Economics

Study Notes

Private Sector and Economic Development

Level:
A Level
Board:
AQA, Edexcel, OCR, IB

To what extent can private sector businesses and corporations be a key driver of growth and development in many of the world’s poorer developing countries?

Free-market approaches favour giving a larger role to private sector enterprises with liberalization of markets, structural economic reforms to boost incentives for people and businesses and increased transparency and accountability for government given a key focus

The Washington Consensus

The Washington Consensus was a term first coined in 1989 in the wake of the Latin American financial crisis and over the years it has become a highly contentious canvas on which supporters and protestors of western-style globalisation have battled.

According to John Williamson, the economist who came up with the idea of the Washington Consensus it comprised a group of market-friendly policy prescriptions favouring the private sector including:

  1. Fiscal discipline - keeping control of government budget deficits and national debt
  2. Reallocating state spending from subsidies towards health care, education & infrastructure.
  3. Tax reform - widening the base of taxation and encouraging lower tax rates to boost enterprise and work incentives as a means of creating wealth
  4. Liberalising interest rates - allowing financial markets more freedom in setting interest rates on savings and loans and letting market interest rates allocate capital among competing uses
  5. Exchange rates – supports a choice of fixed or free floating exchange rates but a preference against "dirty floating" i.e. intervention to manipulate the value of a currency
  6. Trade liberalisation - a gradual reduction in import tariffs and other forms of protectionism – trade seen as an important engine of growth and development
  7. Liberalization of inward foreign direct investment - capital investment between countries
  8. Privatization - transferring state-owned enterprises into the private sector
  9. Deregulation - lowering entry and exit barriers in markets but not at the expense of necessary regulation of aspects such as working conditions and employment rights
  10. Property rights - protecting intellectual and other rights to encourage innovation and risk-taking

According to the World Bank, the private sector already provides 90% of jobs in developing nations, so the health of the private sector will be crucial to maintaining growth and development in the years ahead.

What are the Key Criticisms of Private Sector Dominated Growth?

The Washington Consensus has come under sustained criticism even though private-sector friendly policies in many countries have contributed to an increase in trade and investment much of which has flowed into lower-income developing countries. However, development driven by the private sector has been criticised on several different grounds – some of suspicions about the private sector include the following:

  1. Concern over rising inequality of income and wealth - especially if there is a race to the bottom to cut wages
  2. Fears that profit-seeking businesses invest in the hunt for scarce resources rather than long term partnerships - land grabs in Africa are an example of this
  3. Disputes over ethical standards from transational businesses e.g. labour market standards and tax payments. FoxConn has come under criticism in recent times
  4. Profit-motives are not always aligned with improving social welfare - WTO agreements apply to government policies and actions rather than individual companies
  5. Monopsony power of multinational businesses - hitting prices, revenues and profits flowing to smaller producers
  6. Doubts over sustainable production processes - e.g. the impact of fast private sector growth on the environment and the loss of natural capital in many resource-rich poorer countries
  7. Tax avoidance - Developing countries lose an estimated $160 billion each year through tax avoidance by multinational companies
  8. Limited job creation - the 200 largest multinationals account for 20% of global trade but only 1% of global employment

Supporters of the private sector have a firm belief that the wealth generated from private sector activity and investment can have a huge positive effect on prospects for countries at every stage of development. This quote taken from the UK government website captures this view:

“The private sector is the engine of economic growth - creating jobs, increasing trade, providing goods and services to the poor and generating tax revenue to fund basic public services such as health and education.

As well as stimulating growth, new thinking within the private sector, shaped by the market, can also offer insights in to how to ensure better access to vital services or goods such as medicines or information.”

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