Doubts about effects of business aid in developing countries

An increasing share of global development aid is being redistributed into private sector assistance in developing countries. Denmark also prioritizes the synergy between aid and businesses. In the spring of 2014 the Danish government rolled out a new strategy to encourage exports and economic diplomacy. Development aid plays a significant role in this strategy.

Unfortunately, the effects of foreign private sector aid are uncertain. In particular, subsidies to Danish businesses investing in their counterparts in developing countries – so called business to business support (B2B) – have sparked controversy.

A new evaluation points out that Denmark’s B2B project Danida Business Partnerships has only produced limited results.

This underlines the need for more knowledge and experience, both from B2B projects and other kinds of private sector aid, says Rasmus Hundsbæk Pedersen, researcher in Natural Resources and Development at DIIS.

- On one hand there is no doubt that businesses play a crucial role in creating growth and jobs, especially in sub-Saharan Africa, where the private sector often performs poorly. On the other hand we cannot neglect that it is difficult to create sustainable development in the private sector through development aid, which is basically subsidies, he says.

On 2 December DIIS hosts a seminar in which consultants and international researchers will discuss the means to get the private sector to play a bigger role in poverty alleviation.

In the case of private partnerships the Danida evaluation indicates that Danish firms have brought new technology and know-how to their partners in developing countries. The report estimates that the system has created 9,000-10,000 jobs in local businesses.

But this is not sufficient compared to the money invested, the evaluation concludes. The project does not create enough growth to alleviate extreme poverty in a larger scale. Only about 30 percent of the B2B partnerships lived on when they no longer received aid from the Danish government.

In October 2014 the Ministry of Foreign Affairs suspended the programme. A new and framework is to be announced in the spring of 2015.

Meanwhile, the challenge is growing. Despite more than a decade of economic growth in Sub-Saharan Africa, progress on job creation and alleviation of extreme poverty has been limited. Youth unemployment is rising, and in 2020 a third of the population in sub-Saharan countries will be under the age of 25.

- The potential for growth in the public sector is very limited in developing countries. They do not need a few thousand jobs, they need millions of jobs. This can only be achieved by strengthening private businesses, says Ole Therkildsen, emeritus researcher in Natural Resources and Development at DIIS.

- The concept itself – to alleviate poverty by creating jobs – is not a key part of the discussion about private sector development. ‘Small is beautiful’ dominates the Danish discourse when it comes to development projects, but we need to look at how aid can create long-term economic growth, he says.