Private Sector Economic Development
This article will focus on the practice of private-sector economic development. Three models of economic development organizations — private sector, public sector, and public-private sector — will be introduced and serve as the foundation for the discussion of economic development partnerships. Development partnerships between corporations and development agencies, a strong and growing practice in private-sector economic development, allow groups to combine staff, technology, and the funding of resources to achieve development goals such as reducing poverty, improving infrastructure, and providing job training. Barriers to private-sector development, including inhospitable business climates and the need for policy reform in developing countries, will also be analyzed to see how they undermine local businesses and alienate foreign investment.
Keywords Business Climate; Corporation; Developing Countries; Development Agencies; Economic Development; Private Sector; Public Sector; Privatization
Private-sector economic development, often referred to simply as private-sector development, is a strategy for promoting economic development by private industries that benefits the poor in developing countries and regions of the world. The private sector comprises all the micro, small, medium, and large enterprises that are outside of government ownership and control.
Modern private-sector economic development involves numerous private-sector stakeholders, such as development agencies, corporations from industrialized countries, businesses from developing countries, community agencies, and populations in need, who are committed to ending poverty and related conditions in developing countries. The World Bank estimated that in 2013, more than one billion people in the world suffered from extreme poverty, with nearly that number suffering from hunger as well. The World Bank defines extreme poverty as living on less than $1.25 a day. Private-sector economic development efforts are based on the argument that poverty reduction is tied to economic growth.
Combating global poverty is a goal that unites international development organizations and national governments around the world. For example, in 2000, the United Nations Millennium Summit was held to create time-bound and measurable goals for combating poverty and related conditions. The millennium development goals, known as MDGs, have become a blueprint of sorts for national governments, development agencies, and corporations committed to aiding the world's poorest people. The millennium development goals include:
- Eradicate extreme poverty and hunger
- Achieve universal primary education
- Promote gender equality and empower women
- Reduce child mortality
- Improve maternal health
- Combat HIV/AIDS, malaria, and other diseases
- Ensure environmental sustainability
- Develop a global partnership for development
While contemporary forms of private-sector economic development are focused primarily on eradicating extreme poverty and related conditions, private-sector economic development has existed in one form or another since the end of World War II. The modern era of sending aid to developing countries began in the 1940s as World War II ended. After the war, world leaders and governing bodies put structures such as the World Bank, the United Nations, the World Trade Organization, and the International Monetary Fund in place to prevent the economic depressions and instability that characterized the years following World War I.
The modern trend of globalization, and the resulting shifts from centralized to market economies in much of the world, has created both a need and an opportunity for economic development in developing countries and regions of the world. International development organizations, national governments, and corporations are coming together to focus on building frameworks for private-sector development as the basis for achieving sustainable economic growth. The following is an analysis of the three main models of economic development used to aid developing countries.
Three Models of Economic Development Organizations
There are three distinct models of economic development organizations: the private-sector model, the public-sector model, and the public-private partnership model. Economic development organizations of all three kinds tend to share a similar structure, consisting of a governing board, which makes policy decisions, goals, and objectives, and an administrative work force, which carries out the board's instructions. What varies between economic development organizations is the level of participation and funding from either the private or public sector. Private-sector development is increasingly characterized by partnerships between these three different models, described below (Whitehead & Ady, 1989).
Private-sector economic development organizations are funded by contributions from business, industry, and private individuals. Economic development functions include activities such as creating, attracting, and retaining jobs and capital investments. Board members may come from a wide range of non-governmental organizations, such as banks or small businesses. Operational advantages of private-sector development organizations may include freedom from political boundaries or restrictions, freedom to maintain confidentiality about important issues, and knowledge of the business sector's interests and needs. Organizational disadvantages include lack of control over development issues requiring government involvement, such as investment incentives and infrastructure planning. Private-sector economic development organizations may choose the legal form of a non-profit organization, otherwise known as a 501(c) corporation.
Public-sector economic development organizations are funded by local and national governments. The public-sector model is often referred to as the government-agency model. While the governing body of private-sector organizations is usually a board of directors, the governing body of the public-sector organization is most often an elected or appointed government official, such as a mayor or city council member. Economic development functions, similar to those of the private-sector development organizations, include creating, attracting, and retaining jobs and capital investment. Operational advantages may include control and direct access to investment incentives, such as tax abatements, and control over infrastructure planning, such as roads and utilities. In addition, the public-sector model invites, and sometimes requires, input and participation from all sectors of the community. Public-sector economic development organizations are legally defined as government agencies for tax-reporting purposes.
Public-Private Partnership Model
Public-private economic development organizations are funded by both the private and public sectors. Policy direction, objectives, and goals are determined through collaboration between public and private interests. Governing boards include members from business and government posts. Public-private partnership organizations are often called balanced organizations. Reasons for the growing number of public-private partnership organizations include the burdensome and escalating costs of economic development activities. In many instances, those involved in economic development combine public- and private-sector resources to build sufficient funds and staff to accomplish development projects and goals. Public and private sectors combine their respective operational advantages to benefit their communities and service areas.
Two important organizational issues should be considered when choosing a model of economic development. First, there are numerous benefits gained from combining a new economic development organization with an existing agency, either non-profit or governmental. This practice is called piggybacking. The public-private partnership often allows the new organization to use the legal status of the established organization, thus saving time and money. Second, economic development organizations must choose the legal form and tax status most suited and advantageous to their organization. For example, the legal...
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