luc Anh/UNDP ACKNOWLEDGEMENTS NESIGETERNUSI:MAKINGBUSINESS WORK FOR THE POOR UNLEASHING ENTREPRENEURSHIP: I These include: Adrian Hodges, International Business Leaders Forum; BusinessLeaders International Hodges, Adrian These include: tohelpshapeourthinking. gaveoftheirtimeandexpertise of themgenerously andanumber work bymanywhohavegonebefore, hasbeeninformed Our READERS ANDEXPERTS vital inputstothework oftheSecretariat. Prabal andIrene who alsoprovided Chakrabarti Philippi To JenniferBarsky, Silverman. Jeremy OppenheimandLes DianaFarrell, Monson andMark Templeton wasledby Ehrbeck, Tilman Michael Blair, TheteamofMaria throughout theproject. and itsSecretariat whoprovided inputandcounsel totheCommission To McKinsey&Company, A SPECIAL THANKS… grateful to allthoselisted here. are deeply individuals andorganizations.We possible withouttheinputandassistance ofmany he Commission’s work would nothave been iii iv UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR

Lalita Gupte, Mahdav Kalyan Bill Kramer, Water Research Institute; Arvind Gupta, Jemal-ud-din and K. V. Kamath, ICICI Bank; Hugh Locke, Locke Associates; Kassum, Michael Klein, Khalid Nandan Nilekani and Sanjay Purohit, Bill Draper, DraperRichards; Mirza, Francois Nankobogo, Neil Infosys Ltd.; Percy S. Mistry, Joaquim Boborquez; Maria Cattaui Roger, Marilou Uy and Dileep Oxford International Group; Livanos and William Stibravy, Wagle, the World Bank; Gerald T. Richard Frank, Bob Graffam, Julio the International Chamber of West, the Multilateral Investment Lastres and Alexander Schwedelheim, Commerce; Robert Litan, Robert Guarantee Agency; Jonathan Darby Overseas Investments Ltd; Chernow, The Ewing Marion Fiechter and Prakash Loungani, Michael Barth, Netherlands Kauffman Foundation; Professors the International Monetary Fund; Development Finance Company; John McMillan and Paul Milgrom, Karen Decker and Arvind Mathur, Nancy Bearg, Enterprise Works; Stanford University; Christopher the Asian Development Bank; Gary Bond, Noreen Doyle and Woodruff, University of California, Nancy Boswell, Transparency Michael McCullough, the European San Diego; Professor Jonathan International; Antonio Vives, the Bank for Reconstruction and Morduch, New York University; Inter-American Development Development; Cameron Rennie, Jeb Brugman and Craig Cohon, Bank; and Ric Cameron and the World Business Council for GlobalLegacy; Bob Fitch, Arthur Saper, the Canadian Sustainable Development; Enrique Enterplan; Daniel Zelikow, International Development Agency. Ferraro, Jim Kaddaras and Maria JP Morgan; Kenny Pegram and Otero, Accion; Jide Zeitlin, Ray Smilor, the Foundation for CONSULTATIONS Goldman Sachs; Masood Ahmed, Enterprise Development; Sunil David Stanton and Adrian Wood, Sinha, Emerging Market Economics; The Commission Secretariat the U.K. Department for Roland Dominicé and Jean-Philippe conducted four formal consultations International Development; de Schrevel, BlueOrchard; with international labour represen- Professors Michael Chu, Calestous Professor Roger Leeds, Johns tatives; European foundations, Juma, Tarun Khanna, George Hopkins University; Professor academics, and Canadian civil Lodge, Michael E. Porter, Iqbal Ted London, the Base of the society organizations. Our thanks Quadir and Deborah Spar, Harvard Pyramid Learning Laboratory at to the hosts of these consultations, University; Michael Fairbanks, the University of North Carolina; including the International Labour On the Frontier; Craig Wilson, John Richardson and Sevdalina Organization and the European DeltaPearl; Elli Kaplan; Benjamin Rukanova, the European Foundations Foundations Centre, as well as to Krutzinna; Neysan Rassekh; Alex Centre; Kenneth Borghese, John participants of these consultations, Shakow; George Ivanov; Eleonore E. Wasielewski, the United States who included: Bob Kyloh, workers’ Kopera, Business Humanitarian Agency for International relations branch, the International Forum; Barbara Samuels, Samuels Development; S. Aftab Ahmed, Labour Organization; Raul Requena, Associates; Donald Snodgrass, Sabine Durier, Mariann Kurtz, Union Network International; Development Alternatives, Inc.; Guy Pfeffermann, Harold Rosen, Wendy Caird, Public Services Elizabeth Littlefield, CGAP; Thomas Schipani, Bernard Sheahan International; Carla Coletti, the and Udayan Wagle, the International International Metalworkers’ Finance Corporation; Gerard Byam, Federation; Esther Busser, the Cesare Calari, Gerard Caprio, International Confederation of Free Trade Unions; Sándor Köles, the Carpathian Foundation; ACKNOWLEDGEMENTS v

Matthieu Vanhove, Cera Holding; North-South Institute; and Kathy Gilbert Houngbo, Lauren Canning, William White, the Charles Vandergrift, World Vision Canada. Alan J. Lee and Mark Suzman; Stewart Mott Foundation; Dario Djibril Diallo, Victor Arango, Disegni, Compagnia di San Paolo; UNITED NATIONS Carmen Higa, Hyacinth Morgan Charles Buchanan, the Luso- and William Orme in the American Foundation; Michael Many within the extended UN Communications Office of the Brophy, Help for All Trust; Luc family gave generously of their time Administrator; Christina Barrineau, Tayart de Borms, the King Baudouin and expertise, including Michael Normand Lauzon and Peter Kooi Foundation; Michel Bourges Henriques and Stephen Pursey at the of the United Nations Capital Maunaury, the Madariaga European International Labour Organization; Development Fund; and Bibi Foundation; Raymond Georis Wilfried Luetkenhorst and his team Amina Khan and Golda Kruss and Alexandre Kirchberger, the at the United Nations Industrial who provided assistance to the Network of European Foundations Development Organization; Commission Secretariat. for Innovative Cooperation; Ineke Georg Kell and his team, Global Derkzen, the Rabobank Foundation; Compact; and Antti Piispanen, EDITING, DESIGN John Mroz, the EastWest Institute; Lorraine Ruffing, Karl Sauvant and AND PRODUCTION Charles Maynes, the Eurasia the team at the United Nations Foundation; John Wyn Owen, Conference on Trade and Last but not least, we thank whole- the Nuffield Trust; David Dollar, Development. Our thanks also heartedly those who have helped us the World Bank; Michael Klein, to John McArthur and his team with the editing, production and the World Bank Group; Raymond of the Millennium Project; and translation, working under very Fisman, Columbia University; colleagues in the United Nations tight deadlines: Bruce Ross-Larson Florencio Lopez-de-Silanes, Yale Development Programme (UNDP): and Meta de Coquereaumont, University; Nazeer Aziz Ladhani, Zéphirin Diabré, Associate Elizabeth McCrocklin, Thomas the Aga Khan Foundation; Gerry Administrator; Bruce Jenks of the Roncoli and Christopher Trott of Barr, the Canadian Council for Bureau of Resources and Strategic Communications Development, International Co-operation; Partnerships, who provided the over- Inc.; Julia Dudnik-Ptasznik of John Watson of Cooperative for all UNDP guidance to the project; Colonial Communications; Michel Assistance and Relief Everywhere Sanjay Gandhi, Connie Gratil, Coclet; Edward Ranney Carta (CARE) Canada; Patricia McCullagh, Sirkka Korpela and Casper of EurOz Technologies; Thomas Ric Cameron and Arthur Saper, Sonesson, also of the Bureau of Barbush and the team at Moore the Canadian International Resources and Strategic Partner- Wallace-Hoechstetter Printing; Development Agency; Michel ships; Kalman Mizsei of the Bureau Kaika Clubwala of A.K. Office Chaurette, the Canadian Centre for Europe and CIS; Shoji Supplies and Elizabeth Scott Andrews, for International Studies and Nishimoto of the Bureau for Naeem Arastu, Sokhna Diouf, Cooperation; Pam Foster, the Development Policy; Hafiz Pasha Françoise Gerber, Rajeswary Halifax Initiative; Molly Kane, of the Bureau for Asia and the Iruthayanathan, Maureen Lynch Inter Pares; Robert Letendre, the Pacific; the staff of the Office of and Jeremy Owens of UNDP. Canadian Catholic Organization the Administrator, particularly for Development and Peace; Mark Fried and Rieky Stuart, OXFAM Canada; Roy Culpeper, the TABLE OF CONTENTS

COMMISSION MEMBERS

FOREWORD i

ACKNOWLEDGEMENTS iii

HIGHLIGHTS 1

CHAPTER 1. WHY THE PRIVATE SECTOR IS SO IMPORTANT IN ALLEVIATING POVERTY 5 Deep poverty remains intractable 6 The private sector is important for the poor—and often is the poor 7 Who are all the entrepreneurs? 8 A focus on the domestic private sector 9

CHAPTER 2. CONSTRAINTS ON THE PRIVATE SECTOR IN DEVELOPING COUNTRIES 11 Widespread informality for microenterprises 12 Few competitive small and medium size enterprises 13 Lack of competitive pressure on large companies 14 Foundations for entrepreneurship—not yet in place 14 Three pillars of entrepreneurship—too often missing 17

CHAPTER 3. UNLEASHING THE POTENTIAL OF THE PRIVATE SECTOR 21 Building the foundations 23 Erecting the pillars 24

CHAPTER 4. ENGAGING THE PRIVATE SECTOR IN DEVELOPMENT 29 Serving markets at the bottom of the pyramid 30 Forming ecosystems and building networks 30 Fostering public-private partnerships for sustainable development 33 Improving corporate governance 34 Advancing responsible business practices and corporate social responsibility standards 34

CHAPTER 5. RECOMMENDED ACTIONS 37 Actions in the public sphere: create an enabling environment 38 Actions in the public-private sphere: partner and innovate 40 Actions in the private sphere: mobilize capabilities and resources 41 Looking forward 42

BIBLIOGRAPHIC NOTE 43

BIBLIOGRAPHY 45 BOXES Box 1.1 The Millennium Development Goals 7 Box 3.1 Costa Rica’s private sector—unleashed 27 Box 4.1 Resources under the radar screen for private sector development 30 Box 4.2 Showing what’s possible at the bottom of the pyramid 32

FIGURES Figure 1.1 More investment—more growth 7 Figure 1.2 Four billion people at the bottom of the pyramid 8 Figure 2.1 Informality thrives in poorer countries 12 Figure 2.2 Small and medium enterprises become more important and informality less important as countries become wealthier 13 Figure 2.3 Foundations for the private sector and pillars of entrepreneurship 15 Figure 2.4 Enterprises in low income countries face many more burdens when registering 17 Figure 3.1 Strengthening the effectiveness of traditional private sector development activities 22 Figure 4.1 Private sector contributions to private sector development 30 Figure 5.1 Actions in the three focus areas 38 Photo: Pedro Cote/UNDP HIGHLIGHTS NESIGETERNUSI:MAKINGBUSINESS WORK FOR THE POOR UNLEASHING ENTREPRENEURSHIP: I rwhadeutbedvlpetle ihdvlpn onre.This countries. lieswithdeveloping growth andequitabledevelopment forachieving responsibility thattheprimary The Commissionbelieves base thatcompaniesare built on. the capital, accesstofinancingandlong-term lack They low productivity. and towidespread informality contributing legal system, outside theformal Manyoperate are marginalinthedomesticecosystem. medium enterprises and small Butinmanypoorcountries, for innovation andentrepreneurship. beenginesofjobcreation—seedbeds can andmediumenterprises Small atlower prices. people byproviding abroad of products range andservices alsoempower Itcan poor jobcreation andpoor people’s incomes. growth, toeconomic bycontributing poverty alleviate sectorcan The private andcommunities. corporations individuals, byprivate largely areand innovation undertaken thatleadtodevelopment ruddi h elzto httesvns investment grounded intherealization thatthesavings, recommendations thataccompany it—shouldbe andaction development—andsector thepolicy he Commission believes thatany approach to private 1 2 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR responsibility includes creating the 2. In the public-private sphere, with representatives of the domestic conditions that make it possible facilitating cooperation and private sector to implement changes to secure the needed financial partnerships between public and and ensure that the voice of the private resources for investment. private players to enhance access sector includes small and medium to such key factors as financing, enterprises and microenterprises. Those conditions—the state of skills and basic services. governance, macroeconomic and For developed 3. In the private sphere, microeconomic policies, public country governments encouraging the development finances, the financial system and Foster a conducive international of business models that can be other basic elements of a country’s macroeconomic environment and scaled up and copied and that economic environment—are largely trade regime. Increasing the flow of are commercially sustainable. determined by the actions of development aid and reforming the domestic policymakers. Their global trading system to provide fair challenge is to capitalize on advances ACTIONS IN THE economic opportunities to producers in macroeconomic stability and PUBLIC SPHERE: from developing countries are democracy and to launch reforms CREATE AN ENABLING essential for promoting rapid growth that bring about further changes in ENVIRONMENT in domestic private investment. institutional frameworks to unleash Creating an enabling environment Redirect the operational and foster the private sector. involves steps to reduce the share of strategies of multilateral and Most of the recommended actions the informal sector in an economy, bilateral development institutions involve more than one of the through reform of the overall and agencies. In encouraging actors working together. Where enabling environment for the sustainable private sector develop- governments are implementing formal economy. ment developed countries need to policy change, it is often with the For developing ensure that the collective actions direct support and involvement of country governments of these agencies are better multilateral development institutions. Reform regulations and strengthen coordinated—to improve their Where the private sector is taking a the rule of law. Developing country efficiency and to reduce the pressures more active stance on sustainable governments have to make a strong on the administrative capacity of development, it is often with civil and unambiguous policy commit- developing country governments. society raising the profile of this ment to sustainable private sector Untie aid. Changes in the issue. Where governments are development—and combine that administrative rules controlling implementing regulatory reform, with a genuine commitment to tied funds would permit more it may be in direct consultation reform the regulatory environment effective use and delivery of with representatives of the private by eliminating artificial and policy- technical assistance to stimulate sector. The individual actions induced constraints to strong private sector development. identified here should be seen in economic growth. the framework of this broader For multilateral cooperation—needed even more Formalize the economy. development institutions to reduce poverty. Developing country governments Apply the Monterrey recommen- need to focus on creating the dation of specialization and Our interest lies in three areas: conditions to reduce informality partnership to private sector 1. In the public sphere, promoting and change the composition of the development activities. The the reform of laws, regulations private sector ecosystem over time. extent of overlapping activities is and other barriers to growth. Engage the private sector in counterproductive and needs to the policy process. Governments be urgently addressed. need to create a real partnership Address informality in developing countries. Some pioneering work is underway to map the structure of the informal sector, and a global HIGHLIGHTS 3 effort to expand the coverage For the private sector Increase accountability in the of this work is likely to yield Channel private initiative system. This is a core part of the significant benefits. into development efforts. We work of civil society organizations, believe that the private sector has as is their leadership in pushing ACTIONS IN THE tremendous potential to contribute forward the concept of sustainable PUBLIC-PRIVATE to development through its development. This work should SPHERE: PARTNER knowledge, expertise, resources be strengthened. and relationships. AND INNOVATE Develop new partnerships and The Commission believes that all Develop linkages with relationships to achieve common stakeholders need to make concerted multinational and large domestic objectives. Civil society organizations efforts in finance, skills and public- companies to nurture smaller are closest to the base of the pyramid. private partnerships for the delivery companies. Linkages between They also are often proxies for of basic services. different types of firms in experimenting with new technologies developing countries provide an for solving problems. Facilitate access to broader effective channel for local companies financing options. We envision to gain access to markets, financing, LOOKING FORWARD continuing development of domestic skills and know-how. financial markets coupled with To promote progress, the Commission skill-building for regulators and Pursue business opportunities recommends that the United Nations private financial institutions. in bottom-of-pyramid markets. sponsor the tracking of private Recognizing the needs of bottom-of- Assist skill and knowledge sector development. An annual the-pyramid markets (the 4 billion progress report would maintain the development. Skill-building people who are earning less than activities could range from prominence of the Commission’s $1,500 a year) and creating innovative programs for top public and overall recommendations and ensure solutions to meet these needs are private leadership to training the commitment to addressing the other vital actions required from microentrepreneurs to joint efforts many issues identified here. the private sector, both domestic with public authorities and unions and international. The Commission is assembling to improve workforce skills. a first set of actionable initiatives Set standards. The private Make possible sustainable delivery to facilitate transformations in sector needs to make a genuine of basic services, particularly energy individual countries and to provide commitment to sustainable and water. The Commission sees the tools for governments and development—with a sharp the need to develop innovative the private sector to supplement focus on corporate governance models for partnerships of available resources and begin rapidly and transparency. governmental service providers, implementing a programme of multinational companies and For civil society and change. These first actions are local companies. labour organizations intended to stimulate a collaborative The Commission believes that civil response from potential partners ACTIONS IN THE society and labour organizations who read this report. Our message PRIVATE SPHERE: have to continue as critical to all of you is: join us. MOBILIZE CAPABILITIES observers of the development AND RESOURCES agenda—and as facilitators and supporters of innovative approaches The Commission believes that the for meeting the Millennium private sector, particularly large Development Goals and improving local companies and multinational the quality of life for poor people. corporations, must realize that it can contribute to accelerated economic development and to poverty alleviation. Photo: Boris Missirkov ALLEVIATING POVERTY IS SOIMPORTANT IN WHY THE PRIVATE SECTOR NESIGETERNUSI:MAKINGBUSINESS WORK FOR THE POOR UNLEASHING ENTREPRENEURSHIP: leit oet.Cnie amn xot nBnlds,information inBangladesh, exports Consider garment poverty. alleviate can examplesshow Butsomeencouraging how enterprise private $1 aday. oftheplanet’s peoplelivingonless than with afifth The problem ishuge, ofbest knowledge through committedapplication andpractice. only achieved be can andscope, ambitious inscale Goals, Development The Millennium their communities andnations. It isaboutunleashingthepower entrepreneurs oflocal in toreduce poverty innovation sectortoimprove thatresides intheprivate thelivesofpoor. andtechnological organizational Itisaboutusingthemanagerial, lives better. is already tothelivesofpoorandhaspower central tomakethose sector Itisaboutacknowledging thattheprivate multinational corporation. I CHAPTER 1 is as important a part ofthe private asthe sector apart is asimportant isaboutrealizing thatthepoorentrepreneurIt dayon market andseeingentrepreneurs atwork. into thepoorest village isaboutwalking his report 5 6 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR technology in Costa Rica and cut more than one-third of electricity DEEP POVERTY flowers in Kenya—new industries customers nationwide. REMAINS INTRACTABLE creating jobs, boosting incomes, Fierce competition between lifting hopes. And consider the private locally owned mobile Despite great progress in some following successes, ranging from phone companies in Somalia has countries and regions, deep poverty modern multinationals to domestic driven costs on international remains a stubborn and intractable entrepreneurs, demonstrating phone calls to less than $1 a problem across much of the world. the potential of private return minute, about a sixth that in Substantial gains in some countries to boost development. many other African countries. have been accompanied by deep This, in a country where there losses in others, and far too many Cemex, the Mexican cement is no official banking or postal people still earn less than $1 a day, firm, has become one of the system and where many do suffer from hunger and lack access world’s leading producers and not have regular running water to water, sanitation and energy. innovators in the industry, or electricity. The latest Human Development employing thousands. In Guatemala the Confederation Report of the United Nations Casas Bahia in Brazil has of Agricultural Cooperatives Development Programme reports developed a unique business formed a joint venture with a that the proportion of people in model providing efficient retail Canadian firm. The enterprise extreme poverty fell to 23.2% in services aimed at poorer customers. now exports vegetables worth 1999 from 29.6% in 1990. But the Infosys, an Indian information more than $3 million a year number of people living on $1 a technology services firm, grew to Canada, providing steady day slipped only to 1.17 billion from from less than $10 million in income for 100 indigenous 1.29 billion a decade earlier. Moreover, sales in the early 1990s to become women and supporting more if the dramatic improvement in a leading global player with than 1,000 farmers. China’s poverty indicators is excluded, almost $800 million in sales In Mozambique a farmer bought the number of people living in today. Along the way, it has also an oilseed press on credit. Now absolute poverty actually increased. been setting international standards as the owner of four presses, he for corporate governance and In recent years poverty alleviation has organized nine other press creating a new partnership for has moved to the centre of the global operators into a small cooperative development with local and dialogue as the primary overriding association, bargaining with local central government. objective of development—not a banks and customers as a group. ICICI Bank, also in India, is derived outcome. The Millennium In India small-scale soybean applying technology and a Declaration was an unprecedented farmers use a village Internet comprehensive approach to the expression of solidarity and determi- kiosk to check spot prices for full range of its client base— nation to rid the world of poverty, their products on the Chicago particularly in rural markets and committing countries, rich and Board of Trade’s website, to small and medium enterprises poor, to eradicate poverty, promote bypassing local intermediaries human dignity and equality and and microentrepreneurs. and getting better prices. achieve peace and environmental In Cambodia hundreds of small sustainability. It led to agreement private providers offer services These examples are not just success on the Millennium Development ranging from battery recharging stories—they are stories about the Goals (box 1.1). to fully metered electricity successes of the domestic private provision for entire communities. sector. They are what this report is Yet progress is more than possible— These providers now serve an about. But moving from example and it occurs with regularity under the estimated 115,000 customers— to broad achievement requires right conditions. Economic growth thinking freshly about development, has lifted hundreds of millions of unconstrained by ideology, unhinged people out of subsistence agriculture from tired debate. into manufacturing and service employment, increasing wealth and reducing poverty. Witness the CHAPTER 1: WHY THE PRIVATE SECTOR IS SO IMPORTANT IN ALLEVIATING POVERTY 7

BOX 1.1 THE MILLENNIUM FIGURE 1.1 MORE INVESTMENT—MORE GROWTH DEVELOPMENT GOALS 16 1. Eradicate extreme poverty and Private Public hunger: reduce by half the proportion 14 of people living on less than $1 a day; reduce by half the proportion of people 12 who suffer from hunger. 10 2. Achieve universal primary education: ensure that all boys and girls complete 8 a full course of primary schooling. 6 3. Promote gender equality and empower women: eliminate gender 4 disparity in primary and secondary education by 2005, and at all levels of 2 education by 2015. Investment as percent of GDP,1970–98 as percent Investment 4. Reduce child mortality: reduce by 0 < 3% 3–5% > 5% two-thirds the mortality rate for children Growth rates, 1970–98 under five. 5. Improve maternal health: reduce Source: Bouton and Sumilinski (2000) by three-quarters the maternal mortality ratio. 6. Combat HIV/AIDS, malaria and other 6.4% resulted in a 15% decline in quantity of employment and the diseases: halt and begin to reverse the the rate of poverty (using the $2 a rate of pay are crucial. For the self- spread of HIV/AIDS; halt and begin to day criterion), and in South Asia employed, productivity and returns reverse the incidence of malaria and 3.3% annual growth led to an 8.4% are important, influenced by other major diseases. decline. In contrast, the slow growth technology, inputs and prices. 7. Ensure environmental sustainability: Employment is thus the key link integrate the principles of sustainable of 1.6% in Latin America and the development into country policies Caribbean and 1.0% in the Middle between output growth and and programmes; reverse the loss of East and North Africa caused a poverty alleviation. environmental resources; reduce by marginal deterioration in poverty half the proportion of people without sustainable access to safe drinking water rates. More dramatically, negative THE PRIVATE SECTOR and basic sanitation; achieve significant growth rates increased poverty rates IS IMPORTANT FOR improvement in the lives of at least by 1.6% in Sub-Saharan Africa and THE POOR—AND 100 million slum dwellers by 2020. 13.5% in Europe and Central Asia. OFTEN IS THE POOR 8. Develop a global partnership for development. The message is clear: sustained The private sector is central to the economic growth reduces poverty. lives of the poor. First, all poor The link is equally clear between people are consumers. Across the dramatic improvement in the living economic growth and strong private standards in East Asian countries, world the story is the same—poor investment. A study of 50 developing consumers pay more than rich including Indonesia, The Republic of countries from 1970 to 1998 examined Korea, Malaysia and Thailand, and consumers for basic services. In the relationship between private Mumbai, slum-dwellers in Dharavi the sizable reduction in the number and public investment and growth of people in poverty in China. pay 1.2 times more for rice, 10 times and incomes. Countries with higher more for medicine and 3.5 times The impact of economic growth, growth featured higher private more for water than do middle class overall, on poverty depends on a investment (figure 1.1). people living at the other end of range of factors that influence the But for output growth to contribute the city on Bhulabhai Desai Road. nature of this growth, but the empirical to poverty alleviation, it must translate evidence is compelling. In East Asia into incomes of the poor. For wage and the Pacific, the region with the labourers and salaried workers, the strongest growth in the 1990s, annual per capita GDP growth of 8 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR

Fully 4 billion people in the world— FIGURE 1.2 FOUR BILLION PEOPLE AT THE BOTTOM OF THE PYRAMID those who earn less than $1,500 a year—make up the “bottom of the Purchasing power Population parity in dollars in millions pyramid” markets (figure 1.2).

The quality of goods that poor > $20,000 Tier 1 75–100 people purchase—whether food, water or financial services—is almost always substandard. Often, $1,500–20,000 Tiers 2–3 1,500–1,750 an informal private sector fills the gaps with goods of higher prices and varying quality. It serves an important need, for informal < $1,500 Tier 4 4,000 economies sustain the majority of poor families in many countries. Yet the advantages of economies of scale and scope are missing Source: Prahalad and Hammond (2002) from the lives of people at the bottom of the pyramid. Some of the barriers are poor marketing data on the distribution of new The first creates employment and poor distribution. water connections by income and income growth. The second quintile from three countries in improves the quality of life for the The private sector is already Latin America show that 25–30% poor. And the greater interaction meeting the needs of poor people of the network expansion was between those at the base of the in places governments do not reach. targeted at the lowest fifth of pyramid and the private sector creates In some countries, for example, the income profile. opportunities for direct involvement the government has little impact on in the market economy. the poor. In the slums there are no Put simply, an innovative private health services, no public education sector can find ways to deliver low-cost (even sophisticated) WHO ARE ALL THE and no infrastructure. This story ENTREPRENEURS? repeats itself across the developing goods and services to demanding world. In many cases, where services consumers across all income ranges. The Commission takes an expansive exist, they are provided by private It can sell to the urban distressed view of the private sector. Large sources. Anywhere from 15% area as well as the poor rural village companies are a vital part of the to 90% of primary education is or town. It can develop distribution private economy, but the poor are provided in private schools. Some links to the consumer in the village an equally important part. They are 63% of health care expenditures in and so be better able to harness often entrepreneurs themselves— the poorest countries are private, knowledge about the actual needs frequently of necessity, operating almost twice the 33% in high of this segment of the market. informally, trapped in subscale income countries that belong to It can keep costs low through enterprises. We endorse the view the Organisation for Economic outsourcing, for greater flexibility. that market-oriented business Co-operation and Development. The private sector can thus alleviate ecosystems comprise many forms of private enterprise coexisting With the right attention and poverty by: in a symbiotic relationship. The regulatory requirements, privately Contributing to economic growth. ecosystem generally includes provided services can help meet Empowering poor people by multinational corporations, large the needs of poor people. Recent providing them with services and domestic companies, cooperatives, consumer products, increasing small and medium enterprises and choices and reducing prices. microenterprises, with formal and informal players. It thus encompasses CHAPTER 1: WHY THE PRIVATE SECTOR IS SO IMPORTANT IN ALLEVIATING POVERTY 9 the farmer in the field as much as executives take the initiative to the potential value of land, the the multinational company. innovate and expand the business. domestic assets that can be tapped This report highlights many are significantly larger than the Agriculture is of particular interest instances of large companies that cumulative FDI or private portfolio because 75% of the people living have targeted bottom-of-the-pyramid flows. Third, unleashing the domestic on less than $1 a day are in rural markets and developed products resources in an economy—both areas, with livelihoods dependent and processes to serve the poor financial and entrepreneurial—is on mostly subsistence production. profitably or to operate sustainably likely to create a more stable and In Africa agriculture supports in very challenging environments. sustainable pattern of growth. more than 70% of the population, Entrepreneurship by individual contributing an average of 30% Estimates of the informal assets in engineers and executives is often of GDP. Providing inputs to the developing countries range as high at the root of such moves by big agricultural sector and the value as $9.4 trillion, many multiples of corporations, which can have a major added processing and marketing cumulative portfolio flows or of positive impact on development. of agricultural goods are important FDI flows to developing countries parts of private sector development. Entrepreneurship also drives many over the past 15 years. These The critical importance of agriculture civil society organizations, and it comparisons are illustrative only, in alleviating poverty reinforces exists in government and public comparing flows and stocks of assets. the need for urgent progress on administrations. Individuals in these Converting informal assets into eliminating subsidies for producers organizations have the drive to financial resources will require a in developed markets, and on innovate and pursue opportunities broad programme of reform that trade reform. with the passion and dedication of will enable these assets to be used an entrepreneur, albeit with little In many developing countries, as collateral in the banking system. if any pecuniary reward. women constitute the majority of But keep in mind the size of these microentrepreneurs in the informal Entrepreneurship flourishes assets. Recent work in Egypt, for economy and a significant percentage perhaps most in small and medium example, concludes that the country of the formal sector. Many of them firms with significant potential to has a large and vibrant extra-legal are illiterate and live in poor rural grow and innovate. This dynamic economy that employs over 8 communities. And setting up segment is typically the hotbed of million people (about 40% of the their own enterprises—generally entrepreneurship and innovation. workforce) and has assets of almost microenterprises—is usually the It can drive economic growth, $250 billion, 30 times the market only possibility for them to be create jobs and foster competition, value of all companies registered employed and earn an income innovation and productivity. on the Cairo Stock Exchange. on their own. In Latin America This focus on the domestic and the Caribbean between 25% A FOCUS ON private sector does not diminish and 35% of formal sector micro- THE DOMESTIC the importance of FDI. Beyond the enterprises and small and medium PRIVATE SECTOR financial resources that FDI brings, enterprises are owned and operated its infusion of a corporate culture by women. In the Philippines women We focus here on the domestic can change the way business is own 44% of the microenterprises, private sector—for three main done, bring managerial know-how more than 80% in rural areas. reasons. First, domestic resources and best practices, provide access In Zimbabwe women run the are much larger than actual or to international markets, transfer majority of microenterprises and potential external resources. technology and innovation, introduce small enterprises (67%), while Domestic private investment competitive pressures in previously enterprises run by men tend to averaged 10–12% of GDP in the closed markets and be the principal provide proportionally more of 1990s, compared with 7% for driver for the growth of local business. the household income and have domestic public investment and In these situations, FDI can improve more employees. 2–5% for foreign direct investment (FDI). Second, when informal the overall investment climate. Entrepreneurship exists in large resources are examined, such as companies, where individual UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR 11 Photo: UNDP Cuba

CHAPTER 2 CONSTRAINTS ON THE PRIVATE SECTOR IN DEVELOPING COUNTRIES

eveloping countries have remarkable energy and assets, and all segments of the private sector have demonstrated the ability to respond when D empowered. But the Commission finds that three major structural challenges confront the private sector in all developing countries, to varying degrees. Microenterprises and many small and medium enterprises operate informally. Many small and medium enterprises have barriers to growth. A lack of competitive pressure shields larger firms from market forces and the need to innovate and become more productive. 12 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR

FIGURE 2.1 INFORMALITY THRIVES IN POORER COUNTRIES could otherwise be invested in making operations more productive. Estimated share of nonagricultural workforce that is informal Cruel and arbitrary informal enforcement systems limit the ability Portugal 30 of entrepreneurs to be productive as well. Local debtor prisons and Chile 38 mafia-like punishments can hurt Mexico 40 an entrepreneur’s full access to crucial human inputs. According to Thailand,Turkey, Brazil 50 Hernando de Soto, a third of debtors India, Indonesia, who obtained credit informally in Pakistan, Philippines 70 Egypt spent some time in private jails because they did not pay back Sub-Saharan Africa 80 what they owed.

Source: World Bank and International Labour Organization Entrepreneurs who operate formally are hurt by the implicit subsidies that informal enterprises receive WIDESPREAD Difficulties in getting finance also through uneven enforcement and INFORMALITY FOR trap developing country entrepreneurs by poor mechanisms for protecting MICROENTERPRISES in subscale operations. Entrepreneurs property and contracts, both of which and enterprises that operate informally distort competition. Both aspects Microentrepreneurship is a common cannot borrow at a reasonable cost create an uneven playing field and form of employment in many because they do not have legal status reduce formal entrepreneurs’ access developing countries (figure 2.1). or title to the land they occupy. to inputs and markets, discouraging Almost all microenterprises operate Frequently, the only option for entrepreneurs who operate formally outside the formal legal system, access to capital is through illegal from making investments to contributing to widespread informality. moneylenders who charge high increase productivity. Informality provides some benefits rates and who may be able to lend Informal firms can charge less in some circumstances. It can act as only small sums relative to the because they avoid paying taxes or a form of employment substitution needs of a growing enterprise. complying with other regulations. for labourers who have difficulty The access of businesses that More productive formal firms have finding jobs. For example, urban difficulty capturing market share dwellers in Thailand who lost their operate informally to the formal from informal firms because the jobs during the economic crisis of legal system and its benefits are formal firms pay taxes and other the late 1990s supported themselves limited. In general, the formal legal contributions, which increases their by turning to informal street-vending system should enforce contracts and costs significantly. More productive opportunities. In societies that limit protect property rights more fairly firms are less able to drive the less the economic role of women, home- than informal enforcement systems do. competitive informal firms out based enterprises provide women Predictable rules and dispute of business. So, poor enforcement with opportunities to earn money. resolution mechanisms are essential permits the informal firms to If the formal rules, enforcement for entrepreneurs to engage in the continue to exist, holding back the systems and cultural conditions in a long-term arrangements that enable productive firms from reaching country are so restrictive that most them to innovate, to scale up and maximum scale. Yet, given the entrepreneurs cannot use their to diffuse their knowledge and significant productivity advantage talents, the economy may benefit benefits. Side payments to officials held by formal firms, the inability if they operate informally. that increase predictability in an to compete may reflect an unwill- uncertain world reduce income that ingness to serve some parts of the market rather than the cost advantages offered by informality. CHAPTER 2: CONSTRAINTS ON THE PRIVATE SECTOR IN DEVELOPING COUNTRIES 13

Moreover, worker rights and developing countries, exposing FIGURE 2.2 SMALL AND MEDIUM protections in the informal sector formal entrepreneurs to even more ENTERPRISES BECOME MORE IMPORTANT AND INFORMALITY stand up poorly to those in the risks (due to more visibility) than LESS IMPORTANT AS COUNTRIES formal sector. And consumers— if they remained informal. BECOME WEALTHIER able to purchase only goods of Percentage of GDP inappropriate quality and safety FEW COMPETITIVE standards—do not have access to the SMALL AND MEDIUM 13 greater choice and lower prices in ENTERPRISES 31 truly competitive consumer markets. 47 Small and medium enterprises tend There are many constraints on to be engines of job creation— 51 entering the formal sector. The over- seedbeds for innovation and 39 arching issue is one of costs versus entrepreneurship. By providing 16 benefits for the individual entrepreneur new entry and competition, they who has to choose between formal can boost efficiency and growth and informal operations. and lead to economic development. 37 36 30 In most developing countries it is Indeed, recent research indicates costly to be formal. Formal players that economic growth in poor Low Middle High are often overtaxed (a vicious circle, income income income countries is accompanied by a countries countries countries since they are overtaxed because a more than proportional growth in few formal companies carry most the share of the formal small and Informal activity of the tax weight). Registering a Small and medium enterprise activity medium enterprise sector. In low Remaining activity business can be a long and expensive income countries the share of formal proposition (in Angola it takes 146 small and medium enterprises in Source: Ayyagari, Beck, and Demirguc-Kunt (2003) days and more than 8 times the per employment is about 30% and in capita income). Regulations and GDP about 17%, while in high government requirements are income countries the shares are Rules that constrain market entry and complex—and compliance costs about 60% and 50%. Indeed, richer expansion have a chilling effect on high. The opportunities for bribery countries see far less informal and small and medium enterprises at the increase with the complexity of much more small and medium expense of established larger firms. regulations, exposing smaller players enterprise activity (figure 2.2). Small and medium enterprises who lack the legal resources to often could compete effectively in defend themselves. The reality in many poor countries, niche markets, but the advantages especially in Sub-Saharan Africa, that accrue to established large Entrepreneurs also see little benefit is that the small and medium players fend off competition from in going formal. While formal enterprise sector is relatively the small and medium enterprise businesses in developed countries marginal in the domestic ecosystem. sector. Without the reasonable can raise capital by mortgaging their Why are small and medium compliance costs that exist only in a assets, this is often not possible in enterprises not able to “graduate” fairer system of competition, small many developing countries where to the ranks of larger companies? and medium enterprises cannot mortgage laws are weak and banks grow and become more productive. prove reluctant to finance small For this evolution to be possible, Ineffective or arbitrary tax laws, players. In theory, being formal it is essential that a reasonably onerous business regulations and would facilitate selling beyond level playing field and supporting other restrictions penalize them. geographic boundaries, but poor institutional structures exist local infrastructure and customs between (often larger) incumbents abuse limit the opportunities. and (often smaller) new entrants. And bankruptcy laws, which protect formal players in developed countries, are often ineffective in 14 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR

Widespread informality and the LACK OF COMPETITIVE alliance between large protected lack of skills also affect the ability PRESSURE ON LARGE incumbents and poor people, of entrepreneurs to scale up a COMPANIES who fear a loss of jobs in business. While often animated competitive markets. by innovative ideas or addressing Large companies form the hub of Corruption combined with weak untapped markets, small and networks and clusters and, by the and arbitrary legal enforcement medium enterprises suffer from virtue of their size and range of buttresses incumbent firms at lower total factor productivity, business activities, provide the spark the expense of potentially more by using older technologies or for the private sector ecosystem. competitive ones. Specifically, employing inferior workforce But in many developing countries incumbents might receive subsidies, practices. The cost of business large incumbent companies can also special licenses or other privileges services is often more than small stifle entrepreneurial energy and that preserve their position and and medium enterprises can pay, initiative. Too often, they can take dampen the incentive to innovate or is not in tune with their needs. advantage of weak institutional and reduce prices. Such firms may Lower export sales from small environments to raise anticompetitive respond to perverse incentives to and medium enterprises come barriers and protect their dominant strip assets or dole out contracts to in large part from lack of access position. While local informal uncompetitive suppliers even when to knowledge about foreign markets can often function without more efficient providers exist. The standards of quality. much regulation, more mature and complex markets need appropriate poor domestic macro environment Perhaps most important, small and regulations to function effectively. encourages wasteful rent-seeking and medium enterprises lack access to retards the growth of competitive financing and long-term capital, A dynamic financial sector, in which firms based on productivity. the base that companies are built new entrants and incumbents can These firms might also indirectly on. High risks associated with get finance under competitive terms, starve competitors from receiving small and medium enterprises, is also important for creating capital by contributing to an whether real or perceived, exist in competitive pressures in the market. environment that keeps finance the absence of financial instruments But companies with a protected underdeveloped. Large firms that manage and diversify the risk. position in these markets often thus command the lion’s share of Banks also face high costs or have strong incentives to use their resources in an underdeveloped cannot acquire information that lobbying power to slow government financial system. they can trust, even when small progress in improving the institutional and medium enterprises are credit- infrastructure for markets. worthy. These factors raise interest Such practices directly hurt poor FOUNDATIONS FOR rates and reduce lending volumes, people, through higher prices ENTREPRENEURSHIP— setting up price and quantity and lower quality products. Poor NOT YET IN PLACE barriers to small and medium people benefited from the opening Building a sound private sector enterprise growth. Small and medium of competitive markets in India in requires a strong foundation in enterprises have to resort to financing the early 1990s. Until then the the global and domestic macro from networks of family or friends, population was effectively subsidizing environments, physical and social from retained earnings, or from a large part of the private sector, infrastructure and rule of law short-term credit from other small which was selling low quality (figure 2.3). buyers or suppliers, rather than products at high prices—made from larger institutions providing possible by controls on entry by Global macro environment dedicated long-term financing domestic competitors and severe The foundations for growth in vehicles for specific purposes. quotas and high tariffs on imports. the private sector start with a well- Such anticompetitive policies are functioning global macro business often perpetuated by an unlikely environment involving a dynamic global economy that provides markets, as well as adequate trade CHAPTER 2: CONSTRAINTS ON THE PRIVATE SECTOR IN DEVELOPING COUNTRIES 15

rules that enable competitive access FIGURE 2.3 FOUNDATIONS FOR THE PRIVATE SECTOR to market opportunities. The open AND PILLARS OF ENTREPRENEURSHIP exchange of goods, capital and information—and the transfer of technology and ideas—stimulates Private sector growth private sector development. This occurs through several mechanisms: open markets, good-quality foreign investment, effective development aid Level Access to and efficient transfers of technology Pillars of Access to entrepreneurship playing financing skills and and knowledge. It requires such field knowledge reforms as dismantling the agricultural subsidies and other forms of protection that so evidently impede export-oriented private sector development in the rural Rule of law areas of developing countries. Physical and social infrastructure There is broad agreement that open Foundations for the private sector markets have supported economic Domestic macro environment growth. The advantages, while well catalogued, merit repeating. Global macro environment An open trade policy fosters productivity growth by opening the private sector to competition. human capital, the misallocation of Low quality roads can shut small Free trade helps countries allocate scarce public funds, the devastation of producers off from regional markets— their resources towards their most land, the seizure of natural resources and encumber large producers with productive areas of comparative and the elimination of market access. shortages of critical inputs. advantage. Cheaper imports raise Physical and Well-maintained infrastructure the domestic standard of living social infrastructure improves commerce by speeding and allow for the use of lower cost A country’s physical and social the transport of goods and raw inputs as the private sector produces infrastructure includes roads, power, materials, sustaining energy- for domestic or foreign customers. ports, water and telecommunications intensive production and making Such a regime provides open market as well as basic education and health. information readily accessible access through lower tariff and Building up these basic services has and communication timely. Poor nontariff barriers. a dual benefit: improving the lives physical infrastructure often Domestic macro environment of poor people directly and enabling precludes business activity. the growth of businesses. The central elements of a strong Ensuring connectivity through domestic macro environment for Technical inefficiencies in roads, telecommunications and information business include peace and political railways, power and water alone technology has become particularly stability, good governance with policy caused an estimated $55 billion a important in recent years, helping predictability, transparency and year in losses in the early 1990s— to overcome some of the barriers of accountability, and sound macro- an amount equal to 1% of the inadequate physical infrastructure. economic policies. For businesses, GDP of developing countries Efficient access to information is internal or external conflict increases or twice the annual budget for clearly a vital part of the basic infra- cost and uncertainty, deterring both financing infrastructure in the structure need of modern economies. domestic and foreign investment. developing world. These losses fall Worse, conflict forestalls private on firms large and small—and on sector development, because it often individuals, especially the poorest. leads to the tragic destruction of 16 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR

Maintaining high quality physical Improving the social infrastructure property rights circumscribe private infrastructure is largely, but not and ensuring that those surviving sector behaviour. Confusing and solely, a matter of capital investment. on the lowest incomes have access contradictory legal systems make Efficient contracting, open bidding, to affordable and high quality formal business practices difficult regulatory credibility and private health and education services is an and push businesses to become or and public managerial capability important foundation for private remain informal. Poor legislation carry weight as well. sector development. buttresses oligarchic and corrupt firms against competitive forces, Studies demonstrating the social The rule of law often at the expense of small and private returns from investments The rule of law means that and medium enterprises. Cosy in education and health spotlight government decisions are made relationships between business and their efficacy. High levels of according to a set of written laws and regulator impair the development investment in human capital, rules, to be followed by every citizen. of open, free market competition. especially in education and health, The rules are applied consistently, The poor are likely to be the first lay the groundwork for private administered by a professional victims of lawlessness. sector growth. A healthy, educated bureaucracy and adjudicated by a workforce is a productive workforce. fair and transparent judiciary that is Even though a written set of laws One need look only at countries adequately compensated. In nearly may exist, the legal system in many ravaged by poor health or disease all cases, courts provide reasons for developing countries works informally. to see the deleterious effects of their decisions based on the law, In the shift from informal to formal an underfinanced or inadequate through some form of due process. systems, many countries have old health infrastructure on previously Countries may subscribe to different and new systems coexisting, often in productive economies. Private firms legal systems arising from different conflict. The loser is often the more profit from investments in education, political and social cultures, but the formal new system, implemented in from primary to university, from fair administration and enforcement a shallow and ineffective manner. universal to targeted. Ensuring that of a just system of laws is a cardinal One estimate suggests that as many such education is appropriate for a principle. Both elements matter— as 80% of the legal issues facing the future workforce is a core task of laws and their administration. poor are addressed through customary a well-functioning education or informal systems. Laws form an intrinsic layer of infrastructure. Educating women the foundation for a robust private Corruption and confusion over the has particularly positive effects on sector. Without a transparent legal enforcement of rules are often to their future earnings—and society’s. framework and a fair judicial and blame for high compliance costs. Investments in health and education administrative system, other efforts Bureaucratic red tape, backlogs, involve both the public and private to foster private sector development arbitrary decisionmaking and other sectors, and counter to conventional cannot work as intended, and may onerous requirements and inefficient belief, many education and health even do harm. Home governments practices hamper private activity. services in developing countries are must establish the “rules of the game”, Arbitrary or corrupt enforcement delivered through private initiatives, a system that reduces transaction subvert laws intended as benevolent including cooperatives and mutual costs by making them predictable protections, including laws for worker health insurance organizations. In and enforceable. Legal and admin- safety, environmental protection some systems 70–80% of health care istrative systems influence whether and consumer safety. And corrupt expenditures are through private and how transactions take place. practices distort prices and markets, actors. Often, but not always, and hinder free and fair competition. The rule of law manifests itself in private involvement is a response the private sector with commercial to government underinvestments. The World Bank estimates that laws, customs laws and contract corruption can reduce a country’s laws, among others. Critically, growth rate by 0.5 to 1.0 percentage the assignment and protection of points a year. Transparency International’s Corruption Perception Index could, with CHAPTER 2: CONSTRAINTS ON THE PRIVATE SECTOR IN DEVELOPING COUNTRIES 17

very few exceptions, almost FIGURE 2.4 ENTERPRISES IN LOW INCOME COUNTRIES be ordered by income—poorer FACE MANY MORE BURDENS WHEN REGISTERING countries are almost universally Income Number of Duration Cost (% of rated more corrupt, though there procedures (days) GNI per capita) is plenty of recent evidence that corruption is not limited to lower Low and 11 70 115 Enterprises income categories. lower in low and middle lower middle income countries face THREE PILLARS OF the longest ENTREPRENEURSHIP— Upper 11 58 29 duration and middle the highest TOO OFTEN MISSING cost (as a percent of GNI Even with strong macroeconomic per capita). and institutional foundations, three High 8 42 17 additional factors are indispensable for entrepreneurship and the private sector to flourish in an economy: a Note: Low and lower middle-income countries had GDP per capita (purchasing power level playing field, access to finance, parity) of less than $2,976 in 2001, upper middle-income countries were between $2,976 and $9,205, and high income countries were above $9,205. and knowledge and skills. Source: World Bank (2003a) A level playing field— with fair rules, fairly enforced Perhaps most important in allowing and licensing procedures raise the need to make choices about the entrepreneurship and the private cost of entry into the formal sector products they purchase and the sector to blossom is a level playing and tilt the playing field in many capital they allocate. Labour market field for firms competing in the developing countries (figure 2.4). rules are critical to protecting domestic market. That can be For example, the World Bank’s Cost employees from exploitation. But created only by a system of rules of Doing Business survey estimates a number of developing countries and enforcement mechanisms that that starting a business requires have excessively complex labour is fair, trustworthy and effective. $5,531 in Angola (more than eight rules, more than wealthier countries. Predictable rules ensure that times the per capita income) and For laying off employees, companies entrepreneurs have open access about $28 in New Zealand (far less in middle and low income nations to markets and can do business than 1% of the per capita income). face higher barriers on average than efficiently. And basic trust in the Cumbersome entry regulations their counterparts in developed system encourages entrepreneurship are directly correlated with lower economies. The mechanisms for and attracts talent (local, foreign productivity. When countries are social dialogue to find ways of and diaspora) to embark on ranked by ease of starting a business, mitigating the effects of layoffs, entrepreneurial ventures. the top quartile of countries has and safety nets to protect the poor labour productivity of about $40 are often weak or non-existent Good rules are a critical element in per worker, almost twice that of the in most developing countries. creating a level playing field, and bottom quartile. Longer registration Moreover, rigid employment effective regulations are essential processes are directly associated regulations are associated with for the market economy. Rules, if with higher levels of corruption. higher female unemployment. excessively complex and incorrectly Note, however, that few of these Operating rules. Disclosure applied, can turn into significant rules are regularly enforced, making requirements can have a positive barriers for enterprises and hamper the case for simpler rules with business growth. This applies to rules impact at the industry and business for entry, operating, market and exit. environment by giving consumers and investors the information they Entry rules. Excessive procedural requirements for business registration 18 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR better enforcement. Complex tax Product market barriers also not have the skills and resources rules and structures also impose stifle growth. Subsidies and trade they need to enforce the laws. high costs that fall more on small barriers in the developed world They often require additional and medium enterprises than on are the biggest culprits. But many training or tools. large enterprises, which can afford developing countries also raise Access to financing tax experts. barriers to entry—say, by forbidding While foreign direct investment small companies to distribute Credit rules. Many countries lack has had an essential role in the electricity in rural areas, even rules for sharing credit information, development process, it is impossible when state monopolies do not which makes it virtually impossible for a country to progress without serve those areas. for creditors to check how indebted a domestic investment based on potential client already is. In addition, Restrictions on pricing can also domestic savings. This requires domestic financial institutions creditors have limited protection in cloud the business environment. that can efficiently manage risk the case of default, significantly For example, many governments and allocate capital to productive lessening their willingness to assume charge excessively high prices for investments. Many developing the risks associated with small and fixed-line domestic and international countries have had weak, state- medium enterprise lending. telecommunications services. The dominated financial sectors unable monopolies that operate in these Tax rules. High tax rates and to act as a catalyst for development. conditions are highly profitable as a complex tax administration is a But where genuine reform has been result, but their capital and labour significant constraint for small and implemented, the benefits have productivity are low. The high medium enterprises and can lead been quick and evident, even if prices provide few incentives for them to the informal sector if tax creating and restructuring an telecommunications players to use efficient domestic financial sector burdens become excessive. their resources more effectively. is a long task. A large informal economy can Exit rules. Inadequate bankruptcy Large companies are well served mean lower government revenues rules and protections can create by existing banking systems, and and higher taxes for firms in the additional hurdles for financing there has been good progress in formal economy, creating more enterprises. Countries with better microfinance over the last 10 years— incentives for informal operation. insolvency regulations tend to have with 41 million poor people served For example, in Brazil the informal more and cheaper lending. in more than 65 countries. But the economy grew as tax revenues progress on small and medium increased from 24% of GDP in Poor enforcement by formal enterprise financing has been slow 1991 to 29% in 1999. institutions permits enterprises at best. It is not only about money to avoid some or all of these rules, Market rules. Barriers in the land needed, though. Small and medium advantaging some of them over market are high in many nations. enterprises are risky ventures. They others. Breakdowns in formal For example, it takes about 168 require risk capital, but the sources institutions occur when officials steps, involving 53 public and private of such capital are difficult to tap. do not have the skill or will to agencies and 13–25 years to acquire So small and medium enterprises carry out their oversight functions. “informal” land and receive legal generally have to turn to classic debt Government officials may not have title to it in the Philippines. This financing. This can be difficult for the will to enforce the laws because arduous process discourages people them, because few entrepreneurs in the institutions they work for do from formally purchasing land, developing countries can leverage not provide the right incentives. making it impossible to use land assets as collateral the way they do in The institutions may not reward as collateral for getting credit, one developed countries. Why? Mainly officials for applying the law fairly because of informal property rights of the main sources of capital in and equally, and the organizations and the lack of mortgage markets. developed countries. may lack transparency and may not Collateral requirements act as a supervise officials sufficiently. In screen that selects wealthy borrowers addition, government officials may and crowds out many entrepreneurs with high growth potential. CHAPTER 2: CONSTRAINTS ON THE PRIVATE SECTOR IN DEVELOPING COUNTRIES 19

Most emerging markets finance up accustomed to full-blown risk It contributes directly to a firm’s to 90% of their investments locally, assessments working with large productivity by enabling the although for Sub-Saharan Africa clients—too costly for small adoption of innovative technologies the figure is closer to 65% and medium enterprises. and processes. A firm’s competitive (and most productive enterprises At the other end of the spectrum advantage comes from its generate revenue in local currency, microfinance institutions lend with entrepreneurial capabilities; so the reliance on local financing very limited analysis, relying mostly its management and technical is sustainable). Private credit as a on social networks for repayment. know-how, including labour- percentage of GDP rises from This does not work well for the management relations; and the 12% in low income countries larger amounts that small and skills, education and adaptability to 25% in lower middle-income medium enterprises require. of its employees. countries, 30% in upper middle- A lack of reliable credit information The level of education matters, income countries and 85% in also hampers the growth of and the skills of employees need to high income countries. small and medium enterprise be continually upgraded through lending—usually because there A web of factors is at work, more on-the-job training to increase the are no credit information agencies than just the lack of capital. firm’s productivity and its ability to and disclosure requirements are absorb new technologies. In Costa Rules and their enforcement are weak or not enforced. Rica, Mauritius and Singapore the often at the core. Most countries Investors lack exit opportunities. private sector has benefited from a have weak property rights, Capital markets are absent or virtuous cycle with formal education making the use of assets as highly illiquid in many poor reinforced by on-the-job learning collateral difficult. Even when countries, making public offerings and training. Costa Rica has the property rights are well defined, impossible. Private offerings most software exports per capita the enforcement of mortgage can work, but most markets are in Latin America, making it a contracts is often impossible, far from liquid, with very few technological hub in the region, for both political and judicial transaction opportunities. thanks to its investments in both reasons. In addition, bankruptcy Entrepreneurs often lack the skill basic education (producing one laws are typically lacking, and the will for receiving risk of the highest literacy rates) and increasing the risk to creditors capital. On skill, management technical education. and further deterring them talent is limited. On will, from investing in small and private equity investors report Many developing countries suffer medium enterprises. the reluctance of small and from low levels of human capital Poor financial institutions medium enterprises to open investment, aggravated by the are also a problem. Domestic their books to outsiders in outward migration of highly skilled financial institutions can operate environments where parallel professionals. The cumulative in oligopolistic or monopolistic accounting is widespread. “brain drain” since 1990 has been conditions, with limited share- estimated at 15% for Central Access to skills and knowledge holder pressure to enter new and America, 6% for Africa, 5% for Technological innovations and the more difficult markets, such as Asia and 3% for South America. shift towards knowledge-based lending to small and medium The International Organization economies make human capital enterprises. Added to the lack for Migration estimates that some investment a prerequisite for of incentives is the public 300,000 professionals from the sustained economic growth and borrowing that crowds out African continent live and work central to the start-up, growth private borrowing. in Europe and North America. and productivity of firms. Human Even when financial institutions capital can determine the potential have the will, they often lack for a firm’s growth and survival. the skills for small and medium enterprise lending. Banks are 20 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR

By some estimates up to a third of R&D professionals from This diagnosis of the structure the developing world reside in of the private sector and the OECD countries. constraints to its rapid growth This persistent brain drain deprives applies in differing degrees across a developing countries of the know-how wide range of developing countries. of thousands of their most talented The balance among the different people. It reduces the stock of factors varies with income, human capital at home, erodes the institutional development and domestic tax base and shrinks the the composition of the private educated middle class, a stabilizing sector. Addressing the constraints factor in most societies. to unleash the potential of the private sector will require The migration of talented risk- programmes tailored to the needs seeking entrepreneurs from the of individual countries, but the developing world seeking opportu- underlying approaches will be nities in more entrepreneurially broadly similar. We turn to minded societies spotlights the them now. obstacles to starting and scaling up businesses in their native countries. The underlying cause is a disabling social environment that limits both the number of potential entrepreneurs and the degree to which they can unfold their potential. Photo: Evan Schneider/UNDP OF THE PRIVATE SECTOR POTENTIAL UNLEASHING THE NESIGETERNUSI:MAKINGBUSINESS WORK FOR THE POOR UNLEASHING ENTREPRENEURSHIP: a comprehensive programme ofreform andchange. provide thatthiscreates for and consensusforchange can thespringboard Andthemomentum support. translateinto greater political can development sector approaches toprivate constructive results evident, ofreform are quickly andthe articulated Ifthebenefitsofreform are clearly poor inmanyways. tothe sectorisimportant thattheprivate The Commissionhasemphasized sector andtotheefficientfunctioningofamarket economy. oftheprivate thatisvitaltothedevelopment capacity govern transactions, neededto andhelpcreate theseconstraints thecapacity alleviate that can Here steps weexaminethepolicies andadministrative them. istolift “who” and are they tobelifted are theconstraints to “how” determining “what” Now from thefocusmust shift packages. country putting togetherspecific, ismovingchallenge from anunderstandingofthebroad to constraints I CHAPTER 3 elements of policies for addressing them.The big elements ofpoliciesfor addressing them.The are So thekey generally accepted. known—and on developing asustainableprivate are widely sector he Commission thattheconstraints acknowledges 21 22 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR

FIGURE 3.1 STRENGTHENING THE EFFECTIVENESS OF The main public players in this TRADITIONAL PRIVATE SECTOR DEVELOPMENT ACTIVITIES field are the World Bank Group Targeted at public Targeted at private (including the International sector players sector players Finance Corporation and the Multilateral Investment Guarantee Driven by private Setting broader standards Business linkages and Agency) and the International sector players (industry norms,sustainability, partnerships Companies corporate governance) Investment, including Monetary Fund. The regional Civil society Lobbying for policy changes foreign direct investment development banks, including the organizations Promoting participatory Mentorship for Asian Development Bank, the Foundations processes through entrepreneurs social dialogue African Development Bank, the European Bank for Reconstruction Driven by public Policy reform Public-private partnerships, and Development and the Inter- sector players Policy advice for example, for basic American Development Bank, are Local Funding and delivering service delivery governments technical assistance for Public-private also focused on helping to create Donor public sector reforms consultative bodies the enabling environment for governments Financial transfers Privatization or contracting entrepreneurial development in Development (aid, loans) Investment promotion agencies Direct business their respective regions. Important development services roles are also being played by Direct financing the Organisation for Economic Co-operation and Development in research and policy, and by the Some broad lessons of experience: of poor governance (Kenya, major UN specialized organizations Nigeria in the past few years) Successful policy reforms have such as the United Nations Industrial can often use the impetus of generally been those in which Development Organization, the change to implement reforms. concerned governments and United Nations Conference on Changes almost always policymakers have made strong Trade and Development, the include new roles for the local and voluntary commitments International Labour Organization private sector and civil society to change. and the United Nations Development organizations, including employer Reforms linked to conditionality Programme. Bilateral agencies and and worker organizations. rarely succeed when implementing institutions (such as the United Technology is the agent for much governments are not committed States Agency for International of the needed change, and new to them. Development, the U.K. Department technology enables change to be Significant changes often occur for International Development, the implemented much faster than when countries are faced with Canadian International Development might generally be expected. major economic crisis (India in Agency and the Netherlands 1991, East Asia in the late 1990s), Support to private sector Development Finance Company) and the response to these changes development—both global and are also focused on important can be rapid. Of course, it is better national—can involve economic elements of the task, including not to wait for a crisis to reform. research, macro and sector policy enhancing access to capital and Changes can also follow advice, technical assistance and supporting the development of major shifts in basic economic direct financial support to specific micro entrepreneurs and small philosophy (China, Vietnam private sector projects. Barring and medium enterprises. and Eastern Europe). the latter, the bulk of these The Commission believes that New governments that replace interventions involve governments any approach to private sector previous regimes with a history and public institutions directing development—and the policy their support to governments and and action recommendations that public institutions in developing accompany it—needs to be grounded countries (figure 3.1). in the realization that the savings, investment and innovation that CHAPTER 3: UNLEASHING THE POTENTIAL OF THE PRIVATE SECTOR 23 lead to development are undertaken enforcement is required before implementation of these policies primarily by private individuals, proceeding to full liberalization. can help private entrepreneurs enter corporations and communities. Influencing national, regional into transactions with confidence Governments should thus act and global risk perceptions that the contractual underpinnings as facilitators of private sector favourably through better of these transactions can be enforced. development and avoid actions information dissemination in In any economy, a strong that impede it. Governments and real time (rather than simply capacity to govern transactions intergovernmental agencies can through promotional marketing is needed to unleash domestic facilitate private sector development of investment opportunities) entrepreneurial energy. only by fostering properly functioning and encouraging government Strengthening the rule of law competitive markets. behaviour that excites and For private enterprises the rule of supports rather than turns off Providing conducive operating law provides the foundation for a investors, whether domestic and investment environments predictable regulatory framework or foreign. in which all private enterprise and capacity to govern transactions Targeting subsidies and tax (domestic, foreign, politically between private parties. Ensuring the incentives where clearly needed connected or otherwise) can rule of law is not only about having to address market imperfections, flourish without fear or favour. or introducing the appropriate set and moving away from broader This involves an overall social of laws—it is about ensuring that reliance on measures that may context that is politically stable laws can be enforced, fairly. and predictable, with appropriate be politically attractive in the procompetition rules and short run but are generally The overriding need is to ensure effective enforcement and sound counterproductive for sound integrity in public service, which macroeconomic fundamentals, private sector development in requires governments to: the long run. including a fiscal policy conducive Establish and use transparent, Providing or enabling the private to the development of the formal public, open, nonexclusionary provision of essential infrastructure private sector and adequate to the and objective procedures in (power, water, communications, financing of the required human public procurement contracts. transport) through public-private and physical infrastructure. Establish open, transparent, partnerships, innovative regulatory Establishing properly functioning efficient and fair employment models and other means to ensure legal and judicial systems for systems for public officials to that private enterprises are not protecting property rights ensure efficiency and good put at a competitive disadvantage. and resolving contractual service and avoid patronage, disputes—systems seen to nepotism and favouritism. operate credibly and efficiently BUILDING Provide education, training, when judged by international THE FOUNDATIONS supervision, incentive structures (not national) standards. Chapter 2 discussed the global and and codes of conduct that Facilitating the movement of domestic macro environment and breed and reward integrity private capital of all kinds, not the availability of physical and and professionalism. just foreign direct investment, social infrastructure. We focus here Establish a system to avoid through the progressive devel- on more specific actions relating to conflicts of interest and improper opment of national capital fostering the rule of law and creating influence on officials and to markets and their links to a level playing field for entrepreneurs. provide mechanisms for officials regional and global capital We also address the broad principles to report such misconduct markets. Liberalization of that need to be applied to improve without endangering their financial capital flows requires access to financing and the availability safety and professional status. great prudence, however. of skills and knowledge. Effective A sound financial system with good regulations and 24 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR

Related to ensuring integrity in public countries—the court system, property ERECTING service is ensuring accountability registries and law enforcement THE PILLARS and transparency in the actions agencies—are often the least of public officials. This requires modern and least funded of all Chapter 2 also described the three governments to: public institutions. pillars that are indispensable for entrepreneurship and the private Build a broad base of support Business property rights can often sector to flourish: a level playing by running well publicized, be protected by providing alternative field, access to finance, and participatory anticorruption channels for resolving disputes with knowledge and skills. campaigns addressing the public other businesses, customers, suppliers Creating a level playing field and private sectors. and government officials. Establish appropriate auditing Creating and defending a level Alternative dispute resolution procedures for public adminis- playing field for companies requires systems provide a substitute tration and the public sector, a system of rules and enforcement for slow and expensive formal and measures and systems to that inspires trust and reasonably courts in their ability to provide provide timely public reporting on limits the cost and burden on predictable legal protection for performance and decisionmaking. enterprises. In recent years this the contracts and property of Ensure transparent procedures area has received more attention small entrepreneurs. Argentina for public procurement, privatiza- from private and public players in piloted such a system, with tion, state projects, state licenses, development. One focus has been on 66% of 32,000 commercial cases state commissions, national improving legislation and regulation. resolved in an average of 2 months bank loans, other government In Vietnam a new enterprise law (not the typical 3–4 years). guaranteed loans, budget helped create a million new jobs. Automated assignment of cases, allocations and tax breaks. These A level playing field also requires involving random computerized procedures should promote fair strengthening the institutions that assignment of individual cases to competition and deter corrupt implement and enforce regulations. judges, increases a judiciary’s activity. They should also establish The content of the solution seems efficiency and reduces corruption. adequate simplified regulatory clear—overcoming the entrenched In a Slovakian pilot case the time environments by abolishing behaviour that led to poor regulation between the filing and the first overlapping, ambiguous or excessive in the first place. Someone benefits hearing fell from 73 days to 28, regulations that burden business. from every rule, and finding out with the number of steps in case Promote systems for access how to overcome resistance by processing reduced from 23 to 6. to information about public those who benefit is the first step Specialized debt collection expenditure. in effective reform. courts resolve claims faster Strengthen antibribery actions because those who preside over Simplifying regulations. An and promote integrity in them have more command over important element for a level playing business operations. the law and have responsibility field is simplifying regulations Enforcing property rights for the entire debt collection affecting the entry, operation and There is also evidence that system, from seizure to auctioning exit of private enterprises. The governments do too little to protect of property, if necessary. In approach to resolving these issues property rights. The best-practice Colombia a specialized debt is simple, and the experience is countries build efficient courts and collection court increased the well demonstrated—needed is the support laws and institutions that number of cases filed from will to implement change. The define the rights of citizens and 4,000 a year to 11,000 (1996– basic steps involve adopting best businesses to their property. Yet, the 2000), with 75% of cases practices for business registration, institutions that define and enforce resolved in a year and the for changes of ownership and property rights in many developing number of pending cases closures and for the governance falling by 5,000. of transactions. Illustrative action programmes include: CHAPTER 3: UNLEASHING THE POTENTIAL OF THE PRIVATE SECTOR 25

Kiosks and one-stop shops trade fairs and creating links with when social safety nets are not that simplify business and title international buyers. Affordable in place. So, opening markets to registration make registration business development services competition may best happen in more efficient, and the greater for boosting management skills, phases, with full openness occurring transparency minimizes corruption productivity and quality are a after a strong set of market institutions at all levels. In Tanzania the demonstrated way of supporting is in place. A safety net focused on Business Registration and formal small and medium enterprises. people, not firms, is needed to Licensing Agency reduced the provide socio-economic security Much of this rests on increasing time to register a business from for those left behind. awareness of the costs of informality— 90 days to about 3. In India and on shifting mindsets. Public To keep this process going electronic title registration in dialogue can be fostered through despite these tensions, the costs the state of Andhra Pradesh public awareness campaigns. And of uncompetitive markets should reduced the process from 7–15 lobbying groups that represent small be made transparent. The public days to a few hours. businesses can be strengthened. should be able to understand when Single business permits enable it benefits from rules that keep governments to consolidate Creating competitive markets. politicians and incumbents in registering businesses so that Creating a competitive market and check. A simple way to accomplish entrepreneurs need secure only reducing the influence of incumbents this might be to demonstrate quality one permit to own and operate are critical ways to level the playing and price differences between goods a business, rather than different field. Where incumbents have in protected economies and that of ones at each level of government. already taken hold, three levers goods in roughly comparable open In Kenya the single business can open markets—technological economies. Another might be to permit reduced the costs to innovation, financial development show the amounts of subsidies that small enterprises and increased and freer trade and capital flows. go to protected firms. government revenues by 30–40%. Technological change fosters Unified tax authorities are competition and relaxes the pressure Reforming taxes—simplicity, responsible for tax collection for entry restrictions. By bringing clarity, stability. Creating a positive (including customs duties) and in competitive pressure from outside, and enabling business environment inspections for all levels of technology helps erode barriers to for small and medium business government. In Zambia such entry and creates a constituency requires a tax policy that responds a system eliminated duplicate for the further freeing of market to business needs, encourages new inspections and investigations entry restrictions. A well developed businesses to start and helps existing while improving overall customer financial market promotes competition businesses to expand. Governments service and compliance. by making debt capital and equity need to develop tax policies in financing available to firms without partnership with small and medium Many of these changes could connections or access to subsidies. businesses, simplifying the rules applied greatly reduce informality in most Trade and capital flows also to these businesses, reducing the economies, particularly if accompanied reduce the ability of incumbents to burden of compliance and promoting by country efforts to fully understand influence governance by creating transparency and stability. the characteristics of informal firms. competition between domestic But informality is so pervasive that Governments also need formal and foreign firms. a special approach is needed. mechanisms for regular briefings Competition creates winners and and consultations to ensure that Finding ways to increase the benefits losers, a source of great tension small business representatives are of formalization is one such approach. between markets and democracy. kept up to date on changes in tax It can be accomplished in part by Some of those employed in codes and can give their views opening public contracts to informal inefficient firms might bear the players willing to formalize if they downside of change, particularly win the contract, and improving market access through organizing 26 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR on proposals. To help small and assistance programmes complement focus on using the existing banking medium businesses comply with rather than compete with private and financial system to direct the rules and ensure common financing that could be available resources rather than creating interpretations across the country, on commercial terms. dedicated state agencies, which tax officials need to be trained have demonstrated for too long Policymakers should concentrate on the substance of tax rules their inability to channel funds on reducing barriers to access to and procedures. themselves. A Small Business finance, recognizing that access Administration type of approach Reforming finance is generally more important than has been successful in the United and access to capital the cost of financing. They should States and may be useful as a model. Creating efficient domestic financial recognize that subsidized credit The goal is to bring about a financial markets and increasing the access programmes are unsustainable and system that can catalyze growth for of domestic businesses to credit have unnecessary and that reducing small and medium enterprises and been major goals of the multilateral transaction costs and increasing allay the nonbusiness risk that development banks and bilateral innovation and productivity among entrepreneurs can do without. development agencies. Their activities financial service providers are more are mainly geared towards fixing important. They should also reform Entrepreneurs should have the risk the business environment and financial market rules and build management tools that large private strengthening financial institutions. enforcement capabilities, introducing firms do. These tools include a range new legal structures and removing of savings and insurance products as The big issue with today’s obstructive caps and ceilings. Legal well as more sophisticated products interventions, working through conditions and well-functioning that minimize foreign exchange or many intermediaries of varying implementation systems need to be inflation risks, for example. But effectiveness, is that they are not established to address bankruptcy, networks and partnerships may always demand driven. Successful registration and collateral and the matter even more. Funds may come models have taken a multiple- regulations for leasing. Such measures from diasporas, nascent venture stakeholder approach to developing can have benefits far more important capitalists, equity funds or other types functioning markets. Consider the than targeted credit programmes. of firms or groups of individuals, IFC’s efforts to develop the leasing commonly referred as “angels” who sector across countries—a model Strengthening the range and have made progress in the system also applicable to micro-finance operational capabilities of financial and are willing to help others. and housing finance. The model institutions will better serve the Access to these funds can embed involves a coalition of market needs of smaller businesses. Subject the entrepreneur in professional players including governments and to appropriate regulation, nonbank networks that use common standards regulators, international leasing financial institutions should become for evaluating new firms. To the companies, local financial institutions more prevalent. New financial extent that access to these networks and experts in the legal, regulatory products and liquidity vehicles is formalized through institutions, and tax aspects of leasing. would allow them to better serve even entrepreneurs who are poor can small and medium enterprises with Governments should play a key receive financing and manage risk. tailored insurance, lending and role in creating and building long- savings products. The long-term goal should be to term and sustainable financial have private financial institutions institutions and infrastructure, In some cases public finance might supporting small and medium strengthening the banking bridge the gaps in financing. But enterprises—and to encourage system to make it competitive. governments must ensure that well-functioning capital markets. In the process, governments public programmes complement This will require putting into place must ensure that public financial rather than compete with private and developing credit bureaus and financing that could be available on other mechanisms to provide credit commercial terms. Efforts should references—an effective way of strengthening financial systems. CHAPTER 3: UNLEASHING THE POTENTIAL OF THE PRIVATE SECTOR 27

Developing human BOX 3.1 COSTA RICA’S PRIVATE SECTOR—UNLEASHED skills and knowledge More investment is needed in local Costa Rica has attracted some leading information technology companies. Intel’s $0.5 billion chip assembly and manufacturing plant now produces 25% of Intel’s global business-related skills, including output and 40% of Costa Rica’s exports.This has made the country one of the top 30 foreign languages, information software exporters worldwide and the highest per capita information technology technology skills and basic finance, exporter in Latin America. Between 1985 and 2002 Costa Rica's exports grew fivefold, economics and project management. from $1.1 billion to $5.1 billion. Foreign direct investment inflows grew more than tenfold, from $59 million in 1989 to $661 million in 2002. Public-private partnerships that combine more practical training on Costa Rica has a 95.5% literacy rate, and 18.5% of the active labour force has completed university, technical or parauniversity studies. Government policy has upgraded the the job with basic education could be educational system by incorporating technical education and training in electronics, the basis for viable apprenticeship informatics and engineering. Costa Rica has 85 vocational high schools (educating more models. Also effective are recent than 85,000 students a year), 4 state universities and 46 private universities, including one of Latin’s America’s best known business schools, INCAE.The government also set efforts to conduct more leadership up a National Learning Institute, which offers technical training free of charge and has training by pre-eminent educational trained more than 127,000 people. and leadership institutions for top The private sector took the lead in attracting investment and creating a pro-business decision makers from developing environment through an apolitical nonprofit organization, the Costa Rica Investment countries. Of particular importance and Development Organization (CINDE) in 1983, with funding from international donors and strong support at the highest levels from the government. In the mid-1990s CINDE is building local training capacity began to woo multinational corporations, and it played a key role in influencing Intel’s by “teaching the teachers”, the only decision to locate its first Latin American chip plant in Costa Rica, which was not origi- way to meet the large demand for nally on Intel’s short list of countries. Intel was swayed by the open, business-friendly local (and developing country to environment, with a stable political system, respect for the rule of law, low corruption and good infrastructure. developing country) training. More than 30 multinational companies have relocated to Costa Rica, employing more There are also opportunities to than 10,000 people in the electronics industry. Multinational corporations like Intel have accelerate skill-building and foster also directly contributed to the development of a skilled workforce through on-the-job training and support for formal education institutions. And Intel’s presence has increased entrepreneurship by using social ties awareness of career opportunities in engineering and other technical fields. to the developing country’s private sector. A country’s diaspora in Source: UNDP (2001) advanced economies is well suited to mentoring local entrepreneurs—or Tap the private sector’s potential characteristics and the business becoming investors or entrepreneurs. to deliver on-the-job training and environment. Expatriates in developing countries apprenticeships as a vital part of Develop government policies to may also have skills that could be human capital development. encourage skilled emigrants to tapped for coaching and motivating Build an effective national return home. local entrepreneurs. system for training and skills True involvement of relevant Additional steps for governments: development involving employer stakeholders in the process of change and worker organizations as Build entrepreneurial networks is useful only if accompanied by key stakeholders. and associations for peer-to-peer commitment from the top and Develop institutions of learning. Networks can create confirmation of the belief that management learning, including an entrepreneurial climate for change is taking place. Particularly business schools, to develop a coaching, mentoring and learning in the beginning of such a process, pool of local managerial talent. and strengthen links between early evidence of victories and real Conduct additional research on companies. Networks support change is vital to dispel the mood entrepreneurship in developing indigenous and private systems of scepticism and disbelief that countries to better understand of learning, so that entrepreneurs the interplay of entrepreneurial can be encouraged to learn from their peers. 28 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR often accompanies government to be supplemented by international announcements of change. And or developing country to developing particularly where the changes country learning. involve administrative rules, the Poor people have repeatedly authorities generally already have demonstrated the ability to use the authority to implement newer technology—so it should be a approaches and to do so rapidly. central element of any change Building explicitly on successful programme, allowing the leap- models of change in other developing frogging that is essential if progress or neighbouring countries is likely is to be rapid. And working with to be particularly useful in ensuring civil society organizations to audit support because it is more likely and monitor impact and extract to be seen as applicable to local lessons will continue the process conditions. Thus, tapping the of coalition building and lay the intellectual and implementation groundwork for future stages capacity of the domestic private of reform. sector will be particularly important where it is available, UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR 29 Photo: Somalia Green/UNDP Laurence Sonya

CHAPTER 4 ENGAGING THE PRIVATE SECTOR IN DEVELOPMENT

ost efforts to address the constraints to sustainable private sector development originate in governments and public development institutions. But the Commission believes that Mto reach the needed level of change, it is essential to go farther and think about how better to engage the private sector in addressing the development challenge. Many critical resources for private sector development are under the radar screen of development, since they are not carried out by traditional development players and do not occur under the explicit label of development (box 4.1). Private actions and public-private partnerships fall into two categories. They are commercial transactions driven by market incentives, developed as part of a corporation’s evolving business and commercial strategy, which nonetheless have strong implications for development. Or they are specifically structured as innovative efforts to apply private sector principles and approaches to developmental problems (figure 4.1). From a different perspective, these innovative private sector activities are either purely private-private interactions or they fall more obviously into the area of public-private partnerships. 30 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR

BOX 4.1 RESOURCES UNDER THE RADAR SCREEN As today’s advanced economies FOR PRIVATE SECTOR DEVELOPMENT become a shrinking part of the

Many private actors outside the traditional development community are addressing world economy, the accompanying the challenges of development: shifts in spending could provide Companies significant opportunities for global Large corporations (both multinational and local) are leading private ecosystems companies. Being invested and that develop and strengthen the capabilities of local small and medium enterprises involved in the right markets— and microenterprises. Global financial institutions and emerging local financial institutions are developing particularly the right emerging innovative approaches and technologies to improve access to credit for the poor markets—may become a much and for small and medium enterprises. more important strategic choice. Individual companies, generally multinational corporations but also some large local Indeed, many companies are already ones, are launching corporate social responsibility programmes to address specific development needs. serving the world’s poor in ways Important local companies—alone or with domestic private sector associations—are that generate strong revenues, lead broadening their strategy and reach from strictly lobbying for actions beneficial to to greater operating efficiencies and the private sector to informing and influencing the development process. uncover new sources of innovation. Associations and foundations International private sector associations, such as the Council on Sustainable Development, For these companies—and for International Chamber of Commerce, International Business Leaders Forum,World those following their lead—building Economic Forum, International Organization of Employers and others at the regional businesses aimed at the bottom of level, such as the West African Business Network and the Commonwealth Business the pyramid promises to provide Forum, are focusing on various aspects of development. National business associations, such as the Confederation of Indian Industries and the Federation of Malaysian competitive advantages as the 21st Manufacturers, have played a key role in national economic planning. century unfolds. At the same time, Private foundations are engaging in the broader development process, with a focus it provides critical links to the on accountability and results. marketplace for consumers at Academic institutions Academic institutions (including management schools)—both in countries that are the bottom of the pyramid. members of the Organisation for Economic Co-operation and Development and in some developing countries—are focusing more on private sector development and broader development issues. FORMING Leading business schools are working with African counterparts for the joint ECOSYSTEMS AND management training of local public officials and private sector leaders. BUILDING NETWORKS Networks of individuals Individuals are playing or wishing to play a bigger role in resolving global issues by One of the most compelling ways to contributing their know-how and services to various types of “developmental peace help firms succeed is by increasing corps” organizations (retired senior executives, business administration students, the power of the linkages and financial sector experts). Expatriate executives of multinational corporations are mentoring local entrepreneurs networks they are part of. Many or teaching business in schools where they are stationed. business ecosystems bypass weak Diaspora members in North America and Europe are supporting entrepreneurs in regulatory environments by creating their homelands with remittances, informal financing of small businesses, and business advice and mentorship.They are the mirror image of the brain drain discussed in private capacity for regulation and chapter 2 and represent the potential brain bank that could play a bigger role as enforcement within the network. the changes in country policies discussed in chapter 3 begin to take hold. This capacity can reduce asymmetries within networks and enhance the SERVING MARKETS income of less than $1,500— ability to enforce contracts, thus AT THE BOTTOM OF THE provides multinationals and large building trust in the system. ECONOMIC PYRAMID local companies with an attractive Networks can bring many benefits by: market for their goods and The vast emerging consumer services (box 4.2; see page 32). Enabling the transfer of skills, market at the base of the pyramid— India has 700 million people technology and quality. 4 billion people with a per capita in rural markets. China Ensuring that foreign direct has a billion. investment has positive spillover effects. Bringing companies into the formal sector. CHAPTER 4: ENGAGING THE PRIVATE SECTOR IN DEVELOPMENT 31

Creating the capacity to FIGURE 4.1 PRIVATE SECTOR CONTRIBUTIONS govern transactions through TO PRIVATE SECTOR DEVELOPMENT commercial contracts. Targeted at public Targeted at private Opening markets and the supply sector players sector players of inputs to smaller firms through networks of larger partners. Driven by private Setting broader Business linkages and sector players standards (industry partnerships Improving the ability of small Companies norms, sustainability, Investment, including and medium enterprises in such Civil society corporate governance) foreign direct investment networks to get financing on organizations Lobbying for Mentorship for Foundations policy changes entrepreneurs commercial terms. Promoting participatory Increasing the wages, employment processes through standards and productivity of social dialogue local companies. Driven by public Policy reform Public-private partnerships, Increasing the choice and sector players Policy advice for example, for basic lowering the prices for poor Local Funding and delivering service delivery consumers by bringing a greater governments technical assistance for Public-private variety of goods to market. Donor public sector reforms consultative bodies governments Financial transfers Development (aid, loans) Privatization or contracting These networks—which can agencies Investment promotion include vertical supply-chain Direct business relationships and horizontal development services Direct financing clustering—also have enormous potential. But so far their impact has been limited, concentrated in a Working with women entrepreneurs, of spreading innovation. In view few developing countries, such as Hindustan Lever is leveraging the of the limits on Korean textile Brazil, China, India and Malaysia. ecosystem to target the potential of and garment exports to the United In Sub-Saharan African countries more than 200 million consumers States, Daewoo started a joint there are few commercial transactions in rural areas. These business women venture with a local Bangladeshi between large multinationals and learn about products, prices and company to produce garments for small local companies. A study of returns and advise the customers in export and trained local employees 5 foreign and 36 local companies their villages about the products in the latest production techniques. in Kenya showed that none of the they sell. Hindustan Lever has Over time, however, as many as multinational affiliates engaged the potential to reach customers it 115 of the first 130 Korean-trained in local sourcing. could not effectively reach otherwise managers left with the knowledge through normal distribution channels. and networks they had acquired A good example of a business This market-based ecosystem is a to set up their own companies. ecosystem at work is Hindustan means of informing the poor about The industry has grown to more Lever Ltd., a major producer of the benefits of transparency in than $2 billion in annual sales and personal care and food products in transactions and the need to respect accounts for more than half the India. Its ecosystem includes 80 contracts—be they explicit or country’s exports. manufacturing facilities, 150 small implicit with the company. This Networks link entrepreneurs with and medium enterprise suppliers connection with national and potential sources of financing, employing up to 40,000 people, global business systems reduces human skills, partners, suppliers 7,250 exclusive stockists, 12,000 reliance on local moneylenders and information. Through such wholesalers and small retailers, and slumlords. 300,000 shop owners and 150,000 networks entrepreneurs share individual entrepreneurs in remote Another example is the $2 billion information and assessments of villages who sell its products, a garment export industry in number likely to grow to 1 million Bangladesh, based on the power on current expectations. 32 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR

BOX 4.2 SHOWING WHAT’S POSSIBLE AT THE BOTTOM OF THE PYRAMID

In the financial sector Patrimonio Hoy targets the low income, do-it-yourself home- ICICI Bank-India is offering innovative ways to deliver financial builder segment of the population. It is set up like a microcredit services to the poor. It has developed two models: scheme, with small lending groups, but the savings are used to purchase cement and other building materials. The direct-access–bank-led model promotes and nurtures self-help Construmex is an innovative way of tapping the diaspora groups, to create a savings pool. Once a pool reaches a certain community so that money sent home for construction can be size (few hundred U.S. dollars), ICICI will consider making loans of transferred directly to the cement company without paying $5,000 with a distribution of $250 per individual. Group pressure financial intermediaries.The service allows Mexicans living in is the best collateral, and repayment rates are 99.9%. the United States to send their money and their orders directly In the indirect channel ICICI partners with microfinance institutions to cement distributors in Mexico, who then deliver cement to drawing on the advantages of each.The microfinance institution the site of the person's future home or business. draws on its skills to contribute the social intermediation aspects, while the bank carries out the financial intermediation and CEMEX knew that a significant part of the $10 billion in remittances bears the credit risk.This can effectively leverage the risk capital to Mexico (about 10%) is used for construction of houses. that already exists with banks and can be a potential solution Patrimonio Hoy tripled the rate of cement consumed by its low to the capital constraints of microfinance institutions.This income, do-it-yourself homebuilders. Construmex has reported model reduces the cost of intermediation without affecting $2.5 million in sales since it started in July 2001, mostly from the quality of the portfolio. emigrants in Los Angeles.With its U.S. sales potential estimated The strategy has both made good business sense and had at $160 million a year, Construmex is planning to expand to significant development impact. For example, the number of other cities with large Mexican communities, including Chicago self-help groups has increased to over 10,000, allowing ICICI to and Houston. Both programmes provide the poor with more substantially increase its market share in rural areas.Villagers cost-effective opportunities to build their homes and improve have had a surge in financing opportunities. Interestingly, a study their livelihoods. conducted independently has shown a strong surge in self- confidence In the cellular network sector of members in self-help groups. GrameenPhone is the largest cellular operator in Bangladesh. Vodacom In the retail sector is a South African subsidiary of Vodafone and thelargest operator Casas Bahia, the largest retailer in Brazil, focuses almost entirely on in South Africa. Both companies work with local entrepreneurs poor consumers. It uses a carne, or passbook, system of financing who acquire cellular phones and resell phone services within their that allows poor customers to buy on credit. Casas Bahia uses a villages. GrameenPhone combines this activity with microcredit proprietary system that does credit checks and applies common- for entrepreneurs and focuses mostly on women. sense rules to determine whether to offer financing to those GrameenPhone has built the largest cellular network in the country, without credit history. with investments exceeding $300 million and a subscriber base of Casas Bahia has 4.2 billion reais in revenues, 330 stores, 10 million more than 1 million. Its rural programme is already available in customers and 20,000 employees. Some 70% of its customers have more than 35,000 villages, providing telephone access to more no formal or consistent income and are primarily maids, cooks, than 50 million people, while helping to create microentrepreneurs. independent street vendors and construction workers whose The key to the success of the village phone has been a cadre average monthly income is two times the minimum wage.The of entrepreneurs, 95% of them women, who benefit from the poor now have access to a much broader range of products and opportunity to run their own microentreprises. benefit from better credit schemes than they previously had. Vodacom provides more than 23,000 cellular lines at more than In the cement sector 4,400 locations throughout South Africa.The company has provided CEMEX, Mexico’s largest and the world’s third largest cement affordable communication services to millions of South Africans company, created two key programmes to tap the large poor and empowered thousands of previously disadvantaged individuals population of Mexico, where 60% of the people survive on less with income-generating opportunities and lasting business skills. than $5 a day. These accounts generate Vodacom’s highest revenues.

Source: Prahalad (forthcoming) markets and technology and lessons Informal entrepreneurial networks and informal contract enforcement— from their own experiences. They (often ethnic or religious in origin) facilitate cross-border trade and can also coalesce into groups to predominate in developing countries. business transactions and provide discuss issues of common interest In the absence of clear legal enforce- a source of financing. Best known and contribute more broadly to the ment of contractual obligations, is the extensive network of communities they live in. these relationship-based networks— Chinese overseas entrepreneurs relying on trust, personal guarantees with predominantly family-owned businesses, found among the 50 million-strong Chinese diaspora. CHAPTER 4: ENGAGING THE PRIVATE SECTOR IN DEVELOPMENT 33

It has played a key role in the Business associations, especially through agreements with the economic transformation of trade and industry organizations, are public sector grid. Solar power China and emerged as a business representing the common interests and small run-of-the-river hydro force in Southeast Asia. Official of their members by coordinating plants are examples. Chinese statistics reveal that overseas activities, establishing self-regulatory Public-private partnerships are also Chinese entrepreneurs account for standards, lobbying governments effective in implementing sustainable 70% of China's foreign direct and providing direct services to development objectives. Noteworthy investment—more than $50 members. Direct services include here are the United Nations’ Global billion recently. the promotion of linkages, training, Compact—a voluntary corporate information dissemination and access The Indian diaspora has been less commitment to environmental, human to markets. Business associations involved in direct investment back rights and labour standards—and the have taken the lead in improving home than in making business International Finance Corporation’s the competitiveness of their connections between overseas Equator Principles, an agreement members by: investors and the local business by leading international financial community and in facilitating Lowering the costs of information. institutions to observe global the faster development of Establishing horizontal standards in environmental and private ecosystems. coordination (quota allocation, social policies in all large projects capacity reduction) and they finance, regardless of whether With market development and the vertical coordination these are jointly financed with emergence of larger firms, informal (upstream-downstream). public institutions that observe ties based on personal ties are Setting standards and the same rigorous standards. supplanted by formal networking upgrading quality. organizations, such as chambers of Similar public-private partnerships commerce, alumni associations and in corporate governance and incubators. These formal networking FOSTERING PUBLIC- transparency are attempting to organizations have long been PRIVATE PARTNERSHIPS influence private sector behaviour. sources of mutual support in the FOR SUSTAINABLE The “Publish What You Pay” developed world and are now DEVELOPMENT campaign aims to help citizens of providing the same in the developing Important benefits can be obtained resource-rich developing countries world, playing a vital role in: by fostering more effective public- hold their governments accountable for how revenues from the oil, gas Organizing and pooling private partnerships, particularly and mining industries are managed resources to create shared in the selective provision of such and distributed. institutions and capabilities. services as energy and water. Energy Creating relationships and production and basic water supply The campaign, backed by a levels of trust that make them projects can use the most effective worldwide coalition of more than more effective. ownership structure necessary, 170 nongovernmental and civil Defining common standards. including public ownership. But society organizations, was founded Conducting or facilitating final delivery to the rural customer by Global Witness, George Soros's collective action in procurement, or to the informal sector can often Open Society Institute, CAFOD, information gathering and be managed by smaller domestic Oxfam, Save the Children U.K. and international marketing. companies. Decentralized power Transparency International U.K. Defining and communicating production, through distributed common beliefs and attitudes. energy of various kinds, can also Providing mechanisms to be contracted to the private sector develop a common economic or regional agenda. 34 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR

The coalition calls for international IMPROVING governance to protect shareholders regulation on the disclosure of CORPORATE and other constituents—and standards net taxes, fees, royalties and other GOVERNANCE of social responsibility to respond to payments made by companies to external stakeholders. Private sector developing country governments in Corporate governance is a focal task forces promoting corporate all countries where they operate. point in creating safeguards against governance and business associations corruption and mismanagement, developing codes of corporate Because individual companies limiting insider dealing and cronyism governance for its members are might be put at a disadvantage by while promoting the values of a market promising starting points. disclosing information others fail economy in a democratic society. to reveal, expecting voluntary The values include accountability, disclosure might not be a viable transparency and the rule of law— ADVANCING option. Yet all companies and the as well as fairness, responsibility RESPONSIBLE BUSINESS investment community would and ownership and protection for PRACTICES AND benefit from a level playing field minority shareholders. CORPORATE SOCIAL if regulators required disclosure. RESPONSIBILITY The importance of this approach The benefits of committing to STANDARDS is also reflected in the Extractive corporate governance mechanisms are less corruption, a healthier To some extent the mainstreaming Industries Transparency Initiative of what is now commonly referred developed by the U.K. government private sector, fairer markets and greater institutional development— to as “the triple bottom line”— and recently endorsed by the reconciling respect for the World Bank. all supporting a growing economy. Separate from corporate governance, environment, social equity and In addition to setting standards for which at its heart is the protection financial profitability—is good the private sector, a small but growing of shareholders rights, is the news for business. The triple number of companies are driving growing interest in corporate bottom line focuses corporations standards higher themselves—to be social responsibility. Companies are not just on the economic value they the pacesetters for measuring other not only pressured by government, add, but also on the environmental private companies. These newer which adopts corporate governance and social value they add—and trends provide a valuable complement regulations forcing codes of destroy. The term captures the to the traditional approach of a conduct on businesses, but also by values, issues and processes that regulated private sector and a public opinion galvanized by civil companies must address to minimize regulating government agency. society and labour organizations. any harm from their activities and Infosys in India is not only paving Self-regulating or voluntary codes to create economic, social and the way in this field but also of corporate behaviour prove that environmental value. This involves engaging directly with governments companies are willing to be good being clear about the company’s to influence the broader reform and corporate citizens. purpose and taking into consideration developmental agenda in its state of the needs of all the company’s operations and in the country. This It is important for the public and stakeholders—shareholders, kind of role for the private sector is private sectors to work together to customers, employees, business vital to the development effort. develop a set of rules binding for partners, governments, local all, establishing the ways companies communities and the public. have to govern themselves. Business associations, such as chambers of The possibilities of such an commerce and industry groups, should alignment, between social and try encouraging their members commercial interests, remain to develop standards of corporate largely untapped. The majority of companies that have taken an enlightened approach to sustainable development have been pushed and pulled in that direction: pushed by CHAPTER 4: ENGAGING THE PRIVATE SECTOR IN DEVELOPMENT 35 changing societal expectations and public, using sophisticated corporate development. Among the new stakeholder demands, and pulled social responsibility reports. standards are: AA1000 (developed towards emerging markets by by the Institute for Social and Global partnerships to define greater competition for market Ethical Accountability), ISO14001 standards in different sectors of share in the mature markets of (International Organization for industry have also facilitated private the developed world. Standardization) and Project Sigma sector leadership and corporate (a sustainability management Most of the efforts have been governance attributes that reflect standard under development by concentrated in traditional changing corporate behaviour. the British Standards Institution, philanthropic or charitable models: These include Responsible Care Forum for the Future and others). building schools and health clinics in the chemical industry, the or supporting cultural and artistic Sustainable Forest Initiative, The development and improvement organizations. Though valuable Sustainable Fisheries, and the of indicators for development by and perhaps necessary, this model Global Mining Initiative launched international development agencies, is more window-dressing than a in 1998 by nine mining companies such as the International Finance substantive or sustainable contribution from around the world. Corporation’s Sustainability Frame- to the lives of the poor. Because it work, and by corporations, such as The global mining industry sought lies outside the traditional business the Global Reporting Initiative, to redefine its role by demonstrating model, the benefits are measured in present unique opportunities to corporate commitments to stake- intangibles—such as reputation, risk track private sector contributions to holder dialogue and sustainable reduction and license to operate— sustainable development. So does development. The initiative led to rather than the bottom line. It the scoring of corporate efforts to an independent research project on represents mainly short term, pursue the Millennium Development mining, minerals and sustainable unquantifiable and unaccountable Goals, published through the development and a multistakeholder financial contributions. And World Economic Forum’s Global conference in May 2002. The commitments can come and go Governance Initiative. Such partnerships and research efforts with changes in the business quantitative tools will allow that flowed from these initiatives climate or management. corporations to move beyond continue through the International qualitative stories associated with In the last decade there has been Council on Mining and Metals, traditional philanthropy towards a growing body of evidence that the World Business Council for strategic social investments with pioneering companies that actively Sustainable Development and other short, medium and long targets. manage their impacts on sustainable industry associations and companies Being able to budget and report development have better financial that share experience in promoting on results will have the benefit performance. Companies have been local growth through sustainability of quantifying private sector pushed by advocates, labour unions, principles and standards. contributions to international the media and even shareholders The partnerships reflect the evolution poverty reduction targets while to take the positive and negative of new voluntary standards for simultaneously creating incentives impacts of their activities into far judging corporations. Some critics for more proactive approaches more consideration than they did will point to these partnerships as to sustainable development. before. They are building human corporate ways of avoiding binding Standard indicators based on rights, core labour standards and regulations. Others see them existing international frameworks sustainable development into their as direct evidence of corporate corporate commitments. They are commitment and understanding slowly learning to implement them of the importance of taking a through management systems and leadership role on sustainable broader accounting standards. And they are reporting their successes and failures along the way to the 36 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR also provide the tools for cost-benefit to make a much more serious analysis of investments and the commitment to capturing the identification of effective models. opportunities—by researching

bottom-of-the-pyramid markets, by advancing standards of sustainability The Commission sees a distinct need and public trust and by thinking for accelerating the dissemination creatively about linking with other of information on successful models, businesses locally or abroad for creating new ones or adapting mutual benefit. Governments, from existing ones to new environments, both developing and developed replicating them across geographies countries, can facilitate this, and scaling them up rapidly. and international development institutions can assist them. The private sector, particularly the management of large local and multinational companies, needs Photo: Chao Doan/UNDP RECOMMENDED ACTIONS NESIGETERNUSI:MAKINGBUSINESS WORK FOR THE POOR UNLEASHING ENTREPRENEURSHIP: individual actions identifiedhere ofthis shouldbeseenin theframework The be indirect consultation withrepresentatives sector. oftheprivate itmay reform, governments are implementingregulatory Where this issue. theprofile raising of withcivilsociety itisoften sustainable development, sectoristakingamore active stanceon the private Where institutions. ofmultilateral development andinvolvement withthedirect support often itis change, governments are implementingpolicy Where working together. moreMost oftherecommended thanoneoftheactors actions involve sector. tounleashandfostertheprivate institutional frameworks in changes aboutfurther reforms thatwouldbring andtolaunch democracy and onadvancesinmacroeconomic stability istocapitalize Their challenge environment—are determinedbytheactions ofdomesticpolicymakers. largely economic andotherbasicelements ofacountry’s thefinancialsystem finances, public macroeconomic andmicroeconomic policies, state ofgovernance, Andthoseconditions—the the neededfinancialresources forinvestment. I CHAPTER 5 creating itpossibleto theconditions secure thatmake includes responsibility with developing countries.This for achievinggrowth andequitabledevelopment lies responsibility he Commission believes thattheprimary 37 38 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR

FIGURE 5.1 ACTIONS IN THE THREE FOCUS AREAS

Targeted at public sector players Targeted at private sector players

Driven by private sector players 3. Private sphere: Mobilize capabilities and resources Companies Focus private sector capabilities to support Civil society organizations entrepreneurs and firms Build ecosystems and linkages Foundations Pursue bottom-of-pyramid business

2. Public-private sphere: Partner and innovate Develop broader financing options for entrepreneurs Driven by public Build leadership and business skills and training sector players Broker public-private partnerships for basic services Local governments 1. Public sphere: Donor Create an enabling environment governments Reform regulations and strengthen rule of law Development Formalize the economy agencies Engage private sector in the policy process broader cooperation—which is the contributions of the private commitment to sustainable private needed even more to reduce poverty. sector to development, as outlined sector development—and combine in chapter 4. that with a genuine commitment to Our interest lies in three areas: reform the regulatory environment 1. In the public sphere, promoting ACTIONS IN THE by eliminating artificial and policy- the reform of laws, regulations PUBLIC SPHERE: induced constraints to strong and other barriers to growth. CREATE AN ENABLING economic growth. Everything starts 2. In the public-private sphere, ENVIRONMENT with the tone at the top. There is facilitating cooperation and no reason, for example, for the cost partnerships between public and Creating an enabling environment of business registration in low income private players to enhance access involves steps designed to reduce countries to be many multiples that to such key factors as financing, the share of the informal sector in of similar procedures in OECD skills and basic services. an economy, through reform of the countries. We emphasize a pragmatic, 3. In the private sphere, overall enabling environment for end-user perspective that focuses encouraging the development the formal economy. These steps on actual improvements in an of business models that can be should have the effect of both entrepreneur’s dealings with public scaled up and copied and that reducing the costs as well as institutions or regulations. And as are commercially sustainable. increasing the benefits of formality. governments develop and enforce more effective formal rules and The broad range of actions in these Recommended actions by regulations, they need to understand three focus areas—necessary for developing country governments the importance of private sector a successful program of private The Commission believes that ecosystems in creating broader sector development—flow from the developing country governments participation in the economy and analytical framework for unleashing should undertake the following actions: in illustrating the value of the the capacity of domestic entrepreneurs Reform regulations and strengthen capacity to govern transactions. developed in chapters 2 and 3. the rule of law. Developing country Formalize the economy. These actions reinforce and leverage governments have to make a Developing country governments strong and unambiguous policy need to focus on creating the conditions to reduce informality CHAPTER 5: RECOMMENDED ACTIONS 39 and change the composition of the ensure that the voice of the private Redirect the operational strategies private sector ecosystem over time. sector includes small and medium of multilateral and bilateral The focus should be on measurable enterprises and microenterprises. development institutions and outcomes. Since the composition Government–private sector councils agencies. Developed countries of the private sector ecosystem in a and advisory bodies are being set up. are the primary shareholders of country is a measure of its development But the difference between notional the multilateral development banks. progress (high levels of informality collaboration and truly effective They control most of the bilateral are associated with lower incomes), cooperation can be ensured only by aid agencies and ministries active the objective should be to strive governments and their private sector in the developmental arena. In to change this composition in partners. When new arrangements encouraging sustainable private a specific and measurable way. are put in place, a few high-profile sector development, they need to Indicative targets should be set examples of successful cooperation can ensure that the collective actions to increase the shares of formal change the environment from mutual of these agencies are better enterprises and smaller enterprises distrust to strategic partnership. coordinated—to improve their in the economy, monitorable over Public-private consultative bodies, efficiency and to reduce the pressures a five to ten year horizon. where public officials and private on the administrative capacity of sector representatives share a voice developing country governments. A clear recognition of the informal are another key element. But the full They also need to focus their support sector will need to be accompanied spectrum of private sector players for private sector development in by rapid steps to analyze its local must be at the table, including developing countries by creating characteristics and put in place the informal and small entrepreneurs the conditions to reduce informality measures to improve its access to and workers’ organizations. and change the composition of the finance and to support from the private sector ecosystem. formal sector. We need to start by Recommended actions by raising awareness and disseminating developed country governments Untie aid. Developed country information about the prevalence Developed country governments governments are also the main of informality—and by diagnosing are the principal players in source of technical assistance funds the problem in a country context. creating and maintaining a used by multilateral development Remedies include reforms of positive global environment. institutions to support policy and specific government rules and institutional reform in developing Foster a conducive international their enforcement. countries. Although some flexibility macroeconomic environment and has been introduced in recent years, One area for urgent action is trade regime. The Commission the major elements of these funds improving the rules and processes believes that developed country are tied. This can create unnecessary for registering and titling land, governments have to foster a complications in how effectively critical preconditions for financial conducive international macro- funds can be deployed and can access based on these assets. Needed economic and policy environment affect the quality of the advisory here are practical, user-friendly to unleash the full potential of work that they support. Moreover, processes to obtain and enforce entrepreneurs in developing countries. the bulk of the funds are provided property rights. As with any public A robust international economy to governments rather than more reform process, consultative bodies provides markets for goods from directly to the final recipients. need to steer reform efforts in a developing country companies. Changes in the administrative rules transparent way, involving informal In addition, increasing the flow of controlling these funds would permit entrepreneurs, cooperatives and development aid and reforming the more effective use and delivery of civil society organizations. global trading system to provide fair technical assistance to stimulate economic opportunities to producers Engage the private sector in the private sector development. from developing countries are policy process. Governments need essential for promoting rapid growth to create a real partnership with in domestic private investment. representatives of the domestic private sector to implement changes and 40 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR

Recommended America has just been arranged by innovation in this area to develop actions by multilateral the Inter-American Development truly sustainable partnership models development institutions Bank in collaboration with the for developing countries. The Monterrey Consensus explicitly Institute for Leadership and Facilitate access to broader financing acknowledged the role of private Democracy of Peru. There is also options. We envision continuing business in development. It touched great scope for facilitating linkages development of domestic financial on the need for improving the among multinational corporations markets coupled with skill-building functioning and efficiency of global and small and medium enterprises, for regulators and private financial and bilateral development agencies. given the importance of private institutions. We see great promise It recognized the limited absorptive sector ecosystems and the benefits in facilitating the South-South capacity of many developing countries from private-private partnerships. transfer of expertise between financial and the stretched administrative institutions and public regulators. capability to deal with overlapping ACTIONS IN THE Broad alliances for microfinance, activities of development institu- PUBLIC-PRIVATE as part of the United Nations tions. The Consensus Document SPHERE: PARTNER International Year of Microcredit thus encourages a fair degree of AND INNOVATE 2005, and for small and medium specialization and partnership in the enterprise lending could develop development community to improve The Commission believes that all financially sustainable models. the overall impact of various forms stakeholders need to make concerted Innovative schemes are also needed of development assistance. efforts in finance, skills and public- to transform financial flows from private partnerships for the delivery the many diasporas into long-term Apply the Monterrey recommen- of basic services. In each of these productive investment in their dation of specialization and critical areas, developing country home countries. partnerships to private sector governments and private players development activities. Many need to develop viable partnership Assist skill and knowledge institutions are engaged in efforts models that leverage their respective development. Skill-building activities to support the development of strengths. Various civil society could range from programs for top financial markets, provide business organizations can add valuable skills public and private leadership to development services to small and insights to such partnerships. training microentrepreneurs to joint companies, advise on the enabling Building sustainable partnerships efforts with public authorities and environment, improve corporate requires sophisticated skills to unions to improve workforce skills. governance and enhance the focus assess competing interests and The Commission envisions larger on sustainability. While the choice negotiate pragmatic agreements. alliances with business and trade of “supplier” is important to schools, public-private collaboration Multilateral development institutions recipient countries, it is clear to in professional education and can be neutral conveners and us that these overlapping activities training, and mentoring programs moderators. To be effective inter- are counterproductive and need for entrepreneurs—all leveraging mediaries they must build the skills to be urgently addressed. peers, expatriates and those in the to create partnerships that make diaspora. We see a large opportunity Address informality in developing economic sense for private players for organizational infrastructures countries. Some pioneering work while being manageable for developing that network private resources world- is underway to map the structure of country public agencies. Different wide with aspiring entrepreneurs in the informal sector, and a global players may initiate and lead a developing countries. This includes effort to expand the coverage of partnership at different times. formal programs of multinational this work is likely to yield significant What matters most is that all parties companies to make their human benefits. A partnership to accelerate approach partnerships with realistic resources and know-how available to the pace of such work in Latin expectations of each party’s interests developing country entrepreneurs. and capabilities. The Commission sees a distinct need for further Make possible sustainable delivery of basic services, particularly energy and water. The Commission sees the CHAPTER 5: RECOMMENDED ACTIONS 41 need to develop innovative models potential to contribute to development expanding markets and new business for partnerships of governmental through its knowledge, expertise, opportunities. The interplay in service providers, multinational resources and relationships. Unleashing domestic ecosystems is likely to companies and local companies. this potential will require increasing result in parallel changes in the The sustainable delivery of basic the visibility of the broad range of economic behaviour of all those along services depends on effective private contributions (illustrated the chain, from informal operators partnerships and other forms of in chapter 4) that remain disparate through small and medium enterprises public-private cooperation, which and unnoted—and establishing and their financiers. This is important has proven to be difficult. Still to be an infrastructure to channel these in empowering the poor. There developed are the sophisticated skills contributions effectively. This could could also be great value in creating to implement lasting partnerships, be accomplished through a new private a scorecard for multinationals and where all players’ incentives are well focal point organization that would other large firms to measure their balanced and proper governance is in match private know-how, services success in creating profitable markets place. We see a clear need to create and resources with the needs for for poor consumers. additional capacity to help overcome such services in developing countries, Set standards. The private sector market dysfunctions and information primarily by the private sector but needs to make a genuine commitment asymmetries, provide hands-on also by governmental agencies. to sustainable development—with a operational support, fill knowledge Develop linkages with sharp focus on corporate governance gaps and act as neutral intermediary multinational and large domestic and transparency. We have highlighted between competing interests. Effective companies to nurture smaller successful companies that have brokering can make more transactions companies. Linkages between shifted the development debate feasible because it can overcome different types of firms in developing within their economies and created the barriers that would otherwise countries provide an effective channel a political consensus that eases the impede action. We plan to follow for local companies to gain access way for governments to facilitate the up with public and private entities to markets, financing, skills and expansion and growth of a vibrant in this area to see how existing know-how. There is an urgent need private sector. Such a shift will occur institutional capacity can be for multinational corporations to when pioneering managements supplemented—and how poor integrate better with local small realize the value of leading from the people can be empowered to build and medium enterprises and to front, being responsive to social businesses directly. strengthen links with the domestic development needs and setting ecosystem, such as those between new standards that demonstrate the ACTIONS IN THE microenterprise distributors and value of sustainability. Many large PRIVATE SPHERE: large domestic companies. Many companies in developing countries MOBILIZE CAPABILITIES parties need to work together for today are also multinational in the AND RESOURCES this to happen, and the range of sense that their business operations The Commission believes that the activities to make the links durable are no longer limited to their private sector, particularly large includes information, know-how country of origin. Still, they do play local companies and multinational and hands-on support. a different role within their home economies—and are seen differently corporations, should contribute to Pursue business opportunities in from multinationals in the traditional accelerated economic development bottom-of-the-pyramid markets. sense of the term. Where such and to poverty alleviation. Recognizing the needs of bottom- high-profile local companies exist, Recommended actions of-the-pyramid markets and creating they too will need to understand by the private sector innovative solutions to meet these the broader framework of their The required actions for the private needs are vital actions required from operations and work actively to sector are as laid out in chapter 4: the private sector, both domestic create the new consensus that we and international. Efforts should be Channel private initiative into driven mainly by the incentives of development efforts. We believe that the private sector has tremendous 42 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR propose. Many of the sustainability on a commercial and sustainable As the main actors begin to work initiatives discussed in this report basis. Civil society organizations are together towards common goals, a tend to involve large multinationals. closest to the bottom of the pyramid. significant change will be required But similar initiatives or offshoots They also are often proxies for in the structure of economic and of global initiatives involving the experimenting with new technologies political interactions in many local private sector could be very for solving problems. And they, too, developing countries. Today’s effective in redefining the roles will need to measure their success fractured and confrontational of different stakeholders in the in facilitating innovative private- relationships will need to be development process. private partnerships to address gradually replaced by collaborative economic and social policy objectives. partnerships in which each player’s Recommended actions actions are influenced and modified by civil society and by larger challenges and by the labour organizations LOOKING FORWARD capabilities of others. The Commission believes that civil Recognizing the size and complexity society and labour organizations of the challenge, the Commission To catalyze this process, the have to continue as critical observers concludes that it is necessary to Commission is assembling a first of the development agenda—and channel private capabilities and set of actionable initiatives to as facilitators and supporters of resources into unleashing the private facilitate transformations in individual innovative approaches for meeting sector in developing countries. countries and to provide the tools for the Millennium Development We believe that the energies and governments and the private sector Goals and improving the quality opportunities remain untapped to supplement available resources of life for poor people. Civil society because the needs in developing and begin rapidly implementing a organizations have a major part in countries have not been appropri- programme of change. These first a robust global alliance that builds ately matched with resources and actions are intended to stimulate a on the strengths of each key player interests around the globe. Our collaborative response from potential to meet the Goals. proposed programme of action is partners who read this report. Our message to all of you is: join us. Increase accountability in the thus designed to catalyze the strong system. This is a core part of the private response that is the main In the coming months we will be work of civil society organizations, objective of our work. launching initiatives and consulting as is their leadership in pushing To promote progress, the Commission with the readers of this report to forward the concept of sustainable recommends that the United Nations draw them into the undertaking. development. This work should sponsor the tracking of private We invite the broad range of be strengthened. sector development. An annual stakeholders identified in this report to heed our call and to work Develop new partnerships and progress report would maintain the rapidly to convert initial ideas to relationships to achieve common prominence of the Commission’s specific business plans that can be objectives. Numerous civil society overall recommendations and ensure launched within the coming six organizations are also acting in the commitment to addressing the months. Only if we can generate direct partnership with the private many issues identified here. The an urgent sense of following up sector to combine the management report would offer an opportunity to on our initial work can we hope to skills and financial capacity of celebrate progress and expose obstacles unleash the trapped entrepreneurial private companies with their own to private sector development. It energy of the poor as a force for know-how and contacts in bottom- would be prepared with the support private sector growth. of-the-pyramid markets. This can of a number of Commission members facilitate the kind of private sector– and development institutions. civil society organization collaboration that builds microcredit programmes UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR 43 Photo: Morshed Munni/UNDP Bangladesh Munira

BIBLIOGRAPHIC NOTE

s indicated in the Bibliography that follows and in the detailed references cited below, this report draws on a wide range of documents A and on numerous outside sources. Many people contributed a tremendous amount of time and energy to informing the Commission of their experiences and views, and they are identified in the Acknowledgements. Institutional resources from the World Bank Group, including the International Finance Corporation and the Multilateral Investment Guarantee Agency, were an important source of information, as detailed in the chapter references below. The Bank’s Doing Business in 2004: Understanding Regulation deserves special mention as the basis for a substantial amount of the analysis and conclusions in Chapters 2 and 3. The recommendations in chapter 3 are a synthesis of suggested policy interventions from a variety of sources and, in particular, also benefit from the private sector development work of the Organisation for Economic Co-operation and Development. 44 UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR

The Secretariat of the Commission ADDITIONAL also benefited from extensive REFERENCES discussions and interviews with Michael Barth, Richard Frank and Chapter 1 draws on Bouton and Percy Mistry, and their influence Sumlinski 2000; De Soto 2000; is felt throughout this document. IFAD 2002; IFC 2000; McKinsey Similarly, K.V. Kamath, Lalita and Co. 2003; Pfeffermann 2000; Gupte and Madhav Kalyan from Prahalad, forthcoming; Prahalad ICICI Bank and Nandan Nilekani and Hammond 2002; World and Sanjay Purohit from Infosys Bank 2002b, 2002c, 2003d; provided broad insights into the UNDP 2003b. management approaches of leading Chapter 2 draws on Ananth corporations in developing countries. and Soju 2003; Ayyagari, Beck, Their perspectives have particular Demirgüç-Kun 2003; Carrington relevance for the developmental and Detragiache 1998; Cervantes issues we address. and Guellec 2002; De Soto 2000; IFC 1997; McKinsey and Co. 2003; Transparency International 2003; World Bank 2003a. Chapter 3 draws on De Soto 2000; IFC 1996; McKinsey and Co. 2003; OECD 1993; OECD and UNIDO 1999; Rajan and Zingales 2003; World Bank 2003a. Chapter 4 draws on IFC 2002a; Porter 2003; Prahalad and Hammond 2002; Prahalad, forthcoming; Saper and Saravanamutto 2003; UNCTAD 2001, 2002; Wignaraja and Ikiara 1999. UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR 45 Photo: Phillip Archer/UNDP

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