Over the past 15 years, there has been a surge in international development financing from the private sector, eclipsing official development assistance from donor governments, said Patrick Fine, CEO of Durham-based human development organization FHI 360. As a result, the private sector is increasingly viewed as a “panacea” for poverty and economic stagnation.

“Official development assistance has remained pretty stable for 22 years,” Fine said. “But there’s been massive growth in non-public sector funding, so that paints a pretty compelling picture.”

Unfortunately, the picture is also misleading, he added. The problem is that private sector investment goes mainly to countries with the best growth prospects and most attractive policy and institutional environments, including China, India and Indonesia, he said.

“But if you look at the least developed countries, you see a completely different picture,” Fine said. “Official development assistance continues to make up half or more of the financing available for these countries.”

Private sector no cure-all for developing world

Fine discussed the myths surrounding private sector development financing on Friday, Feb. 6, during the latest talk in the Rethinking Development Policy series. The series is sponsored by the Duke Center for International Development (DCID) at the Sanford School of Public Policy.

Part of the problem is that countries need to meet certain criteria before private companies are willing to invest in them. In addition, since private sector financing goes primarily toward infrastructure, it does not address developing countries’ most pressing needs, such as health and education.

“The private sector invests in communities not for corporate social responsibility, but because it advances their business interests,” Fine said.

While this is a valid model that can lead to positive change, “it’s not going to address the institutions that underlie rule of law, healthy, nourished populations, and education, which are the keys to productivity,” he said. “Until you have those institutional foundations, you don’t have the environment for the private sector to come in and be that engine of growth.”

Less poverty – or more inequality?

The role of private sector financing in international development also leads to a deceptively rosy picture about poverty alleviation worldwide.  

“[The figures] are skewed by the fact that some of these growth economies are the most populous countries in the world,” Fine said, citing China, India and South Africa as examples. “This disguises what’s happening in non-growth economies and gives us a false sense of optimism and of progress.”

The developed world has also set high global standards for health care, education and public administration, Fine said, forcing all countries to compete in the same global marketplace. It is “intellectually dishonest” to expect least developed countries to meet these modern standards with meager resources, he said.

“The international community really needs to come to grips with the true cost of financing modern institutions,” he said.

Fine added that he hopes the upcoming conference in Addis Ababa, Ethiopia, which is the third in a series of international conferences on the topic of development financing, will recognize the limitations of private financial flows and the continued need for other sources of financing.

“In my experience, this issue is left out and not really dealt with … because there are no simple solutions,” he said.

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