Government, inclusive business and donor facilitation
Inclusive economic growth
As development practitioners our primary goal is poverty reduction, and economic growth is essential (but not sufficient on its own) to achieve this. As illustrated below (Porter & Ketels, 2003), this requires a vibrant and competitive private sector, enabled by a progressive and responsive public sector.
The above is a clear and compelling view of competitiveness and growth and the respective roles of the private sector and government in driving this. However, there isn’t a singular model of competitiveness: some growth models are more inclusive of the poor (e.g. labour intensive); others are more exclusive (e.g. capital and technology intensive). This is why there isn’t a linear or uniform relationship between the rates of economic growth and poverty reduction.
- Governments, who are seeking to maximise welfare, should be more naturally attracted to implementing and supporting competitiveness models which are more inclusive of the poor.
- Private firms, with commercial, profit-driven incentives, will be most interested in policies that contribute most to their bottom line. These may, or may not be inclusive of the poor.
Governments and firms have different motivations and interests and yet they need to be working coherently to see improved productivity, growth and poverty reduction. How can this apparent divergence be addressed? Inclusive business represents a new class of firm that begins to bridge this gap. IBs appreciate that profit maximisation in the short term is not necessarily the best long term approach, recognising the strategic benefits of a blend of social and commercial objectives in opportunities such as BOP consumer markets. In other instances, inclusive businesses are responding to social responsibilities, otherwise known as a needing a “licence to operate”, as dictated by specific legislation or civil society pressures.
Barriers to scaling inclusive business
The increased alignment of interests offered by inclusive business should help improve the dialogue and quality of engagement between such firms and government. This engagement is needed because scale is often impeded due to constraints external to the firm. These external constraints are a common theme in two interesting additions to the literature on inclusive business; namely, Growing Prosperity and Beyond the Pioneer. My recent review of these reports can be found on the Springfield soapbox page. These documents are born from a recognition that despite high hopes for pioneer firms (aka inclusive businesses) in providing significant impact to poor producers, employees and consumers, the results to date have not lived up to initial expectations.
In Growing Prosperity, Bain & Company primarily focus their attentions on weak performance within the firms themselves, essentially advocating for improvements in marketing strategy tailored to poor consumers. However, they acknowledge that “the widespread adoption of an innovation may be undermined by the structural challenges in the larger system in which the firm operates”. The extent to which this is the case is illustrated in Beyond the Pioneer (Monitor Inclusive Markets, MIM); a survey of 50 pioneer firms revealed that all were affected by at least one external barrier, and 80% cited those affecting them to be critically limiting to scaling their businesses.
MIM classify these external constraints as value chain barriers, public good barriers and government barriers. Whilst lack of finance dominates as single biggest perceived constraint, issues caused by inappropriate policies or ineffective enactment of policies, make up a large proportion of the ecosystem barriers to scale identified by the firms.
So how should, or could, scaling barriers faced by inclusive businesses be addressed? For common scale barriers to be tackled there needs to be a shared vision between business and government. As borne out by DFID’s IPPG research work, the higher the quality of state-business relations, the greater the pro-poor impact. In most countries in which development agencies work, the quality of these relations is poor, and needs to be improved. This means changing the way firms engage and advocate to government, and the way in which government responds to firms. Making progress here requires more industry level cooperation and coordination, and less individual firm competition around advocacy issues.
Implications for development agencies
Given these challenges of aligning interests to facilitate pro-poor economic growth, how should development agencies respond?
Beyond the Pioneer’s research suggests that there are a variety of potential ‘industry facilitators’ who can help bridge the gap between inclusive enterprises and the ecosystems in which they operate. Prime candidates are those with social incentives rather than vested interests in commercial outcomes, i.e. donors, but also “mission-driven intermediaries” such as specialised not-for-profits, and industry associations. However, the exact nature of these facilitators remains ill defined by MIM. It might be helpful to define the role as providing two distinct functions:
- Shaping the market: supporting the improvement of state-business relations in support of a clearer vision of pro-poor market impact
- Building the market: supporting firms and government to invest, compete and expand pro-poor market opportunities.
The UNDP Mekong Bamboo case study illustrates how the first can be achieved by adopting a market systems development approach. The social enterprise Prosperity Initiative conducted in-depth research and analysis that enabled stakeholders (government and private sector firms) to converge around industrial growth strategies that were both competitive and inclusive for the bamboo market. The subsequent project then worked at local and national government level to introduce policies to support development of the sector, as well as with SMEs throughout the value chains.
Similarly, the success of the Finmark Trust in South Africa in contributing to a 7.5% increase in the banked population from 2003-2005 is another example of industry facilitation deployed to shape a market. More inclusive financial services in South Africa was, at the time, an important development goal in the context of addressing post-apartheid poverty, but there was no common understanding between the banks, the government or other market players as to the critical factors to address. As a credible, external agent, Finmark ran a number of scenario building workshops with key stakeholders to generate three different options for the government in the sector, influencing the quality and the direction of the debate.
Having shaped the enabling environment to be more aligned to pro-poor growth, agencies can then help private sector and government to compete and improve performance “within” the market. Donors can support innovation through technical assistance or investment in the private sector to expand pro-poor impacts, as well as assist government in developing and implementing supportive policy.
This blog is a part of our May 2015 series on the role of Government and policy in inclusive business. To view all the articles in this series click here.