Private sector development
Economic growth generates wealth and thus is an important precondition to the eradication of poverty. Increasing levels of growth are necessary to improve income and employment prospects in developing countries.
In many developing countries, the expansion of the private sector, notably micro-, small and medium-sized enterprises (SMEs) is a powerful engine of economic growth and the main source of job creation. Private sector development affects the local populations, including the informal sector and the poor, at several levels:
- As employees: poor people identified getting a job – whether through self-employment or from receiving a salary – as their most promising path out of poverty. Better employment opportunities also increase incentives for people to invest in their education and skills. Competitive, profitable and growing SMEs, including those in the informal sector, can also pay better wages and invest more in training.
- As entrepreneurs: the innumerable firms in the informal economy, as well as the numerous SMEs, face many of the same constraints as larger firms, including insecure property rights, corruption, policy unpredictability, and limited access to finance and public services. Relieving these constraints increases entrepreneurs’ incomes and enables them to expand their activities. This also increases incentives to join the formal economy.
- As consumers: a successful private sector expands the variety and reduces the costs of goods and services, including those consumed by poor people.
One of the main challenges for governments in developing countries is to design institutional, organisational and regulatory frameworks which are conducive to private sector development. Governments alone cannot create a private sector with an enterprise culture but their actions can either hinder or facilitate it. This often requires far-reaching economic reforms.
The European Commission's role
The European Commission has been very active in assisting developing countries in their economic reforms and helping beneficiary governments to structure policies in support of private sector development, with a particular focus on SMEs.
EC assistance covers a wide range of areas such as support in creating an enabling business environment. A better business climate helps to promote efficient domestic investment, attract foreign direct investment and increase productivity, thereby raising income and employment opportunities. Assistance is given to reduce administrative and regulatory barriers for business, build capacities in relevant ministries, and review existing legislation and policies.
Support is also provided for business development services such as training, advice and information services which aim at improving technical and managerial skills and encourage the transfer of know-how and technologies.
At the institutional level, EC projects and programmes involve support for professional institutions such as chambers of commerce, industrial federations or SME associations, as well as the promotion of reliable local financial institutions.