Contributions from
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Focus

Thomas Loster: Untapped wealth: ways to advance climate protection

Stephan Kunz: Raising labour standards in Bangladesh

Interview with Barbara Unmüssig: “Eroding statehood“

Dominikus Collenberg: paradigm shift

Jan Martin Witte and Thorsten Benner: Benefits and limits of UN partnerships with the private sector

Carola Torti: aid: logistics giant DHL supports UN in times of disaster


10/2006 		 

Hesitant paradigm shift

Because of rising foreign direct investments, the private sector has become more significant for the economy, society and policy-making in developing and newly industrialising countries. Development agencies are aware of this change and have begun to enter various forms of cooperation with the private sector. The approach has gained momentum in Germany. But in spite of encouraging results, wide-spread skepticism still tends to hamper the implementation of sensible strategies.


[ By Dominikus Collenberg ]

“In the 1970s, the business sector and DC were in conflict with one another, in the 1980s they worked parallel to one another and, since the 1990s, they have been cooperating.” This is the verdict by Franz Schoser, the former Chief Executive Director of the German Chamber of Commerce and Industry and current chair of the Carl-Duisberg Gesellschaft, one of InWent’s shareholders. Schoser aptly summarises the change in attitudes noticed by many of those involved in DC.
The Federal Ministry for Economic Cooperation and Development (BMZ) initially treated public-private partnerships (PPP) as pilot projects. This type of facility has since become the most obvious manifestation of a paradigm shift which started to emerge as early as the mid-1990s.

The paradigmatic nature of the PPP facility is not due to the funds allocated which, at less than one per cent of the BMZ budget, seem comparatively modest. Rather, it results from the fact that, on a small scale, the traditional roles have been turned upside-down. Now it is private-sector businesses, which initiate development projects.

While it is recognised that the private sector must become more involved at management level both nationally and internationally, practical implementation in individual cases is often difficult. It is not easy to overcome prejudices, which grew over decades in order to see common goals and detect areas of potential synergy. The result, time and again, has been inadequate and unsatisfactory cooperation, which of course does nothing to alleviate the suffering of those who should benefit from development efforts, namely poor people in the developing world and countries in transition. Some basic questions concerning the relationship between business and development therefore deserve clarification.


Reasons for the paradigm shift

To many, it remains obscure what factors have led to the change in the relationship between development agencies and business. Critics generally tend to assume that it is above all about providing subsidies to businesses (and mainly multinational corporations). However, if one looks at the changing history of the relationship, three processes that more appropriately explain the change stand out.

Theoretical discourse. The 1960s and 1970s were marked by the controversy between the dependencia theory and the modernisation theory. These approaches promoted opposing strategies. The first theory supported import substitution and protection from the world market. It was based on the assumption that the industrialisation of Africa, Asia and Latin America was not to be expected within the world economic system, the structure of which disadvantaged developing countries. Modernisation theorists, in contrast, based their favourable view of integration into the global market on the history of the West’s industrialised nations. Discourse has since become more pragmatic and less ideology-driven. Along with the reorientation of international relations after the fall of the Berlin Wall, that trend has facilitated the advent of cooperation between business and development agencies.

Economic globalisation. This new pragmatism was accompanied by a drastic change in the financial flows into developing and newly industrialising countries in the 1990s. While official development aid (ODA) levelled off at almost $ 50 billion in the previous two decades, foreign direct investments by the private sector in developing countries skyrocketed. Depending on various estimates, private-sector investments now amount to three to nine times the total of ODA. It is, nonetheless, noteworthy that a considerable share of foreign direct investments comes from mergers and acquisitions and not through ‘Greenfield investments’, which are particularly favourable for economic development.

It would be wrong to make the sweeping claim that every investment is beneficial per se. Benefits depend primarily on whether the foreign commitment creates or secures jobs, and whether it involves the transfer of know-how. On the other hand, if we look simply at financial flows, we may underestimate the commitment of foreign companies in developing and newly industrialising countries. In Africa, management contracts are a common way to implement projects by foreign firms with domestic capital. This approach can also have positive impacts of transferring know-how and technology. In any case, there can be no doubt that foreign businesses have become a key development factor for developing and newly industrialised countries, and now play a more significant role than ODA in a number of important countries.

New corporate models. In addition, many multinational companies now have a different perspective on developing and newly industrialising countries than they once did. They recognise new opportunities as a result of the greater global market integration. Moreover, they know that they need a stable legal, political and business environment. In line with this, businesses have self-interest in sustainable infrastructure, adequately trained work forces and efficient health-care systems. The objectives of development policy and the needs of investors overlap in many areas.

The general public has begun to show a growing interest in global affairs, and corporate executives are reacting. Cornelius Herkströter, former President of Royal Dutch Shell, observed in relation to the Brent-Spar crisis of 1995: “Where people once expected the government to provide the solution to political or ecological problems, they are now asking businesses directly to take on that role.” The notions of corporate social responsibility (CSR) and good corporate citizenship are gaining ground in the business sector. Reports on sustainability issues, dialogue with civil society and rankings of corporate performance in environmental and social terms have become commonplace (above all in Europe, but in North America too).


Ramifications of this trend

At the international level, the United Nations (UN), which had already sought partnerships with the private sector in the 1960s, elevated the inclusion of non-state actors to a guiding principle, after Secretary General Kofi Annan took office in the mid 1990s. Annan said at the World Economic Forum in Davos: “A fundamental shift has occurred. The United Nations once dealt only with governments. By now we know that peace and prosperity cannot be achieved without active partnerships involving governments, international organisations, the business community and civil society. In today’s world, we depend on each other.” The new policy found its clearest expression yet when the Global Compact was drawn up in 2000 and it was also taken up in the Millennium Development Goals.

At the national level, there are noteworthy efforts by development organisations, the private sector and policy-makers to work together and to explore potentials for cooperation. For example, in early 2003, the Working Group for Development Policy of German Business (AGE) set up a joint cooperation office with the governmental agencies German Technical Cooperation (GTZ) and German Development Service (DED). The role of the AGE is to promote existing forms of cooperation and to develop new interfaces.

In the meantime, the various associations that represent Germany’s different economic sectors consider development issues so important that they have begun to lobby on these issues on their own account. In future, the AGE, based at the Federation of German Industries (BDI), thus may be less in a position to speak on behalf of the private sector in general. It did, however, experience a very dynamic starting phase. That it may be losing some of its impact should under no circumstances be interpreted as dwindling interest by German business in development issues – it is the exact opposite which has brought about the change.

It is encouraging that Germany’s Federal Ministry for Economic Affairs (BMWi) began a study this year on PPPs in developing countries. The BMWi and the BMZ have coordinated this programme competently. The study places the various instruments for trade promotion and for boosting development in a joint context and identifies potential synergies.


Conclusion

The objective of development policy is, and remains, to reduce poverty and to encourage progress, while taking into consideration the cultural, political and economic conditions prevalent locally. A pragmatic approach to this objective makes it necessary to remain impartial and discerning when deciding on the stakeholders relevant for attaining these goals. There is no alternative to close cooperation between policy-makers and the private sector.

However, despite various attempts and the stated intention of cooperation, there is nevertheless a lack of tangible examples of cooperation. German development agencies still use only a fraction of the potential the PPP approach offers, even after six years of the PPP facility. This is still the case, even though the facility was extended to fund “lighthouse projects” with greater financial scope. Major initiatives by the private sector, such as infrastructure projects, often cannot be implemented in developing countries because of a high level of risk. Likewise, commitments by social entrepreneurs in developing countries currently attract far too little interest, despite the potentials they offer. Policy-makers and the private sector must develop tangible instruments for cooperation in order to implement PPP projects, which are prudent from a development perspective.

It is therefore heartening that there is intensifying exchange between businesses and the policy-makers in the field of development. Business associations are in constant contact with development institutions through the AGE. The above-mentioned BMWi study attests to the interest in the matter spanning various ministries. Personnel exchanges between state bodies and private-sector actors have begun. Such interfaces are important for becoming aware of shared goals, to quell reservations and to drive forward tangible cooperation. However, they must also be made use of, or else Germany will risk falling behind other European countries. France, for instance, has moved ahead on output-based aid and other options to grant concessionary funds to private entities. In the Netherlands, the Agency for International Business and Cooperation (EVD) and the development bank Finance for Development (FMO) have established a one-stop-shop for all those interested in export promotion and development cooperation. Germany should learn from such best practices to speed up delivery – less for the benefit of the private sector than for the sake of developmental success.


Dominikus Collenberg
is a social entrepreneur. Until June 2006 he was director of the office for cooperation between development agencies and the Working Group for Development Policy of German Business (AGE). Berlin@Collenberg.org