The Private Sector and Poverty Reduction

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Many commentators claim a key role for the private sector in reducing poverty. This can be achieved through direct benefits, such as the adoption of ethical business practices and the provision of employment, goods, and services to the poor
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    The Private Sector and Poverty Reduction Kate Raworth, Sumi Dhanarajan and Liam Wren-Lewis  Many commentators claim a key role for the private sector in reducing poverty. This can be achieved through direct benefits, such as the adoption of ethical business practices and the provision of employment, goods, and services to the poor; and through indirect  positive impacts on macro-economic policy and business development. This paper argues that the likelihood of business impacts being pro- poor depends also on wider policy and structural conditions. These include the importance of poor people in a company’s business model, and the length of local investment and commitment that this demands. Case studies of three companies demonstrate the importance of legislation and civil society as catalysts for pro-poor change in business. Leadership from within the company and a strong business case are also essential. However, multiple entrenched  problems with modern capitalist systems work against positive change within international business. Overcoming or mitigating these will be necessary if the pro-poor potential of the private sector is to be realised. This background paper was written as a contribution to the development of From Poverty to Power: How Active Citizens and Effective States Can Change the World , Oxfam International 2008. It is published in order to share widely the results of commissioned research and programme experience. The views it expresses are those of the author and do not necessarily reflect those of Oxfam International or its affiliate organisations.    The Private Sector and Poverty Reduction From Poverty to Power – www.fp2p.org   1 1. Why consider the private sector? According to Oxfam’s framework of development, people need sustainable livelihoods  in order to get out of poverty. What does that mean? A livelihood comprises the capabilities, assets and activities required for a means of living. It is sustainable when it can cope with and recover from shocks, maintain itself over time and provide the same or better opportunities for all, now and in the future. In order to build up such livelihoods, people need assets in five areas: ã human capital – skills, knowledge and information, health and education ã natural capital – environment, air, water, wildlife, biodiversity ã financial capital – savings, credit, remittances, pensions, safety nets and benefits ã physical capital – transport, housing, water, energy communications, land ã social capital – networks, groups, access to institutions They also need to consume goods and services to meet their immediate needs. Poor people acquire these assets and consumption goods from four sources: ã the natural resource base  – making use of available land, air, water, biodiversity, plant-based raw materials and wild foods; ã the unpaid, reproductive economy  – receiving care, nurture and security as members of a household and community. This is especially important for children, old people and unwell people and those who are especially dependent on the unpaid work of women ã state-provided services  – using publicly subsidised health clinics, schools, electricity, and water services, and benefiting from the security and stability created by good governance and the rule of law. ã the market economy  – selling their labour or production, buying goods and services, and investing in ventures (for example, providing credit or equity to others, for a return on capital). This working paper sets out to address the following questions: On impact: ã How does the private sector affect poor people’s acquisition of the necessary assets and consumption goods? ã What is the impact of private sector activity on the assets provided by the natural resource base, the reproductive economy and state services? On change: ã What creates a dynamic Small and Medium-scale Enterprise (SME) sector? ã What causes some companies to change their strategy, policies and behaviour in order to have a positive impact on poor people’s livelihoods? 2. What is the private sector and how does it affect poverty reduction? In this paper, the private sector is defined as all organisations within the monetised economy which are privately owned and funded, and that are operating for profit. It is a small sub-sector of the total productive system on which human beings depend for their wellbeing, which is bounded by the planet’s natural resource base and relies heavily on the unpaid and caring work of individuals.    The private sector within the total productive system on which human beings depend 1  Within the monetised economy, the private sector is constituted by all those organisations that are privately owned and operate for profit, as shown below. 1  Diagram adapted from Henderson, 1991 The Private Sector and Poverty Reduction From Poverty to Power – www.fp2p.org   2    Organisations in the Monetised Economy: Within the private sector, we can distinguish further among organisations according to: ã size (SMEs vs. large enterprises) ã formality (formal vs. informal sector) ã ownership and profit distribution (private vs. shareholders, vs. co-ops vs. mutuals) For the purposes of this paper, we group them as follows: ã Agricultural smallholders (non-subsistence) ã Informal micro-enterprises ã Formal small and medium enterprises ã Large domestic companies ã Trans-national corporations (TNCs) The private sector relates to poverty reduction through market-based transactions and state transfers and externalities, as shown below. The private sector interacts with poor people in the following ways: The Private Sector and Poverty Reduction From Poverty to Power – www.fp2p.org   3
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