Aligning private sector development instruments

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The Emerging Markets Group, a consulting firm, organised a recent workshop on Aligning Private Sector Development Instruments with the focus on Africa; I attended. The report is here.

Most of the 'instruments' were cheap money. 'Aligning' them seems to mean, for example, making sure that private firms don't get cheap money when they're small and then run out of cheap money as they start to grow, or making sure the cheap money is spread around equitably.

Problem number one: cheap money is perilous. We heard approving stories of huge multinational firms having their supply chains subsidised. Supply chains are not core business, and this apparently is excuse enough for a subsidy. Everyone agrees with the idea of 'smart' subsidy, but this is just motherhood and apple pie. Real smart subsidies are performance-based, paid only after delivery of the desired results, such as vaccinations, connection to telephone or water networks.

Problem number two: competition between these funds might be very productive. 'Alignment' is not necessarily desirable. We would need, instead, agreement over the terms of subsidy so that competution doesn't turn into distortion. Even more, we'd need measurement of fund performance through rigorous evaluation, preferably controlled trials. Funds that achieve results get more money to play with next time.

Michael Klein and I argue for this kind of thing here and here and in our book, The Market for Aid.

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