Expanding Enterprise, Lifting the Poor the Private Sector in the Fight Against Global Poverty

Expanding Enterprise, Lifting the Poor The Private Sector in the Fight against Global Poverty

Brookings Blum Roundtable August 2005

AUTHORS Lael Brainard and Vinca LaFleur

CO CHAIRS Richard C. Blum and Strobe Talbott The Global Economy and Development Center at the Brookings Institution seeks to advance research, dialogue, and innovative solutions to address the challenges of global poverty and the forces of globalization. Its goal is to take the policy debate in new directions by providing thought leadership on the road out of poverty, the drivers shaping the global economy, and the rise of new economic powers. Recognizing that the forces of globalization range across disciplinary boundaries, the Global Economy and Development Center draws on the creative thinking of scholars from the fields of economics, development, and political science, building on Brookings’ worldwide reputation for high quality, independent policy research. The Aspen Institute seeks to foster enlightened leadership, the appreciation of timeless ideas and values, and open-minded dialogue on contemporary issues. Through seminars, policy programs, conferences, and leadership development initiatives, the Institute and its international partners seek to promote the pursuit of common ground and deeper understanding in a non- partisan and non-ideological setting. Realizing Rights: The Ethical Globalization Initiative (EGI) is a new project led by former President of Ireland and United Nations High Commissioner for Human Rights Mary Robinson. EGI brings key stakeholders together in new alliances to integrate concepts of human rights, gender sensitivity, and enhanced accountability into efforts to address global challenges and governance shortcomings.

Global Economy & Development At The Brookings Institution

2 (from left to right) Strobe Talbott (President, The Brookings Institution), Smita Singh (Special Advisor for Global Affairs, The William and Flora Hewlett Foundation), Lael Brainard (Vice President and Director of the Global Economy and Development Center, The Brookings Institution), and Mary Robinson (Executive Director, Realizing Rights: The Ethical Globalization Initiative)

Foreword

FROM AUGUST 3 TO 6, 2005, FIFTY PREEMINENT INTERNATIONAL LEADERS from the public, private, and nonprofit sectors came together at the Aspen Institute for a roundtable, “The Private Sector in the Fight against Global Poverty.” The roundtable was hosted by Richard C. Blum of Blum Capital Partners and Strobe Talbott and Lael Brainard of the Brookings Institution, with the active support of honorary cochairs Walter Isaacson of the Aspen Institute and Mary Robinson of Realizing Rights: The Ethical Globalization Initiative. By highlighting the power of the market to help achieve social and economic progress in the world’s poorest nations, the roundtable’s organizers hoped to galvanize the private, public, and nonprofit sectors to move beyond argument and analysis to action. Put simply, as Brookings president Strobe Talbott explained, the roundtable’s work was “brainstorming with a purpose.” With experts hailing from around the world and representing diverse sectors and approaches, the dialogue was as multilayered as the challenge of poverty itself. Rather than summarize the conference proceedings, this essay weaves together the thoughtful observations, fresh insights, and innovative ideas that characterized the discussion. A companion volume, Transforming the Development Landscape: The Role of the Private Sector, contains papers by conference participants, providing in-depth analysis of each conference topic.

Acknowledgments The roundtable was made possible by a generous grant from Richard C. Blum, chairman of Blum Capital Partners, with additional support from the William and Flora Hewlett Foundation and the Ewing Marion Kauffman Foundation. The meeting’s success was greatly due to superb research and planning support from Raji Jagadeesan, Zoë Konovalov, Emily McWithey, Nicholas Warren, and Molly Langer.

1 Turning the Tide The Private Sector’s Role in Development: We Cannot Afford to Wait

A TRIO OF KEY INTERNATIONAL The media also trained its powerful spot- meetings marked 2005 as a pivotal year for light on the world’s poorest people—from the global antipoverty movement: the Time magazine selecting Bono and Melinda Gleneagles Group of Eight (G-8) Summit in and Bill Gates as its Persons of the Year to July, where British prime minister Tony Blair MTV broadcasting The Diary of Angelina pledged to put Africa’s challenges front and Jolie and Dr. Jeffrey Sachs in Africa. And a center; the United Nations General string of natural disasters—the South Asian Assembly’s review of the Millennium tsunami, the Niger drought, Hurricane Development Goals in September; and the Katrina, and the earthquake in Pakistan and World Trade Organization’s Ministerial Kashmir—reminded the world’s people of meeting in December, where the fate of the their common humanity and galvanized an Doha Development Agenda hung in the bal- outpouring of assistance. ance. Each meeting offered opportunities to This heightened public awareness of global help turn the tide on global poverty. poverty—and renewed spirit of generosity— At the same time, civil society groups were are welcome advances in the work of devel- mobilizing worldwide to prod political lead- opment. So far, however, the public agenda ers toward action. From the ONE Campaign has focused primarily on boosting official in the United States to the United Kingdom’s assistance and canceling official debt. Even “Make Poverty History” movement, broad- though the past two decades have witnessed based coalitions were pressuring national an enormous shift in resources away from the governments for vastly increased aid, fair public sector to private hands, and private trade, and debt cancellation. flows to developing countries are now more Meanwhile, prominent public figures than twice the level of public flows, scant added celebrity appeal to the cause. The rock attention has been directed at the most group U2’s front man Bono’s tireless work dynamic engine of growth and poverty allevi- against poverty earned him a Nobel Peace ation: the private sector. Indeed, the private Prize nomination; Bob Geldof staged six sector merits only two very narrow mentions “Live 8” rock-stravaganzas in advance of the in the Millennium Development Goals. G-8 summit; in Trafalgar Square, Nelson Yet private enterprise belongs at the very Mandela urged young people to wear a white center of the development enterprise. By armband to demonstrate their commitment generating jobs, serving the underserved, to combating poverty; and Bill Clinton host- promoting innovation, and spurring produced the high-profile Clinton Global Initiative tivity, indigenous private sector development in New York, which focused in large part on can raise living standards and promote the escape from poverty. opportunity. The most dramatic example is

3 China, where surging growth has raised hospitals, or championing improved market 400 million people from poverty in the past access for developing country exports, a two decades. multinational firm can bring unique Moreover, rich and poor consumers alike resources, leverage, and experience to the benefit from the lower prices and greater development table. choices that competition brings. Private firms Moreover, the private sector can bring to are also the main source of tax revenues for the fight against global poverty the same spirit social services like health care and education. of leadership, innovation, and initiative—and And given the right circumstances, the entre- the same skills in scaling size up, driving costs preneurial spirit can be sparked within any down, and reaching out to new clients—that society—bringing a spirit of internal empow- are required for success in the global market- erment. No wonder, then, that leaders of place. And in contrast to the slow and uncer- poor nations have placed private sector devel- tain pace of the public sector in making opment high on their own priority list—as budget appropriations or adopting reforms, shown, for instance, by the homegrown New the private sector has the power to take Partnership for African Development. meaningful steps against poverty right away. But just as an indigenous private sector can For the world’s neediest people, such a be a powerful force for change, so too does commitment by the private sector cannot the global private sector have a positive role come soon enough. Children are starving to play in development. As the Harvard in an age of abundance, ailing in an era of University scholar Jane Nelson notes, busi- medical miracles, and perishing in extreme ness leaders can make a difference through poverty at a rate of 1,200 each hour. The “the implementation of responsible business ways and means exist to save these children, practices and standards, in areas such as if the world can find the will. In the words of ethics, the environment, labor, and human Richard C. Blum, the chairman of Blum rights,… [by] harnessing the core competen- Capital Partners, “Some people say you can’t cies, resources, and problem-solving skills of afford to invest in poor countries until gover- private enterprise to create new social and nance is right and corruption has been market value; and… [by] working in partner- reduced. I say that we can’t afford to wait.” ship with others to help establish the appropriate enabling environment or conditions for good governance and private sector development.”1 Whether by paying premium prices for coffee produced with sustainable practices, donating resources to build schools and

4 5 Bringing Prosperity

6 Empowering Business to Do Business in the Developing World

THE DYNAMIC GROWTH OF THE nized big business as the enemy and private sector in poor countries is indispen- corporations caricatured activists as tree- sable if the international community is to hugging idealists. After all, private enterprise meet its pledge in the Millennium is the greatest source of self-employment Development Goals to halve extreme pover- and jobs—the two factors poor people them- ty by 2015. As UN secretary general Kofi selves rank highest as means to improve Annan has said, “We cannot reach these their own lives.2 Together, business and civil goals without the support of the private sec- society are devising creative alliances to tor. Most of all, we cannot reach them with- advance shared development goals in out a strong private sector in the developing areas such as microfinance and resource countries themselves, to create jobs and transparency. bring prosperity.” Yet despite a growing recognition of the Indeed, because top-down approaches to importance of entrepreneurship in defeating development have failed to produce consis- poverty and spurring growth, private enter- tent results, appreciation for the role of pri- prise still is not thriving uniformly across the vate enterprise in generating durable growth developing world. Why does it flourish in is increasing. International agencies like the some societies while suffocating in others? United Nations Development Program are What can be done to unleash entrepreneur- assigning a higher priority to the issue; the ship’s contribution to development? program’s influential Commission on the Among the many avenues to explore are Private Sector and Development produced a three fundamental questions: How can the report titled “Unleashing Entrepreneurship,” climate be improved for private enterprise in which the G-8 leaders endorsed at their 2004 developing countries? Do certain sizes or summit. Meanwhile, the World Bank is types of enterprises contribute more power- strengthening its traditional commitment to fully than others to productivity growth, private sector development; its World innovation, and employment? And how can Development Report 2005 drew on surveys of more private capital investment be channeled nearly 30,000 firms in fifty-three developing to poor countries? countries to explain and measure the forces shaping their investment climates. Improving the Climate for At the same time, civil society groups are Private Enterprise showing a greater interest in working with In the words of Warrick Smith of the World private partners on poverty reduction, and Bank Group’s Vice Presidency for Private vice versa. Gone are the days when non- Sector Development, “Firms and entrepreneurs governmental organizations (NGOs) demo- invest and make productivity improvements

7 not out of any sense of philanthropy but to increase the likelihood of new investment by make profits. Their decisions are thus influ- over 30 percent.”4 Where the rule of law is enced by the expected risks and rewards asso- weak, transactions must rely on personal rela- ciated with alternative courses of action. tionships, which greatly undermines the effi- Those risks and rewards are in turn shaped ciency of financial intermediation and by the investment climate—but what shapes reduces productive investment. the investment climate?” 3 Regulations facilitating firm entry and Some of the factors shaping the climate exit—along with relatively open trade poli- for private enterprise are difficult to change. cies—can contribute to a greater degree of A geographically remote or rugged country competition, lower prices, and more con- will inherently face transportation challenges, sumer choices. World Bank research shows just as a small or sparsely populated country that the number of days required to open a will have a limited market size. Social atti- business tends to be significantly higher in tudes toward risk and failure can constitute low-income countries; it ranges from 2 in serious barriers to entrepreneurial growth; in Australia to 203 in Haiti. In an unprecedent- some countries, creativity and innovation are ed move, the U.S. Millennium Challenge not adequately rewarded or valued. Cultural Corporation has adopted this competitive- barriers and norms may disproportionately ness indicator as a criterion for eligibility. But impede certain groups such as women other procedures can exact a huge toll on the and minorities. private sector in poor countries as well; for But research shows that government example, enforcing a simple contract takes policies and behaviors have a critical role 1,459 days in Guatemala, according to the to play. If governments can put the right World Bank, as compared with only 48 in market-friendly framework in place, the the Netherlands. “We need to remember that the private private sector’s ability to spark growth and Of course, while identifying key drivers sector is a lot of individual people; every alleviate poverty can be markedly improved. and constraints to private investment is SME is built from one entrepreneur.” Several policy and regulatory levers can relatively straightforward, actually making Jo’ Schwenke prove especially significant: ensuring effective lasting policy reforms is not. For one thing, Managing Director, Business Partners financial intermediation; assigning property those who benefit from the status quo may Limited rights—including those of poor people, as have significant political clout to resist Hernando de Soto has persuasively argued; change, and incentives may not be sufficient enforcing contracts; and fostering predictable or appropriately aligned to achieve results. policies and a sound macroeconomic envi- In addition, conditions for private enterprise ronment. In fact, World Bank research shows may vary not only among countries but that “improving policy certainty alone could within them, as different sectors or different

8 classes of enterprise face different hurdles. of the Tanzanian entrepreneur Ali Mufuruki, And complex unknowns surround the “The biggest problem in Africa today is not sequencing of reform efforts and the interac- poverty caused by historical conditions but by tion of different policy and regulatory people themselves. We have good examples changes. Setting priorities is difficult when of countries built and wrecked again by their so much is crying out to be done. own people. People need to take responsibility Although the necessary political will must to make their governments deliver.” come from within developing countries And of course, private enterprise depends themselves, the international community does as well on important enabling factors, rang- have some useful points of leverage—such ing from a skilled workforce and adequate as supporting the development of pro-reform infrastructure to contact with potential cus- political forces, small business associations, tomers, connections to suppliers, access to and influential diaspora communities, all of know-how and technology, and, crucially, which can create demand-side pressure for access to capital—a problem that is especially otherwise unpopular reforms. And trade acute with regard to seed funding for early- agreements can help developing country stage enterprises and risk capital for expansion. governments lock in a reform agenda, rein- Liberating entrepreneurship in developing forcing investor confidence that reforms countries is not as simple as “If we build a will be sustained. business-friendly policy environment, they Similarly, though legitimate debates persist will come.” Instead, it involves meeting the over how to prioritize reforms, the challenges manifold challenges sketched in this report, of sequencing should not become a smoke which in turn requires commitment and cre- screen for complacency. Creating a good ativity from a range of stakeholders. It also climate for private enterprise is a long-term requires a clear understanding of ultimate process. The full set of necessary reforms goals and objectives; there may be a trade-off cannot and need not be attained simultane- between those measures that will help the ously. What counts is sustained progress. very poorest citizens of a country and those A corollary is that adopting appropriate that will spark the long-term growth of its laws and policies is necessary—but will not whole economy. be enough on its own. Often, deeper chal- But most immediately, unleashing entre- lenges inhibit private sector growth—such preneurship requires the courage to act— as a lack of policy credibility and poor public recognizing that while a vigorous private trust. Corruption is a particularly corrosive sector is not enough by itself to end poverty, force that undermines vibrant private sectors poverty will never be eradicated as long as and helps to perpetuate poverty. In the words the private sector is stifled.

9 and multinationals can link local markets to Does Size Matter? broader, global opportunities. (For more Even with growing agreement that vibrant details on these four enterprise classes, see private enterprise is essential for vibrant the box on the facing page.) economies, the question remains: Should Regardless of whether looking at different particular sizes and classes of enterprises be sizes of firms constitutes a useful framework targeted? If the development goals are job for thinking about growth and development, creation, poverty reduction, and productivity size definitely matters when it comes to growth, are equally important roles played evaluating enterprise needs and constraints. by a seamstress making clothes on a sewing Financial constraints remain paramount in machine financed through a microcredit loan, many poor countries, hitting microenterprises a farmer with fifty employees expanding his and SMEs particularly hard. business to reach both local and export More than two decades of experience have markets, and hundreds of workers at an yielded a number of successful models for automobile plant churning out components overcoming the acute constraints that for foreign cars? microenterprises initially face. Today, NGOs Rigorous empirical research provides little such as ACCION, FINCA, Unitas, and the support for the notion that business size Grameen Bank operate effective microlend- matters for advancing economic growth; ing programs on a large scale with the sup- instead, the academic literature finds that an port of private philanthropy, official donors, enabling environment is critical for healthy and multinational businesses. From enterprises of all sizes.5 But many practitioners Bangladesh to Zambia, their work has nonetheless see important differences in the demonstrated that poor people are bank- importance of enterprises of various sizes in able—indeed, poor clients, especially women, reducing poverty and promoting innovation have repayment rates that exceed the formal and employment. Broadly speaking, practi- financial sector in many industrial coun- tioners divide enterprises into four classes: tries—and that microfinance institutions can microenterprises, small- and medium-size be profitable and self-sustaining. enterprises (SMEs), large-scale national Such efforts have provided a much-needed enterprises, and huge multinational firms. impetus for the development of financial Microenterprise, while probably not an intermediaries and other complementary engine for overall growth, is invaluable for institutions in support of the microfinance improving the lives of the poorest members sector. One of the goals for 2005, the of society. SMEs can provide bottom-up International Year of Microcredit, was growth and innovation, while large nationals to encourage innovation and strategic

10 Microenterprises Small- and Medium-Size Enterprises Microenterprises are on the front lines of poverty alleviation. SMEs (defined here as enterprises with between ten and 100 Supported by microfinance loans ranging from as little as fifty to as employees) offer a promising channel for employment, investment, much as ten thousand dollars, millions of enterprising poor people innovation, and growth. In the United States, for example, small worldwide are launching and expanding small restaurants, crafts businesses provide roughly three out of four of the net new jobs shops, market stands and more—and empowering themselves to added to the economy.7 Within SMEs, some enterprises’ size and move from struggling for survival to saving for the future. According scope may be inherently limited, such as those engaged in the pro- to the Consultative Group to Assist the Poor (CGAP), microfinance vision of local services (for example, a local construction business). institutions served more than 80 million clients in 2003. And micro- But a potentially critical group pursues opportunities for high finance’s impact on development extends beyond the immediate yielding investment and innovation that could have a clear multiplier wage earner, especially when the loan recipient is a woman; effect on employment, productivity, and growth (for example, a cell indeed, studies show women are most likely to invest in better phone provider). nutrition, education, and health care for their families. Large Enterprises and Multinationals While microenterprises are individually unlikely to become globally Large national enterprises and multinationals are critical contribu- competitive, they are an important means for those at the bottom to tors to capital investment, productivity, and growth. The UN esti- climb the rungs of the economic ladder. Success stories abound, mates there are more than 60,000 multinational corporations in the like that of FINCA client Luz Diamantina Càceres and her husband, world, with hundreds of thousands more foreign affiliates, suppliers, whose shoe business grew from a two-person operation that made and distributors. Because of their extensive linkages to international six dozen pairs of shoes per week to one that employs ten full-time trade and capital markets, large firms may offer higher quality jobs, workers and whose output has grown tenfold—thanks to five better pay, and more stability than SMEs, as well as be able to sup- 6 cycles of microfinance loans totaling $1650. Thus, while microen- ply foreign markets directly, import technology, and undertake terprise may not be the best engine for innovation or capital invest- research and development that lead to innovation and productivity ment, it is a vital tool for self-employment and lifting the lives and improvements. They are also critical conduits linking SMEs and prospects of the poor. microentrepreneurs to broader market opportunities.

11 “So far the biggest challenge to bringing microfinance to scale is not credit risk but high operating costs. The two types of people who meet most frequently with their bankers are the world’s rich- est—whose bankers don’t leave them alone—and the world’s poorest—think of Maria in Latin America meeting her investor every month under the tree to talk about her goats.”

Robert Annibale Global Director of Microfinance, Citigroup partnerships to expand the reach of microfi- or angel investors, as well as strategic over- nance to the hundreds of millions of poor sight and management know-how. This sort people with no bank resources at the bottom of financing and support remains virtually of the economic pyramid. One such partner- nonexistent in most poor countries in part ship has been developed between Hewlett- because of investor concerns about exit risks. Packard and seven leading microfinance As a result, developing country entrepre- institutions, which have worked together to neurs must often struggle to build a business develop a remote transaction system that based entirely on their scant personal assets. effectively turns a microfinance loan officer Or they may be forced to borrow capital into a human automated teller machine— and then must pay to service their loan, wip- thereby reducing cost barriers to microfinance ing out any opportunity to invest, take risks, in far-flung rural areas. In some cases, and grow. As the financial practitioners microfinance intermediaries are being Alan Patricof of Apax Partners and Julie transformed from nonprofits to commercial Sunderland have observed, if iconic American enterprises, although the high transaction firms like Apple Computer, Microsoft, and costs associated with direct contact with FedEx had been obliged to finance their early clients suggest a continuing role for philan- growth with “the short-term, collateralized, thropy and public support. high-interest loans currently available in With scalable models for microfinance developing countries, they would not even increasingly well established, attention is have gotten off the ground.”8 shifting to the SME sector, where enterprise Promising initiatives are beginning to needs are more complex and there are fewer emerge. Organizations such as Technoserve successful models. Although SMEs have cor- in Africa and Latin America, Business respondingly higher needs for capital than Partners Limited in South Africa, ShoreBank microfinance, the problem is not so much the in the United States, and Enablis in South amount as the type of capital needed. Africa are pioneering programs to address The class of SMEs with the greatest critical SME needs for financing together potential for high-yielding investment and with marketing and management advisory innovation is too small and unproven to services, while the Self-Employed Women’s depend on commercial loans or internal cash Association in India has launched a Global flow, and simultaneously too large and risky Trading Network to help microentrepreneurs to rely on modest short-term microcredit and SMEs seize global market opportunities. loans. In sophisticated markets like the Nourishing this dynamic class of businesses United States, a promising business could can have a self-reinforcing effect because attract patient risk capital from venture funds successful entrepreneurs serve as employers,

12 Crime 2% Skills 2% Electricity 2% Finance 4% Policy Uncertainty Corruption 28% 10%

Regulation 10%

Microeconomic Tax Instability 19% 23%

Major Risk Concerns of Firms in Developing Countries Source: World Bank Enterprise Survey Database 2005.

13 “People go to an official finance institution for investment guarantees, and they’re two years older by the time they’re done. The difficulty of the process is a disincen- tive to potential investors. Official finance institutions need to develop easy to understand programs and guidelines. They have to move from the tailor-made to the ready-made business.”

Richard Blum Chairman, Blum Capital Partners

trainers, and role models for others. Yet getting private investors to bet on poor Clearly, there is no single path to private country markets is a difficult proposition, sector development, and targeting support largely because of perceptions of unacceptably to one class of enterprise should not mean high risk. These perceptions are partly neglecting the others. That said, SMEs in grounded in the reality of political instability, developing countries are a starved segment expropriation risk, currency and commodity with unique potential, and the next few years price swings, and the insufficient legal pro- should see great emphasis on their role as tections often associated with developing engines of growth and employment. country markets. And such negative perceptions are compounded by a lack of familiarity Strengthening Private with developing country environments and “Many small- and medium-sized enter- Investment in inadequate information, financial and other- Poor Countries prises are not being well served by the wise, available to investors who reside on the financing options currently available in But how can the capital that indigenous other side of the world. Capital is notoriously most developing countries. I visited a private sectors need to grow be unlocked? cautious about taking risks—perceived or farm equipment producer in And from where will the money come? real. According to some estimates, to offset Mozambique that used 19th century Although official aid flows may remain a the perceived risk differential, the expected equipment for metal bending and vital source of financing for a considerable profitability of a typical SME in a developing time (particularly for countries with heavy country would need to be 50 to 100 percent wanted to buy new equipment—it debt burdens), private capital flows already greater than that of a similar business in a employed 40 to 50 people. Then there outstrip aid flows for many developing coun- more developed economy.10 is the printing company that does tries and have far greater potential over the Diaspora communities can be mobilized $600,000 of business a year. In order medium term. Today, more than $19 trillion to support development in their ancestral to invest in new equipment, they are is invested in the U.S. securities markets homelands, as Ireland, China, and India have about to take a 2-year loan from a donor alone. If little more than half of one percent shown. Some African countries are attempt- organization at a 12% interest rate. of that private capital shifted to investments ing to learn from these successes by identify- That’s an invitation for restructuring.” in developing countries, the increase would ing and tapping into their far-flung diasporas. Alan Patricof radically alter the development landscape. Leaders of poor countries can and must Co-Founder, Apax Partners As the social investor Tim Freundlich of the make a difference by implementing effective Calvert Social Investment Foundation points policies. But achieving an attractive environ- out, $100 billion in private capital invested ment for private enterprise is a long-term for ten years “could finance 1.14 billion endeavor that requires sustained political will, microenterprise jobs, 160 million affordable patience, and not inconsiderable luck. housing units, and 70 million cooperatives In the meantime, changing risk perceptions or nonprofit facilities.” 9 and reward expectations for investments in

14 Changing Perceptions The difficulty of turning around misinformed perceptions is illustrated starkly by Dr. Mohamed Ibrahim, Chairman of Celtel International B.V. “I remember the first guy I talked to… who designed a number of the networks in Europe and in Asia. I said, ‘Let’s go and build a telecom network in Uganda.’ And he said, ‘Mo, are you crazy? There’s a guy called Idi Amin in Uganda. Do you want me to drag my company to work in a country run by a crazy guy called Idi Amin?’ I said, ‘Listen, Idi Amin left 15 years ago.’”11

Despite these obstacles, Dr. Ibrahim went on to found Celtel International, B.V., which now operates cellular networks in 14 countries, and serves 6.5 million customers with revenues of $1 billion.

15 “Let me give you a personal example of the importance of equity capital. Six years ago, a friend and I wanted to start a franchise of stores. The banks didn’t want to lend because we had no track record. We found a venture capital fund with investors and angels. The business culture they instilled in us was almost as important as the dollars. This business discipline is not common in our country, and we argued about whether to accept it. But I think that it saved our business in the long run; development will require official donors and Inevitably, there will be tough challenges today we’re employing 100 people in lenders, NGOs, and private investors to exer- and trade-offs in setting up these new efforts. two countries.” cise greater creativity in designing or adapting Some experts question whether using public

Ali Mufuruki mechanisms to mitigate risk, building on the funds to support the private sector is the best Chairman and Chief Executive Officer, wide variety of tools and techniques available use of limited resources for poverty alleviation. Infotech Investment Group Tanzania in the most sophisticated financial markets. How do we measure whether a dollar is bet- In considering what kinds of new financing ter invested in a girl’s education or in building options to develop, the place to begin is with the business that will provide that girl with a the problem to be addressed and the goal to livelihood as an entrepreneur or an employee? be achieved, as Brookings scholar David de Others point to the danger of distorting Ferranti points out.12 the market with too much cheap capital or There is already considerable experience support for uncompetitive businesses. Will with different forms of official guarantees government guarantees lead to lax project provided by organizations such as the World assessments and poor investment decisions? Bank Group’s International Finance Will funders have the courage to cut off Corporation and the U.S. Overseas Private underperforming clients? Investment Corporation on a case-by-case In addition, there is tension between the basis. But these approaches have often desire to reduce transaction costs for develop- proven laborious and time consuming for ing country investments and the recognition willing investors to use; a goal for these insti- that technical assistance can be as important, tutions should be to move from “tailor-made” if not more important, than finance for many to “off-the-shelf ” products wherever possible. ventures. Many organizations provide finan- The public sector has also helped to estab- cial support in combination with strategic lish and subsidize venture funds focused on advice and business skills development to help investments in transitional and developing promising entrepreneurs reach their fullest economies. The Polish-American Enterprise potential. Yet the more features that are added Fund was an early success, and the European to a program, the more costly it becomes to Bank for Reconstruction and Development replicate and scale. Recognizing this, some has subsequently launched a variety of funds are devising creative approaches to providing for the former Soviet Union. But these ven- technical assistance on a not-for-profit basis ture funds usually have not met expectations, while offering financial support at closer to and many funds originally intended to sup- market terms. port SMEs have drifted toward bigger deals, Finally, some experts believe these efforts in the face of high SME transaction costs and are misguided, noting that history is littered the pressure to produce commercial returns. with failed attempts to finance the private

16 Global Development Bonds (GDBs) SME Financing: Equity or Debt? Magnifying aggregate private flows into poor countries by attracting Another objective is to direct patient investment capital to the commercial and institutional investors remains achievable. One hungry SME sector. While accepting the need for lower returns or promising approach might be to satisfy these investors’ fiduciary subsidies due to high transaction costs, there is still considerable responsibility to invest conservatively through the adaptation of debate on whether long-term loans or equity are better suited to sophisticated financial techniques originally developed for rich address SME financing needs. country capital markets. A group of experienced business executives, economists, and government experts is currently developing Alan Patricof and Julie Sunderland have proposed a venture capital a promising concept called “Global Development Bonds,” which fund to invest equity or equity-like instruments in growth-oriented seeks to boost development capital abroad much as the municipal SMEs in poor countries. The fund would combine resources from bond market has done for states and localities in the United States. development financial institutions, local governments, and private While some official support would be required, the GDB architects local investors. Most of the investors would accept a below market underscore that the goal is to have a market product supported by rate of return in the hopes of leveraging and building the indige- the government, not the other way around. nous commercial risk capital market.13

In contrast, Jo’ Schwenke of Business Partners Limited has pio- neered a model built around long-term loans. In his words, “It’s not about equity, it’s about attitude. If a business is in trouble and you foreclose, that’s thinking like a banker. If you stick it out, that’s thinking like an entrepreneur. The problem with an equity deal is that if you take the fair share you need, your entrepreneur will start thinking like an employee.”

So far, the lending approach is getting more of a test run. The Shell Foundation recently teamed up with African-based specialist financier, GroFin, to launch a $100 million loan fund for small business investments in Africa, funded mainly by the U.K. and Dutch governments and two African banks. But going forward, both equity and lending approaches should be put to the test.

17 “There is still mutual mistrust on both sides. The public sector is terrified that the private sector will divert the money to investments with poor social value. The private sector is terrified that their fund will be full of poorly performing socially responsible stocks.”

Paul Applegarth Former Chief Executive Officer, Millennium Challenge Corporation

sector in developing countries—from directed credit to development banks. They believe that maximum development impact is more likely to be gained by supporting macroeconomic policy change than by trying to provide financial support directly to private enterprises. However, most earlier efforts failed because the government tried to play the role of the capital market without enforcing market discipline or demanding returns. The new generation of innovative financing approaches aims to put market discipline at the “Risk mitigation is only part of the core, with an emphasis on performance and service we provide; people come to us accountability. Far from supplanting market for our stamp of approval, as well as mechanisms, the goal of new risk-sharing more open access to government and tools is to create appropriate incentives for help if those governments misbehave. private investors to venture into markets For us it’s very important the they would otherwise write off as hopeless. risk/reward ratio be acceptable; our The time has come to turn more of these shareholders are very concerned about ideas into reality and give them a test run— moral hazard.” with close collaboration among official donors, NGOs, and experienced financial Assaad J. Jabre market players. Rather than seeking a silver Acting Executive Vice President, International Finance Corporation bullet, those committed to spurring development should pursue a range of promising endeavors. In the words of former U.S. vice president Al Gore, “Because we’re facing an emergency, this is not a question of either/or; it’s a question of and.”

18 Access to Financing Cost of Financing Microeconomic Instability 70%

60%

50%

40%

30%

20%

10%

0% Africa aharan S & Pacific Europe & East Asia outh Asia S ub- North Africa Central Asia Central & Caribbean S Middle East & Latin America

Firms’ Perceptions of Financial Obstacles in Developing Nations*

Source: World Bank. * Percentage of firms identifying the following indicators as major or very severe obstacles to business operation and growth

19 Greater Awareness

20 The Business of Poverty Reduction: The Global Private Sector’s Role

FROM THE CLASSROOM TO THE In response, many companies have adopted boardroom, debates have long been under corporate social responsibility approaches way about the appropriate role for business that seek to mitigate negative social and and its responsibility to society. One school environmental consequences through adher- of thought follows Milton Friedman’s view ence to minimum standards. Many multina- that corporate executives, provided they stay tionals have agreed to comply with voluntary within the law, have no business responsibili- standards and corporate codes of conduct in ties beyond making as much money for their areas such as labor protection, transparency shareholders as they can. Another school of resource flows, and environmental stew- argues that corporations are social institu- ardship in poor countries. tions and have an obligation to lift lives and Increasingly, these codes are being negoti- livelihoods in the places in which they do ated in international forums, such as the business—or, at a minimum, to do no harm. UN’s Global Compact, which now involves That obligation increasingly has global almost 2,000 companies worldwide. Some dimensions. are being made operational through multilat- The issue has moved well beyond abstract eral institutions. For instance, the World discussion, as greater awareness on the part Bank’s Equator Principles encourage the of consumers, investors, and workers—along world’s leading financial institutions to incor- with the increased presence of transnational porate social and environmental considera- “We need to create conditions that will NGOs and the interest of the media—have tions into large infrastructure projects. bring social values into the equation. put corporate practices under the microscope. Pressure is mounting to give these codes Businesses can and do play construc- In an age when civic activists are quick to teeth through regular audits and third-party tive roles, but you have to induce them point out that the annual revenues of many monitoring in industries such as apparel and by showing that socially responsible global firms dwarf the gross domestic prod- footwear. Although some corporations have managers do better. The extractive ucts of the world’s poorest nations, modern been reluctant to embrace these enhanced industries are a case in point—some businesses find themselves scrutinized not approaches, a few industry leaders such as management, such as at British just on their profitability but also on their Nike have progressed well beyond basic com- Petroleum, is at the forefront, while broader social, environmental, and human pliance to develop an elaborate and now Exxon has made it a point to disregard rights impact. Moreover, the same tools of transparent set of supply chain management globalization that have enabled companies to practices to ensure robust implementation. these issues. We must ensure that grow have been used by corporate critics to Indeed, some top executives themselves investors—not just civil society and launch sophisticated campaigns against firms would argue that the scope of corporate consumers—view the BP management perceived as falling short on the social front. social responsibility is too narrow—to the more favorably.” Today more than ever, good corporate citi- detriment of business and society alike. As George Soros zenship is tied to the bottom line. Ian Davis, the worldwide managing director Chairman, Open Society Institute

21 “We are exploring the ways that long-run socio-cultural forces affect a company’s long-run strategic options, such as the enormous impact of HIV/AIDs on the productivity of the work forces of our South African clients. The societal influence on business decisions include the formal contract (laws governing business practice), the semi-formal contract (such as labor standards), and frontier issues, which some businesses are only now starting to take into account.”

Judy Wade Partner, McKinsey & Company

of McKinsey & Company, has written, these Core Business Activities kinds of commitments are “too limited, too Perhaps the most important and still least defensive and too disconnected from corpo- recognized potential opportunity for business rate strategy.”14 Visionary corporate leaders to influence development is through their are revising the definition of business value core business activities—from what and how beyond pure shareholder value—or are look- they sell to how they operate. ing beyond the horizon where the two For example, many businesses are engaged converge—and seeking to proactively manage in creating social value by addressing the their corporations’ social footprint as a underserved needs of poor consumers within fundamental part of strategic planning. the traditional for-profit model. Indeed, the This growing movement to build social business scholar C. K. Prahalad has drawn values into core business strategies can have a attention to “the fortune at the bottom of transformative impact on development and the pyramid”—the vast market potential poverty. At the same time, it can bring real associated with the billions of consumers benefits to companies—including improving who survive on less than $2 a day.15 As customer loyalty and employee morale and Prahalad argues, poor consumers have both helping to refine brand identity. It is not choice and dignity—something that is easy simply a matter of responsibility but also to forget when they are viewed solely more and more of opportunity. through the lens of charity. Indeed, poor Three angles in particular merit explo- people are some of the most value-conscious ration: how to think about the private sector’s consumers in the world. contribution to development, what can be Pioneering firms from Brazil to India are done to maximize the effectiveness of pub- finding new ways to address this huge market’s lic–private partnerships, and what can be underserved needs—from selling individual learned from the private sector’s mobilization sachets of shampoo to creating a system- in the global health arena. atized and standardized eye-care process that allows a doctor and two technician teams to The Private Sector’s perform more than fifty cataract surgeries a Development Footprint day. The challenge for businesses attempting The development footprint of corporations to serve this market is to develop appropriate ranges from their core business activities to products, marketing, and distribution— their philanthropic activities to their policy meaning “small unit packages, low margin and advocacy activities, and it increasingly is per unit, high volume, and high return on reaching into a realm where social value and capital employed.” 16 market value converge. Other corporations are delivering important

22 23 “In Central America I was part of an initiative that brought together 70 companies to work with the government to find long-term solutions for social issues, especially issues that directly affected the future of their business such as raising educational standards to promote innovation and creativity, which are so essential today in the global marketplace. Of these 70 companies, only three were international—Proctor & Gamble, Abbot, and Intel—but they brought knowledge and best practices to the table that were invaluable.”

Luis Javier Castro Managing Director, Mesoamerica Investments

development benefits through their core building community leaders’ capacity, training business activities in poor countries by devel- local specialists in environmental manage- oping human resources, building infrastruc- ment, and establishing microcredit programs. ture, and introducing new technologies. In Companies may give financial resources, offer the words of former Overseas Private employee volunteers, donate materials and Investment Corporation chairman Peter equipment, or even provide space. These Watson, “The most valuable contribution of efforts can often be leveraged through part- foreign investment does not come from the nerships with local NGOs and businesses, the addition to the domestic pool of capital and host government, and official donors. the creation of jobs per se, but from the The potential reach of corporate philan- transfer of globally competitive technologies thropy is huge. In Jane Nelson’s estimation, and business practices”—such as quality con- the philanthropic resources of the top fifty trol procedures, time management, project companies equal the United Nations management skills, and experience in han- Development Program’s annual operating dling external relationships.17 budget of $4 billion. Visionary companies are The next frontier may be for businesses to starting to think about philanthropy in deploy their core competencies against tough strategic terms—making longer-term, holistic development challenges—as will be discussed commitments to communities rather than a below in the context of partnerships and of series of individual, one-time donations. For health. Enterprises that have passed the mar- instance, Chevron has undertaken a compre- ket test on a global scale often have world- hensive approach to development in Angola class capabilities in areas that are of great in partnership with the national government importance and short supply in the develop- and official donors, recognizing that it has a ment field. These include capabilities in fos- long-term strategic interest in the region’s tering research and development, marketing successful development. At the same time, goods and services, successfully adapting there are challenges involved in fully leverag- business models to vastly differing markets, ing corporate philanthropy’s development and driving down costs. promise; big firms may be reluctant to pool resources with competitors or to work Corporate Philanthropy with partners if it means sharing the public Corporations have traditionally viewed their relations credit. positive development impact primarily through the lens of philanthropic activities in Policy Dialogue and Advocacy local communities—such as supporting edu- Another important channel for leveraging cation and youth development projects, business influence is through policy dialogue

24 Business Advocacy for Development In 2003, a group of business leaders in Seattle joined forces to advocate on behalf of the world’s poor. Bill Gates Sr., Daniel J. Evans, William Ruckelshaus, Bill Clapp, and John Shalikashvili founded the Initiative for Global Development (IGD) as an alliance of business and civic leaders dedicated to reducing extreme global poverty. Starting from its roots in Seattle, IGD has expanded to ten cities across the U.S., with plans for further national outreach.

25 “We must find a way to convince fidu- ciaries to monetize values that are currently excluded from consideration. If the only thing we use to assign value is a price tag, then everything that doesn’t have a price tag starts to seem like it has no value.”

Al Gore 45th Vice President of the United States

and advocacy—such as business pressure to Another cutting-edge approach is “blend- improve the climate for private firms in poor ed-value investing,” which argues for a redef- countries and corporate lobbying in support inition of market returns to incorporate social of more development aid or enhanced market and environmental value. This type of invest- access for poor countries. ing is still at a relatively early stage of evolu- Increasingly, private, public, and nonprofit tion and will require advances in social and partners are joining forces on behalf of shared environmental accounting, as well as the cre- goals. For instance, business and civil society ation of supporting institutions to achieve are natural allies in the fight against corrup- scale. But growing numbers of investors tion, which, by strangling trust, hinders already are expressing the desire to create investment and enterprise no less than effec- social value when allocating their portfo- “We are publishing the oil revenues by tive government. BP and Shell have teamed lios—whether through strategies to limit each tier of government in the newspa- up with NGOs such as the Open Society investment in companies that pollute the pers every month. Believe me, it’s the Institute, Global Witness, and Transparency environment or exploit their workers, or most popular reform because people International in partnerships such as Publish through proactive investments that accept can say to their local government What You Pay and the Extractive Industries below-market returns in exchange for chairman or their state governor, ‘You Transparency Initiative that use the power of enhanced social value. got X amount of Naira, 20 billion, why transparency to lift the “resource curse” of In sum, numerous avenues exist for the dysfunctional governments and predatory global private sector to help create social are our roads not fixed?’” 18 elites that too often afflict countries rich in value. But the path ahead is neither clear Her Excellency natural resources. nor easy. There is often a difficult tension Ngozi Okonjo-Iweala between long-term development goals for Minister of Finance of Nigeria Marrying Social Value and Market Value poor people and corporations’ short-term On a parallel track, innovative ventures such pressures to deliver shareholder profits. as the Acumen Fund are marrying philan- What then will it take to channel the thropy with commercial savvy to invest power of private enterprise in these direc- venture capital in developing country enter- tions? How can society create conditions prises that can provide health, housing, water, for the private sector to do the right thing? and other basic services to poor people in a Given that business continues, appropri- sustainable, scalable way. These hybrid ately, to be motivated by financial returns, approaches place a premium on generating one key requirement is to demonstrate that social value, but they have the potential to failure to focus adequately on social impact generate profits over the longer term. can ultimately reduce a corporation’s Promising areas for hybrid ventures include strategic options, or, conversely, that social agribio, health, and clean energy. value and market value converge over

26 time—as Starbucks is doing by demonstrat- are seeking ways to leverage their resources ing that consumers are willing to pay pre- through partnerships with local NGOs and mium prices for a business system that businesses, host governments, and official invests in its suppliers and employees. donors. For many large companies, working Perceived public relations benefits or costs with official donors bestows a range of also influence corporate decisionmaking. The advantages. Donor involvement can often more that the media, NGOs, civil society, confer legitimacy on corporate social respon- and shareholders reward the reputations of sibility efforts such as product trademarks or socially responsible corporations and their natural resource transparency programs. When leaders—and tarnish those of offenders—the corporations work to promote social value in more incentives firms will have to burnish areas related to their core business proposi- their corporate citizenship credentials. tion, such as on social marketing efforts, they “Some companies make it their liveli- Similarly, companies value the connections may enter into partnership with government hood to make strategic partnerships emerging between doing good in the com- to support marketing and distribution targeted work. Many of the same principles are munity and building employee satisfaction. at the poorest consumers. And when corpo- transferable to partnerships with the For example, the executives of Voxiva, a for- rations seek to contribute to social welfare in public sector. These include time upfront profit data solutions provider that uses tech- the poor communities where they do busi- to structure the partnership, exit strate- nology to address public health needs in poor ness, partnerships with host governments and gies, establishing common interests, countries, believe their emphasis on doing official donors ensure synergy with broader and understanding shared goals, with good and doing well at the same time has development plans and programs. periodic review to make sure that people been an asset in attracting and retaining Moreover, public sector partners can help are on the same page. Often these dry highly motivated employees.19 And some corporations gain policy access to govern- issues, if ignored, are what make part- jewelers who were targets of the “Clean ments, provide convening authority, mitigate nerships break up.” Diamonds” campaign reported that they felt risk, and share significant accumulated the biggest loss not on their bottom line but expertise in developing countries. Often, William Ruckelshaus in employee morale.20 With more MBA pro- firms investing in developing countries seek Strategic Director, grams focusing attention on social enterprise the involvement of the official, multilateral Madrona Ventures Fund and corporate citizenship, tomorrow’s top International Finance Corporation—not recruits may hold out for jobs that offer primarily for financial reasons, but rather meaning as well as money. because it conveys an official stamp of approval with regard to environmental and Realizing the Full Potential social standards. of Public–Private Partnerships Likewise, official donors increasingly value As multinationals and large-scale national public–private joint ventures. During the past enterprises embrace a broader mission, many few decades, as aid agencies have shifted

27 “On goal alignment, it’s often hard for companies to admit there is a profit opportunity, so they speak in disingen- uous, veiled language that makes it hard to communicate. This causes mistrust.”

Jacqueline Novogratz CEO, Acumen Fund

from viewing the local private sector as a tar- Nations Development Program making big get for development to looking to the private strides in recent years. sector for social service delivery and infra- Yet for all this activity, challenges remain in structure provision, governments have grown maximizing these partnerships’ potential. In to rely on the private sector’s significant proj- the corporate world, it has been estimated ect management expertise, established local that roughly half of strategic alliances under- presence, and valuable political support. perform or fail. The public–private partner- Although many assume that the public ship arena faces similar hurdles. sector is seeking to leverage financing from At the most basic level, public–private corporations, in reality governments often partnerships must overcome cultural clashes. serve as the “resource” partner, seeking to use Corporations may feel that government col- “With private/NGO partnerships, com- the private sector’s know-how and commit- laboration weighs down their agility and munication is an important issue. The ment. Thus, for instance, when Hewlett- makes projects hard to scale, while official first point of contact is usually a human Packard collaborated with the U.S. Agency donors may feel that their reliance on public rights activist talking to a PR manager; for International Development and several funds, and procedural concerns about fairness that’s not the right place to talk about leading NGOs to develop technology for and due process, make it difficult to grant a shared value proposition because microfinance operations, it was the govern- shared responsibility to a corporate partner. neither of those people has the appro- ment—not the private sector—that supplied Multilateral institutions are further hamstrung the money, while Hewlett-Packard provided by national rivalries among member states, priate authority. If you want to do a project management skills, personnel, and which may lead one country to resist anoth- serious deal, you have to legitimize it technology. er’s firms receiving public sector support. at the top of the pyramid.” The United States has long been promi- In addition, many donor agencies view Ray Offenheiser nent in these efforts, in keeping with the public–private partnerships “almost exclusively President, Oxfam America dominant domestic role of its private sector in terms of corporate social responsibility and the abundance of American-based cor- and/or as a marginal supplement to their porations with global reach. But European other programs for promoting private sector business leaders, such as the global banking growth,” according to Larry Cooley, the pres- group ABN AMRO, have been taking the ident of Management Systems International.21 lead on partnerships with governments and As a result, their partnership offices are often civil society organizations to advance social understaffed and lack bureaucratic clout. The responsibility—an area from which the U.S. U.S. Agency for International Development, government has mostly remained aloof. however, has integrated public–private part- Among international institutions, the World nerships across its development efforts—and Bank has traditionally had an outsized role in has taken commensurate measures to fund private sector development, with the United and train staff, as well as change relevant

28 Public Private Partnerships: Lessons Learned 1. A private entity has surprisingly great power to bring together people who often have never met before. 2. There’s always a lost year; these projects take a while to structure and set up. 3. Success poses its own challenges, especially when it bumps up against capacity constraints. 4. Money talks. operational and procurement procedures to And as forward-looking business leaders Sylvia Mathews foster the use of this business model. increasingly broaden their definitions of value Chief Operating Officer and Similarly, corporations that strongly value creation, and government executives grow to Executive Director, Bill and Melinda Gates Foundation strategic alliances place a premium on desig- appreciate the operational savvy and local nating and retaining good people to manage presence that private partners can bring, pub- these relationships over time. lic–private partnerships are bound to grow in Another key challenge is misaligned expec- reach and impact. Though development and tations among various parties to a partner- poverty reduction primarily remain chal- ship—from the motives for undertaking a lenges for governments, effective partnerships partnership in the first place to expectations are proving every day that corporations can about the pace of decisionmaking and be capable, creative allies. resource allocation. To avoid this problem, both sides need to agree early in the project Learning from Success: design process on what each side hopes to Advances in Health gain from the endeavor and who will bring Nowhere is the proof of public–private part- what to the table. Open communication, nerships’ potential more compelling than in transparency, clarity of roles and ground the health arena. Defying development pes- rules, and regular opportunities for review simists, global health has witnessed some can help get a partnership going and keep it dramatic successes in recent decades. Unlike moving forward. Just as important is mutual economic interventions, which are highly agreement on an appropriate exit strategy in dependent on context for their success, many case the alliance outlives its utility. Time health interventions have been effectively invested in the planning stages of a partner- implemented—even in countries with dys- ship can pay important dividends, and save functional governments, poor public health disappointment, down the line. systems, and civil conflict. In the coming years, a well-tested set of Improved sanitation, combined with inex- best practices should help guide public–private pensive oral rehydration therapy, helped to partnerships in achieving their full poten- achieve a two-thirds drop in deaths from tial—including ways to scale good programs, diarrheal disease between 1980 and 1999. replicate successful configurations, and exit And in one of the biggest triumphs of science gracefully from bad ones. It already seems and political will, smallpox has been com- clear that certain sectors are better suited for pletely eradicated—and polio is well on its these partnerships than others—among them, way to disappearing. Today, the World Health health, water, natural resources industries, and Organization estimates that it is possible to information technology education. eradicate measles—the single leading cause of

29 0–24% 25–49% 50–74% 75–89% 90% or more

Percent of Children Immunized by Country, (DTP 3 coverage) Diphtheria Vaccine 1999

Source: UNICEF/WHO 2001; Gates Foundation.

30 Partnering to Deploy Vaccines for Poor Children Partnering to Eradicate Polio The dynamic public-private Global Alliance for Vaccines and An innovative partnership between the Gates Foundation, the World Immunizations (GAVI) is pioneering important innovations in both Bank, Rotary International, and the UN Foundation deploys perform- the financing and delivery of public health in poor countries. ance-based buy-downs of World Bank loans to encourage poor Established to bring new vaccines to and improve immunization countries to pursue the final stages of polio eradication. Nigeria and systems in the poorest countries, GAVI secured in September 2005 Pakistan have already taken advantage of this program; India and a a $4 billion International Finance Facility for Immunization (IFFIm) number of African countries are interested as well. The initiative that will leverage long-term donor funding commitments through could help close the gap between the enormous social value of borrowing in private capital markets. Initial pledges have come complete global polio eradication and the unattractive cost-benefit from the United Kingdom, France, Italy, Spain, Sweden, and the calculation faced by poor country governments, which incur steep Gates Foundation. The large scale of financing and its predictability costs and only modest benefits from addressing the very last cases. will enable GAVI and its poor country partners to engage in longer- term immunization systems improvements and purchasing contracts. GAVI estimates the IFFIm resources will save the lives of more than five million children over the next decade.22

31 death among Africa’s children—through companies retain the rights to a small prof- vaccinations costing only 26 cents a child. itable market. This is mostly dependent on The successes with polio and smallpox are philanthropy—however, the tsunami showed instructive in other ways as well. In both that people don’t mind having their money cases, the immunizations already existed, spent on these things.” pulled along by rich country demand. In con- There is simply no substitute for the private trast, encouraging spending on research and sector’s research and development capacity in development and expensive clinical trials for medicines, but it will not be deployed for poor country disease treatments that are not poor country diseases on the basis of antici- likely to ever be profitable presents a singular pated profits. Brookings and Harvard scholar predicament for policymakers. According to Michael Kremer has put forth the powerful the Global Forum for Health Research, only proposal that public and philanthropic funding 10 percent of global medical research is should provide incentives to pharmaceutical devoted to diseases that cause 90 percent of and biotechnology companies by mimicking the world’s health burden. And of the more the market, offering guaranteed purchase than 1,200 drugs that reached the market commitments for successfully tested vaccines between 1975 and 1997, a scant 13 were and disease treatments. The Bill and Melinda intended for treatment of tropical infectious Gates Foundation has helped turn this idea diseases in developing countries. into an actionable policy proposal, Advance Public–private partnerships are beginning Purchase Commitments. to turn those statistics around. A report from For diseases where rich country demand the London School of Economics and has already created profitable investment Political Science found that between 2000 opportunities, the challenge is to make the and 2004, public–private partnerships invest- resulting drugs available in poor countries at ed $112 million to stimulate research on ten affordable prices. The late Brookings and neglected diseases, including malaria, tuber- University of California, Berkeley, scholar culosis, and leprosy. As a result, more than Jenny Lanjouw proposed that pharmaceutical sixty new drug research projects are under companies allow generic versions of their way, with the potential for half a dozen new drugs to be produced for the poorest coun- drugs being registered by 2010. In the words tries without requiring royalties. Under her of Chris Hentschel, the chief executive of the proposal, pharmaceutical companies would Medicines for Malaria Venture, “In our lose nothing because these markets are Public Private Partnership for Health there unprofitable anyway, while the poorest coun- are 80 products in the pipeline. We aim to tries would gain access to life-saving drugs at have drugs become instantly generic, while close to cost. Turning this proposal into reali-

32 “It is immoral to live in a world where the life expectancy in developed countries is 80 years while it’s 40 years in poor countries.”

Mary Robinson Executive Director, Realizing Rights: Ethical Globalization Initiative

ty, however, will require not only securing the active support of pharmaceutical companies concerned about the erosion of intellectual property rights but also enlisting generic producers in developing countries, recipient governments, and official and philanthropic donors. The growing list of innovative global health initiatives demonstrates the power of the private sector to address social challenges when it teams up with private philanthropy, official donors, NGOs, and local authorities. These initiatives also provide a fascinating 80 case study of how the strategies of pharmaceutical companies have evolved as they have found themselves on the front lines of the 70 global poverty debate. Though some companies remain wedded to a narrow shareholder- value approach, others have embraced social 60 responsibility and employed philanthropy S

and partnerships to advance social welfare. YEAR 50

30 1962 1967 1972 1977 1982 1987 1992 1997 2002

Zambia United States United Kingdom

India Brazil South Africa

Life Expectancy at Birth, 1962–2002 Source: World Development Indicators 2005.

33 Cause for Hope Answering the Call to Action

IN MANY RESPECTS, THE WORLD’S devising new ways to join forces and track record on development is disheartening. resources with private sector partners. Someone born in Zambia today has less Helping poor people is a smart investment likelihood of reaching the age of thirty than in the future all people are destined to share. someone born in England in 1840. Eighteen In this interconnected world, no society can countries have seen declines in the quality of advance as long as most of humanity is left human development since 1990. behind. That is simply common sense—and Yet there is cause for hope. With visionary more than ever, business sense as well. leadership, the world community can turn Today’s dynamic, value-driven private sec- the tide. The Human Development Report tor has the ability, incentive, and duty to act. 2005 challenges governments to “show that The dream of development is within reach. they mean business.”23 The private sector, too, must step up to the plate—not just as a matter of conscience, but also because business cannot hope to thrive in countries and communities that fail. A clear call to action emerges from the yawning gulf between today’s heartrending reality and the promise inherent in our unprecedented resources and scientific and technological capacities. Private enterprise is a powerful engine for transforming the development landscape. Forward-looking executives are weaving social and environmental goals into their core business strategies. Top corporations are banding together in groups like the “Look at the contrast between the popular International Business Leaders Foundation response to the ‘noisy’ real life tsunami and the Business Leaders Initiative for and the ‘silent tsunami’ of poor children Human Rights, joined by an explicit commitment to build a better, more equitable dying of preventable causes every week. world. World-class business schools are How do we deal with these problems increasing the prominence of corporate when it seems to take a catastrophe to social responsibility in their curriculums. make people pay attention?” Development experts in government, civil Strobe Talbott society, and the philanthropic arena are President, The Brookings Institution

35 Participant List

Co-chairs Richard Cooper: Professor of International Jan Piercy: Executive Vice President, Economics, Harvard University ShoreBank Corporation Richard C. Blum: Chairman and President, Blum Capital Partners, LP Kenneth Dam: Senior Fellow, Brookings John Podesta: President and Chief Executive Institution Officer, Center for American Progress Strobe Talbott: President, Brookings Institution David de Ferranti: Distinguished Visiting Jennifer Potter: Managing Director, Initiative Fellow, Brookings Institution for Global Development Lael Brainard: Vice President and Director, Global Economy and Development Center, Dianne Feinstein: Senator, Peter Reiling: Executive Vice President Brookings Institution United States Senate for International and Policy Programs, Timothy Freundlich: Director, Strategic Aspen Institute Honorary Co-chairs Development, Calvert Social Investments Susan Rice: Senior Fellow, Brookings Michael Froman: Managing Director, Institution Walter Isaacson: President and Chief Citigroup Alternative Investments William Ruckelshaus: Strategic Director, Executive Officer, The Aspen Institute Al Gore: 45th Vice President of the Madrona Venture Fund Mary Robinson: Executive Director, United States Jo’ Schwenke: Managing Director, Business Realizing Rights: The Ethical Globalization Partners Limited Initiative Chris Hentschel: Chief Executive Officer, Medicines for Malaria Venture Brooke Shearer: International Partnership for Microbicides Participants Assaad J. Jabre: Acting Executive Vice President, International Finance Corporation Smita Singh: Special Advisor for Global Sherburne B. Abbott: AAAS Chief Mickey Kantor: Partner, Mayer, Brown, Affairs, The William and Flora Hewlett International Officer; Director, Center for Foundation Science, Innovation and Sustainability Rowe, and Maw LLP Ross Levine: Carlson School of Management Charles Sirois: Chairman and CEO, Alice Albright: Vice President and CFO, Enablis Entrepreneurial Network Vaccine Fund David Lipton: Managing Director, Citigroup Warrick Smith: Director, World Madeleine K. Albright: 64th Secretary of Sylvia Mathews: Chief Operating Officer and Development Report 2005, World Bank State; Principle, The Albright Group LLC Executive Director, Bill and Melinda Gates Foundation George Soros: Chairman, Open Society Robert Annibale: Director of Microfinance, Institute Citigroup Bruce McNamer: President and Chief Executive Officer, Technoserve James Steinberg: Vice President, Foreign Paul Applegarth: Chief Executive Officer, Policy Studies, Brookings Institution Millennium Challenge Corporation M. Peter McPherson: President, Michigan State University Erica Stone: President, American Himalayan Zoe Baird: President, John and Mary R. Foundation Markle Foundation, Inc. Ali Mufuruki: Chairman and Chief Executive Julie Sunderland: Oriane Consulting Elizabeth Becker: Correspondent, Officer, Infotech Investment Group Tanzania New York Times Jane Nelson: Director, Corporate Social Peter Tarnoff: President, International Advisory Corporation Luis Javier Castro: Managing Director, Responsibility Initiative, Harvard University Mesoamerica Investments Her Majesty Queen Noor Norbu Tenzing: Assistant Director, American Himalayan Foundation Peggy Clark: Managing Director, Realizing Jacqueline Novogratz: Chief Executive Rights: The Ethical Globalization Initiative Officer, Acumen Fund, Inc. Judy Wade: Partner, McKinsey & Co. Larry Cooley: President, Management Raymond Offenheiser: President, Systems International Oxfam America Rapporteur Vinca LaFleur: President, Vinca LaFleur Communications 36 Notes

1. Jane Nelson, “Leveraging the Development 10. Commonwealth Secretariat, “Lowering the 21. Larry Cooley, “2 + 2 = 5: A Pragmatic Impact of Business in the Fight Against Threshold: Changing Private Investors’ View of Partnerships between Official Global Poverty,” in Transforming the Perceptions by Reducing the Cost and Risk donors and Multinational Corporations,” Development Landscape: The Role of the of Investment in Least-Developed, Small in Transforming the Development Landscape, Private Sector, edited by Lael Brainard and Vulnerable Economies” (London, 2001). edited by Lael Brainard. (Brookings, forthcoming). 11. Remarks at Clinton Global Initiative, 22. Sylvia Mathews, “Financing for Global 2. United Nations Commission on the Private September 17, 2005. Health,” in Transforming the Development Sector & Development, “Unleashing Landscape, edited by Lael Brainard. Entrepreneurship: Making Business Work 12. David de Ferranti, “Innovative Financing for the Poor” (2004). Options: What’s New and What’s Next,” 23. “Human Development Report 2005: in Transforming the Development Landscape, International cooperation at a crossroads; 3. Warrick Smith, “Unleashing edited by Lael Brainard. aid, trade and security in an unequal Entrepreneurship,” in Transforming the world,” United Nations Development Development Landscape, 13. Patricof and Sunderland, “Venture Capital Programme Report, 2005. edited by Lael Brainard. for Development.”

4. Ibid. 14. Ian Davis, “The Biggest Contract,” The Economist, May 28, 2005, p. 88. 5. Ross Levine, “Does Firm Size Matter for Growth and Poverty Alleviation?” in 15. C. K. Prahalad, The Fortune at the Bottom of Transforming the Development Landscape, the Pyramid (Philadelphia: Wharton School edited by Lael Brainard. Publishing, 2005), p. 24.

6. FINCA, “Client Stories, Latin America: 16. Ibid. The Shoemakers,” October 2005 17. Peter Watson, “Private Sector Investment (www.villagebanking.org). in Development,” Brookings Blum 7. U.S. Small Business Administration Roundtable, July 2004. website. 18. Remarks at the Clinton Global Initiative, 8. Alan Patricof and Julie Sunderland, September 17, 2005. “Venture Capital for Development,” in 19. C. K. Prahalad, The Fortune at the Bottom of Transforming the Development Landscape, the Pyramid (Philadelphia: Wharton School edited by Lael Brainard. Publishing, 2005). 9. Timothy Freundlich, “Blended Value 20. Irwin Rosen, “Corporate Social Investment Investment and a Living Return,” in and Branding in the New South Africa,” Transforming the Development Landscape, Journal of Brand Management 10, nos. 4–5 edited by Lael Brainard. (May 2003): 45–6.

37 Global Economy & Development At The Brookings Institution

Global Economy & Development The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 www.brookings.edu