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Private Sector Development Strategy : The need for a strategy

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The need for a strategy

Why a strategy now

Support for private sector development (PSD) is an integral part of the Poverty Reduction Strategy¹ recently adopted by Asian Development Bank (ADB). Development of a strong and dynamic private sector is crucial to long-term, rapid economic growth, a necessary condition for sustained poverty reduction. ADB now needs to articulate a strategy to define how it can more effectively promote private sector-led growth in support of its vision of an Asian and Pacific region free of poverty.

Articulation of a PSD strategy is also timely as the region is facing serious challenges that require immediate attention. For instance, the recent financial crisis has discouraged private capital flows into the region at a time when the need for private capital is increasing. The corporate and financial sector restructuring now beginning in the region is a resource-intensive exercise. Privatization programs, planned and underway, cannot be funded from domestic sources alone. New markets are beginning to open up, as barriers to entry are lowered in the previously highly protected banking, securities, and insurance subsectors, as well as pension fund management—as in the People’s Republic of China and India. A pressing challenge for the region is the need to regain the confidence of investors and lenders, foreign as well as domestic. ADB’s developing member countries (DMCs) need assistance to catalyze resumption of private investment in the region.

In the wake of the crisis, there has been renewed appreciation of the private sector’s development role as an engine of growth. Experience has shown that, when properly regulated and operating under competitive market conditions, the private sector can generally use resources more efficiently than the public sector. Private sector entities can deliver goods and services to meet growing demands and create job opportunities in the process. Public sector involvement in the productive sectors is often unsustainable, especially if it is at the expense of social sectors where it is truly needed. While government should shift away from commercial business, it has to develop a strong capacity to create and sustain the legal and market institutions needed to enable and regulate private sector activities. Creating the enabling environment for domestic and foreign private investors and shifting the role of government from owner-producer to facilitator-regulator, and the large adjustment costs associated with such a shift, are big challenges for which the DMCs need ADB’s continued and intensified support.

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