Strategy for Norwegian support of private sector development in developing
countries
Contents
Foreword
The Government has aimed from the outset to present a new approach in its
efforts for supporting private sector development in developing countries. The
point of departure for the strategy has been the needs of the developing
countries themselves. The aim of the strategy has been to forge a basis for
cooperation on the developing countries’ own terms and with the most
efficient use of resources.
The current strategy reflects the Government’s priority to support
private sector development in developing countries. This will help both to
increase income and provide jobs for poor groups, and create the necessary
economic basis for the countries’ own investments in health and education.
A vigorous private sector is also a major precondition for reducing aid
dependence and preventing an increased debt burden.
Within Norwegian development assistance, much has been done to support
private sector development, but the efforts so far have lacked a strategic and
integrated perspective. This document embrace efforts from support for more
active participation in the global economy via stimulation of improved
macroeconomic and legal conditions to incentive schemes at the micro level. An
integrated approach implies regarding efforts at these levels in relation to
one another, and achieving better integration of bilateral and multilateral
efforts.
This imposes considerable requirements on the authorities, on Norwegian
commerce and industry and on other players, but also offers good prospects of a
more efficient and less fragmented policy. With this strategy, we have
therefore acquired the instrument that has been lacking. The challenge will now
be to translate words into practical actions, remembering that what counts is
the results in the developing countries.
Hilde F. Johnson
Minister of International Development and Human Rights
With this document, the Government presents for the first time an overall
strategy for Norway’s support for private sector development in developing
countries. The main objective is to promote economic growth and profitable
production in developing countries. This helps reducing poverty in these
countries by creating jobs and income for the population. It also creates tax
revenues that provide a basis for countries’ own efforts within areas such
as health and education. The purpose is also to prevent further aid dependence
and reduce the danger of an increased burden of debt. The strategy will serve
as a guideline for Norwegian efforts to promote private sector development in
developing countries.
The strategy should ensure that development cooperation in this area is
rooted in the Government’s overall development policy goals and
priorities, such as poverty orientation and recipient responsibility. At the
same time, changes in global and national framework conditions require new
approaches to supporting private sector development in developing countries
The point of departure for the strategy should be the needs of developing
countries. Success will therefore be measured in terms of the results in the
developing countries. The approach chosen reflects a recognition of the fact
that the goal of contributing to private sector development in the developing
countries demands a broad approach ranging from global measures for improvement
of the situation of developing countries in relation to international trade via
measures to improve framework conditions for commerce and industry at national
and local levels to direct incentives for investments through institutions such
as NORFUND. An integrated perspective that regards the different allocations
and budget chapters in relation to one another will therefore be important.
This applies to country programmes, regional allocations and global schemes as
well as to the relationship between bilateral and multilateral assistance.
Globalization also implies closer integration of trade policy and development
cooperation policy. Improvement of the developing countries’ potential for
exploiting the WTO system in relation to globalization is another important
objective of the new strategy.
The strategy emphasises close cooperation with other donors and more
efficient donor coordination. It is of decisive importance that increased
Norwegian efforts for private sector development in developing countries are
rooted in plans and priorities of the government in recipient countries.
Incentive schemes for investments must be adapted to local conditions and be
well coordinated with the range of instruments for business development in
individual countries. Stimulation of long-term investments that generate income
and jobs in developing countries will be given higher priority at the expense
of export-oriented schemes. The strategy will reflect the fact that agriculture
and primary industries still dominate the structure of industry in many of the
poorest developing countries.
Improvement of legal, institutional and political framework conditions for
private sector development plays a central role in the strategy. Neither
national initiatives nor foreign assistance will function efficiently unless a
minimum of such framework conditions is in place. In many developing countries,
inadequate framework conditions are perhaps the greatest barrier to sustainable
economic development, and cause foreign capital to flow to other, more
predictable markets. Frequent characteristics are inadequate and insecure legal
guidelines, an undue degree of bureaucracy that hinders private initiative,
corruption and inadequate financial policies. In many countries , poor physical
infrastructure is still a great problem: potential investors fear that goods
and services will not reach the market in time. The new strategy places
considerable emphasis on surmounting this kind of barrier to successful
commercial and industrial activity.
Projects and programmes under the auspices of bilateral and not least
multilateral development assistance will help to build capacity and strengthen
institutions, among other ways, by exchanging experience with countries that
have more robust and open framework conditions for investments.
The strategy involves plans for continued active international efforts to
make incentive schemes for export and investments as efficient as possible, and
to enable the developing countries’ own commerce and industry to succeed
in winning contracts,including contracts in the aid market. The Government will
therefore intensify its efforts in the OECD towards untying development
assistance, and will at the same time untie Norwegian schemes for private
sector development in parallel with other donor countries active in taking
initiatives in this process.
The strategy establishes principles and guidelines for future Norwegian
support for private sector development in developing countries and presents
recommendations for making the strategy operational with an emphasis on efforts
and measures to:
- Promote investments in developing countries and encourage Norwegian
commerce and industry to invest and establish a long-term involvement in
developing countries.
- Reduce export subsidy schemes in parallel with other donor
countries active in international untying initiatives.
- Improve national framework conditions associated with macroeconomic
conditions, development of good governance and improvement of institutional
conditions, for example through a well functioning financial sector.
- Help to reduce marginalization of the poorest countries and
strengthen their capacity to exploit the potential of globalization, while
limiting its disadvantages.
- Help to strengthen South-South trade and regional economic
cooperation between developing countries.
- Promote trade with developing countries by strengthening current
arrangements for import from developing countries to Norway and by giving
increased priority to general measures for increasing trade with the developing
countries.
- Reinforce support of small and medium-sized enterprises, especially
within technical assistance and microfinance.
- Make active and targeted use of the Norwegian knowledge base,
including Norwegian commerce and industry, where this matches identified and
expressed needs in developing countries.
As in the case of other development work, the implementation of the strategy
for private sector development will imply using the Norwegian resource base,
including Norwegian commerce and industry, public institutions and NGOs, again
based on the needs of the developing countries. Norwegian commerce and industry
has a great deal of expertise that can be utilized in the work on promoting
productive activity and developing the private sector in developing countries.
Arenas will therefore be established for cooperation on private sector
development and investment possibilities in developing countries. This will
enable the strengthening of the dialogue between Norwegian development
cooperation authorities and Norwegian commerce and industry, and with
appropriate players in recipient countries.
At country level, Norwegian embassies will play a central role in ensuring
that these efforts are made on the national authorities’ own terms, and
that they are coordinated with the efforts of other donors, including
multilateral institutions. In order to “test” the recommendations of
the strategy and rapidly gain experience, implementation of the strategy will
first be given priority in selected pilot countries. The strategy entails that
private sector development will to a greater extent than previously be an
integrated part of Norway’s total development cooperation. This will be
reflected in the organization and priorities within the cooperation. Quality
assurance of the entire process, from the planning of sector programmes and
projects to implementation, reporting and evaluation, will emphasize continuous
assessment of performance and necessary correction of the use of instruments.
This must be carried out in close coordination with other donor countries
and multilateral institutions.
In the present document, the Norwegian Government for the first time
presents a comprehensive strategy for Norway’s support for private sector
development in developing countries, following the Storting’s
Recommendation S. no. 229 (1995-96) in response to Report no. 19 (1995-96) to
the Storting “A Changing World”. In preparing the new strategy, it
has also been natural to take into consideration recommendations regarding
private sector development in developing countries contained in the report from
the Commission on North-South and Aid Policies, Official Norwegian Report (NOU)
1995:5.
The Commission on North-South and Aid Policies and the Storting have
emphasized the importance of increasing the focus in development cooperation on
private sector development in developing countries . At the same time, there
have been a number of proposals concerning changes to current schemes as well
as proposals for new measures of importance for private sector development. An
increased focus on the needs of the developing countries has recurred as an
important premise for further support in this area. In this connection, it is
referred to guidance from the Storting related to untying of Norwegian
development assistance, increased local procurements and the wish to support
microfinance schemes. The preparation of a comprehensive strategy for Norwegian
support for private sector development in developing countries has provided an
opportunity to deal with such measures in a broader perspective.
The purpose of the strategy is to bring about greater coherence in Norwegian
efforts to stimulate private sector development in the developing countries.
The strategy is intended to ensure that development cooperation in this area is
rooted in the Government’s development policy objectives and priorities,
such as the focus on poverty and recipient responsibility. The strategy defines
the framework for future development work in this area by setting out
priorities and guidelines for such efforts. The strategy also includes specific
recommendations for implementation of the strategy.
In annex 3 to Proposition No. 1 (1998-99) to the Storting (i.e the 1999 aid
budget proposal), the Government outlined general guidelines and premises that
should form the basis of such a strategy, and specified some main elements.
Consideration by the Storting, cf. Budget Recommendation S. no. 3 (1998-99),
demonstrated that there is support for the main features of the
Government’s approach. The present strategy document therefore pursues
further and consolidates the proposals presented in the budget.
1.2 Changes globally and in the developing countries
The international community is characterized by conflicts of interest and by
rapid change. Never have so many people climbed out of absolute poverty as
during the last 20–30 years. At the same time, the number of poor people
is greater than ever. The poorest 20 per cent in the world have witnessed a
fall in their share of the world’s total income from 2.3 per cent to 1.4
per cent during the last 30 years.
An increasing number of developing countries liberalize their trade and the
financial sector, and thereby become more closely integrated into the global
economy. In the 1990s, we have witnessed a dramatic increase in private
transfers of capital to the developing countries. This has contributed to
economic growth in many countries, while others have been marginalized. For
example, Africa, apart from South Africa, has received only very limited
benefit from the increased flow of private capital. The recent financial and
economic turbulence in Southeast Asia has illustrated the considerable
challenges that are also involved in closer economic integration. Although the
effects of the turbulence in the financial market are serious in the short
term, Southeast Asia has built up a formidable developmental lead in relation
to Africa.
Illiteracy among women, infant mortality and population growth are at a
level half of that in Sub-Saharan Africa. At the same time, the gross national
product per inhabitant in Southeast Asia is almost double that of Sub-Saharan
Africa.
Owing to the crisis in Asia, it is now expected that the annual growth rate
for the developing countries taken as a whole during the period 1998–2000
will be approximately 3 per cent, the same level as in the period
1991-1997, while, a year ago, the forecasts for the same period were 4.6 per
cent.
We see from this that the basis for growth is fragile, a fact that has been
illustrated by the crisis in Asia. Moreover, in many of the world’s
poorest countries, population growth is still greater than economic growth. The
only way of ensuring a significant and permanent reduction of poverty is to
bring about a level of economic growth markedly greater than the population
growth, while ensuring that all parts of the population benefit from this
development. Many developing countries are also encumbered with serious debt
problems that prevent them from concentrating their resources on development
and improvement of the living conditions of the population. In this connection,
the Government has presented a separate debt relief plan for the poorest and
most indebted developing countries. In the case of these countries, private
investments are also a scarcity factor. Moreover, in large areas of Africa, the
development of HIV/AIDS represents a special challenge which already results in
increases in the cost of health services and training measures. The solution of
all these problems will require a joint effort by the international community.
At the same time, the developing countries themselves must pursue a policy of
establishing favourable conditions for economic growth, responsible management,
reduced corruption and increased respect for fundamental human rights.
Considerable changes have taken place during the last 10–20 years both
globally and internally in developing countries as regards framework conditions
for development and views on strategies for development and poverty reduction.
The globalization and increased integration of the world economy, coupled with
the implementation of economic reforms in individual developing countries, has
led to a general improvement of the framework conditions for economic
development and private sector development. Deregulation, currency reforms,
market orientation, privatization and trade liberalization are keywords for the
changes that have taken place. These developments have presented the developing
countries with major challenges, while at the same time providing them with new
opportunities for economic development and poverty reduction. However, the
challenges, opportunities and problems are not equally distributed among
developing countries. The poorest countries have the least favourable point of
departure, and have benefited only to a limited extent from private capital
flows. It is therefore a particular challenge for these countries to take
advantage of the development potential and to avoid being marginalized in an
increasingly globalized world economy.
In general, increasing emphasis is now placed on market solutions and
private sector development in developing countries, partly as a result of a
recognition that private sector development and economic growth are decisive
for lasting poverty reduction, and, on given conditions, that the private
sector is capable of making a significant contribution to this. This
recognition is to a great extent based on experience of different development
models and strategies over the years. An increasing number of developing
countries have chosen a market-oriented development strategy placing greater
emphasis on private sector development and a dynamic private sector. These
changes determine the conditions for development cooperation, which Norway as
donor must take into consideration. Simultaneously with the increased emphasis
on private sector development, changes have occurred in the view of the role
and involvement of the State in relation to private sector development. Instead
of participating actively in economic activities, the State now concentrates
more on establishing favourable framework conditions for private sector
development, development of human resources and establishment of a social
safety net.
However, the State still plays a major role as the only party capable of
ensuring the existence of a framework for democracy, good governance, human
rights and a functioning rule of law that creates confidence in state
institutions and ensures social stability. As well as establishing favourable
conditions for private sector development, the State must intervene and correct
the markets when desirable. In most developing countries today, the State
wishes to promote a dynamic private sector and attract foreign investments. The
changed role of the State also reduces the need for aid transfers to government
and parastatal enterprises. There is instead an increased focus on setting up
private industrial and commercial activities, and on mobilizing national and
international capital for this purpose. A comprehensive strategy for private
sector development must take the developments into consideration.
The clearly stated wish of the developing countries for long-term investment
and involvement by for-eign commerce and industry, coupled with gradual changes
in the investment climate, has improved the investment potential for foreign
investors. However, in the poorest developing countries, the flow of foreign
investments does not match the level and scope desired by the countries
them-selves. This is because foreign investors, including Norwegian investors,
still regard the risk as being too great. This may also be a result of the lack
of information and knowledge of business opportunities in the developing
countries. Norwegian efforts in this area must take such matters into
consideration in developing measures and instruments.
1.3 Private sector development and poverty reduction
There is broad agreement today that the creation of jobs and incomes is a
necessary condition for lasting poverty reduction, and that economic growth
over time must be larger than the population growth. Moreover, profitable
industrial and commercial activities strengthen the economic basis for public
expenditure on health and education by contributing to increased tax revenues.
Investments in health and education are important objectives in themselves, and
play a major role in Norwegian and international development cooperation.
However, private sector development and economic growth in developing countries
will be absolutely essential if they are eventually to be able to finance the
ambitious level of investments in health and education currently planned by the
countries themselves and by donors. The absence of economic growth is almost
certain to result in large public budget deficits, a reduction in the basis for
investment in health and education and increased dependence on development
assistance.
Supporting private sector development involves supporting measures that help
to strengthen profitable production, whether within primary industries,
services or manufacturing. It is not of decisive importance in which of these
sectors production takes place, but that the activity is profitable and yields
more than the resources input, in other words that it represents economic
growth. Whether this activity takes place in the private or public sector is
not important in itself, but developments in the developing countries (as
described in chapter 1.2 above), make it natural to place an increased emphasis
on the role of the private sector in this connection1). Private sector
development includes activities in both formal and informal sectors2).
Private sector development and economic growth are necessary for lasting
poverty reduction, but are not sufficient conditions for ensuring actual
reduction of poverty. The degree of poverty reduction and development that
result from private sector development and economic growth depend on the type
of private sector development and growth that takes place. The degree of
poverty reduction also depends on factors such as the share of profits that
remains in the developing country, how public funds are used, income
distribution, rights, and social and environmental conditions. Such factors
must therefore be included in an assessment of the total developmental effect
of private sector development. It is nevertheless necessary to point out that
in the poorest countries, including Norway’s partner countries, where such
large parts of the population are poor, strong and lasting economic growth is
absolutely essential for putting an end to poverty. Poverty reduction by means
of increased tax revenues and public support for health and education is also
completely dependent on private sector development resulting in taxable
profits, on the existence of a functioning system of taxation, and on taxes
actually being collected.
The strategy must take into consideration the decisive importance for
poverty reduction of developing the agricultural sector in the poorest
countries. Efforts for private sector development must therefore reflect the
key role of agriculture as a provider of employment and income and as a
supplier to agro industries. The emphasis in the strategy on satisfactory
framework conditions for economic activity in general is also highly relevant
for this sector. It is important to associate agriculture more closely with
other parts of the economy and to ensure better coherence between our actions
as donors in different areas. Poverty alleviation, for example, is closely
associated with improved food security. Since food security is associated with
access to land, credit and means of production, this cannot be separated from
general conditions for economic and social development.
1.4 Premises of development cooperation policy
The strategy for support for private sector development defines the
frameworks both for supporting authorities in establishing satisfactory
framework conditions for economic development, and for more direct support for
the activities of various players in promoting productive activities in
developing countries. However, it must be borne in mind that Norway and other
donors can play only a limited role in relation to achieving private sector
development in developing countries. The most decisive factors for the
potential for private sector development in developing countries are the
policies of the countries themselves, the framework conditions for local
commercial and industrial activities, and international framework conditions
for private sector development.
The strategy for development cooperation in this area has been prepared in
accordance with Norwegian development policy objectives and priorities (cf.
Proposition No. 1 (1998–99) to the Storting, the aid budget). This entails
a strong emphasis on the poorest African countries, a clear recipient
orientation based as far as possible on the plans and priorities of the
recipient and a reduced emphasis on tied arrangements 3). At the same time,
support for private sector development is to be promoted while paying due
regard to issues concerning human rights, environmental issues, women and
gender equality, in accordance with the general requirements regarding
development projects that receive Norwegian support.
Income potential for women plays an important part in poverty reduction of.
In many developing countries, the low social and economic status of women makes
it particularly difficult for them to participate in economic activities. At
the same time, measures within private sector development must reflect the fact
that in many developing countries women are responsible for considerable
economic activity within agriculture, small-scale industry and trade. This must
be given special consideration. A fundamental assumption of the strategy is
that this is best taken care of by improving the general framework conditions
for economic activity even though there may in some cases be a need for more
targeted schemes for women. The potential for increasing the number of jobs for
women is particularly great in small-scale industry and crafts. This form of
activity often employs simpler technology than large industrial enterprises,
and involves low establishment costs. The question of whether or not it is
appropriate to support special schemes or financing mechanisms for female
entrepreneurs has to be decided on the basis of country-specific circumstances.
These circumstances must be taken into consideration in the planning of
small-scale industry measures.
As regards environment, the same guidelines that apply to Norwegian
development cooperation in general apply to measures implemented in accordance
with the strategy for private sector development. This applies to the whole
production process from extraction and transport of raw materials to the
finished product, including the use of energy and chemicals. Successful
effectuation of a sustainable production cycle is dependent on taking these
aspects into consideration when planning production. It is easier to satisfy
the growing international demands for environmentally correct goods and
services if one begins by planning environmentally benign production and
products. The Norwegian government’s Asia plan includes a special priority
in the environmental area involving the financing of projects that prevent
damage to the environment and promote sustainable production processes. It is
possible to combine different objectives within industrial and commercial
cooperation in areas with indirect relevance for private sector development. An
assessment of the Asia plan will be available in the spring of 1999.
The strategy includes measures to safeguard considerations regarding trade
union rights and other human rights issues, among other ways, by complying with
adopted international conventions and following these national efforts. This
also involves raising awareness of the importance of combating child labour and
ensuring that partners and suppliers do not make use of child labour. In
relation to more general human rights considerations, KOMpakt (the consultative
body for human rights and Norwegian economic involvement abroad) is an
appropriate forum for raising relevant issues for discussion between
authorities, commerce and industry and other players.
Norwegian development assistance is mainly untied, i.e. Norway does not
impose conditions that goods and services should be purchased from Norway.
Industrial and commercial cooperation, technical development assistance and
support via Norwegian NGOs have represented exceptions to this principle. The
principle of not tying development assistance must be viewed in relation to the
principle of recipient responsibility. The general objective of untying
development assistance motivated by the wish to increase the effectiveness of
the assistance is a major premise of development cooperation policy. On several
occasions, the Storting has affirmed that Norwegian development assistance
shall be untied and shall be based on competition. Both in view of this and in
view of the efforts of the OECD to untie all development assistance to the
least developed countries, the strategy prepares for a future range of
instruments with no emphasis on tied schemes. The strategy is therefore also
founded on the principle that current Norwegian tied schemes should be phased
out. However, this should be carried out at the same pace as progress is
achieved internationally through changes in the practice followed by other
countries.
1.5 The role of Norwegian commerce and industry as a part
of the Norwegian resource base
Increased emphasis on private sector development in Norwegian development
cooperation reflects the developing countries’ own priorities and their
clearly stated wish to cooperate with other countries in promoting private
sector development. The developing countries welcome contributions to this
through contact with foreign commerce and industry and through access to
technology, capital and markets.
Norwegian commerce and industry constitutes a natural part of the Norwegian
resource base on a par with other parts of Norwegian society, such as research
institutions and NGOs. In view of the priority given by developing countries to
private sector development, the expertise and experience of Norwegian commerce
and industry is especially relevant.
There are moreover areas of development cooperation where the involvement of
Norwegian partners results in positive ties and involvement by the Norwegian
society, which is of value in itself. Such co-operative relations enable the
dissemination through practical work of Norwegian values, Norwegian working
environment standards and the Norwegian social model. This will also be the
case in the area of private sector development in developing countries. Through
their presence and through their contribution to local economic growth,
Norwegian companies will stimulate an economic development which in the long
term may lead to independence of development assistance. At the same time, such
activities will broaden the range of contacts between Norwegian society and the
developing countries. Moreover, through involvement of the private sector in
recipient countries and in Norway we wish to exploit the advantages of this
sector to think in terms of profitability and to develop viable commercial
activities. Such considerations make Norwegian commerce and industry a natural
partner in the efforts to achieve the overall objectives of development
cooperation.
The fundamental premise represented by the needs of the developing countries
must play a decisive role. All procurements in connection with development
assistance projects must be made at competitive prices. Competition in the
private sector and the wish for future contracts ensures a reasonable
relationship between price, quality and professional expertise. As explained in
Proposition No. 1 to the Storting (1998–99), the Norwegian follow-up of
international initiatives for untying shall be carried out in such a way as not
to weaken the total range of development cooperation instruments. Untying is
not an objective in itself and will be assessed in relation to the total
achievement of objectives.
In some cases, one has to be realistic and accept that corruption and
malfunctioning of markets still create a competitive situation that precludes
the correct management of Norwegian funds by means of normal international
competitive tendering. At the same time, improvement of such framework
conditions is a primary objective of the new strategy.
Investment in developing countries is an area where cooperation with
Norwegian commerce and industry is of especial interest. The developing
countries clearly state a wish for foreign investments, and are positive to
involvement by serious foreign investors, including Norwegian. Experience shows
that the bottleneck lies not only in the investment potential in the developing
countries, but that there are limitations to the willingness of foreign
investors to gamble on something they perceive as being too hazardous in
relation to the yield that can be expected. If we are to deal with this problem
through Norwegian development cooperation, in addition to working to improve
framework conditions in the developing countries, we must encourage and
motivate foreign investors, not least Norwegian, to invest in developing
countries. In consistency with the principle of untying, incentive schemes for
investments should be open for international competition. At the same time,
factors such as proximity and knowledge of the range of instruments provide
Norwegian commerce and industry with a good potential for benefiting from such
schemes. The dialogue between Norwegian development cooperation authorities and
the Norwegian business community should be strengthened to ensure appropriate
structuring and application of the appropriate instruments. Moreover, increased
trade between Norwegian companies and companies in developing countries may
open the eyes of Norwegian commerce and industry to the investment potential
that exists in these countries.
1.6 Current development assistance for private sector
development
The experience of Norwegian development assistance for private sector
development is described in more detail in a background report for this
strategy. It shows that direct and indirect support for private sector
development has constituted a considerable part of Norwegian development
assistance. However, it is difficult to give a precise estimate of the
proportion of the development assistance that has been used for private sector
development, since both budgeting and reporting have placed this type of
measure in the category ‘economic development’, which is somewhat
broader than private sector development 4). It is also difficult to determine
the extent to which this support has actually resulted in the desired
developmental effect. The efforts so far have been too fragmentary and too
little poverty-oriented. Nor is there any certainty regarding the extent to
which these efforts have resulted in establishments in the form of jobs and
economic growth.
During recent years, approximately one-third of Norwegian bilateral
development assistance has been used for economic development. As illustrated
by table 1, the proportion used for economic development was 33 per cent in
1997, whereas the figure for the two previous years was 36 per cent.
However, the proportion of Norwegian development assistance used for
economic development varies considerably between different channels. While
approximately half the assistance over country and regional allocations is
applied to economic development, the corresponding proportion for commercial
and industrial cooperation is 78 per cent and for assistance via NGOs, 27 per
cent.
Support for economic development is distributed between several sectors and
types of activity. In 1997, the largest proportion of the total development
assistance in this area, 51 per cent, was for public utility functions (e.g.
infrastructure), 22 per cent was for agriculture and fisheries, 10 per cent for
regional development and 10 per cent for manufacturing, mining and craft
enterprises.
The proportion of Norwegian multilateral development assistance which is
used for economic development, including private sector development, is more
difficult to estimate, since the major part of this assistance consists of
general grants to these organizations. The proportion that is applied to
economic development varies considerably between different multilateral
institutions dependent on their mandate and priorities. Moreover,
classification of measures varies from organization to organization. While the
proportion of the World Bank’s loans for economic development constitutes
60–70 per cent, the corresponding figure for the UNDP is 30 per cent. In
the case of most other UN organizations, neither economic development nor
private sector development is used as a separate category and, in several
cases; the actual proportion is probably close to zero.
However, it is possible to estimate the proportion of the Norwegian
earmarked contributions, i.e. the Norwegian cofinancing with multilateral
institutions (the World Bank, the regional development banks and the UN system)
that is applied to economic development. The definitions differ somewhat in
relation to those of NORAD, but, in 1997, the proportion of cofinancing that
was applied to economic activity and infrastructure was 24 per cent. As shown
in table 3, this proportion has fallen markedly in recent years. This is partly
because of the increased priority given to support for health and education in
Norwegian development cooperation in general as well as in the distribution of
cofinancing funds.
1) Neither in the context of the OECD nor in our own definition, it is of
decisive importance whether the activities, which OECD documents refer to as
“Private Sector Development” and which Report no. 19 to the Storting
(1995–96) refers to as “productive sector”, are privately or
publicly owned. It is however important that the activities are financed by the
sale of own production and not over public budgets. In practice however, they
consist chiefly of private sector activities. In order to avoid
misunderstandings, the term “Strategy for the Norwegian support of Private
Sector Development in developing countries” is used as the English
translation of the strategy’s Norwegian title of “Strategi for
støtte til næringsutvikling i Sør”.
2) Cf. the definition of ‘Private sector development’ in the
report from the Commission on North-South and Aid Policies, Official Norwegian
Report (NOU 1995:5) p. 33.
3) Tied schemes are financing schemes where the procurement of goods and
services is tied to procurement from a specific country or region, in this case
from Norway.
Agriculture and private sector development in Zambia.
Like a number of African countries, Zambia has a great potential for
agricultural production. As well as enjoying favourable natural conditions, the
sector has clear economic and social advantages, since it provides jobs and
income potential for many people while at the same time contributing to
increased food security. However, the development of agriculture in Zambia has
been adversely affected by the economic framework conditions, which favoured
the production of maize. Other agricultural production stagnated because of
extremely unfavourable policies and a greatly overvalued currency. The State
supported maize production by subsidizing chemical fertilizers and by
purchasing produce at regulated prices far higher than the market prices.
Following economic reforms in 1991, the Zambian authorities made efforts to
bring about a positive development of the agricultural sector, and implemented
a number of structural reforms. However, these reforms have shown limited
results. It has proved very difficult to phase out the extensive public
intervention in the market for maize and chemical fertilizers, which has
hindered the emergence of private players in such areas as distribution of
chemical fertilizers.
Norway has supported agricultural development in Zambia for a long time,
particularly in the northern province, a sparsely populated area with a great
potential for agriculture. The Norwegian assistance has given priority to the
development of expertise, cultivation methods and fundamental infrastructure.
Evaluations of the support have indicated that fundamental economic and market
conditions have not been in place in the province, and this has played a major
role in limiting the effects of the Norwegian programme on agricultural
production and on the incomes of small farmers.
The Zambian authorities intend to make agriculture a key sector for
attracting investments, both from repatriated Zambians and from other sources.
The development of a viable commercial agricultural sector is one of the most
important means available for further development of the Zambian economy and
for combating poverty. In Zambia, agricultural development is therefore the
best private sector development. If this could be successful, the future for
Zambia would be, if not rosy, at least green.
2. Stimulating private sector development in developing
countries
2.1 The need for a comprehensive approach
The slow progress towards a dynamic commercial and industrial sector, in
spite of considerable efforts on the part of the countries themselves and the
donors, is due to a number of factors, some of which are beyond the control of
the countries and the donors. Moreover, expectations regarding development
cooperation in this area have often been unrealistically high. Factors such as
international trade, macroeconomics, good governance, legislation, sectoral
policy, market conditions, technology, capital and competence – and not
least the inter-action between them – all make important contributions to
deciding whether a given enterprise or project will be economically viable and
provide permanent jobs for its employees.
A comprehensive approach is therefore necessary if external assistance is to
contribute effectively to stimulating private sector development in developing
countries. Well founded establishments of, for example, financing schemes or
programmes for transfer of technology often fail to provide the desired results
as long as other critical factors and conditions are not satisfactory. The
acknowledgement that major efforts are necessary does not necessarily imply
that Norway is to do something in all areas in all countries, but rather that
the efforts made in individual countries should be directed towards a selection
of the areas mentioned and that this selection should be based on
country-specific analyses and assessments. Likewise, the efforts should be
coordinated with other donors and multilateral institutions, thereby ensuring
an integrated approach.
2.2 Factors at several levels decisive for private sector
development
The various factors that are decisive for the potential for private sector
development in a country are often grouped on four levels7):
- International framework conditions in the form of access to
international markets, regulations for international trade, debt, ODA levels,
etc.
- Macroeconomic conditions in the individual country.
- Physical and institutional infrastructure and good governance,
which, broadly speaking, comprise both the physical infrastructure and the
institutional and legal framework.
- Factors at the micro level (enterprise level) such as access to
technology, expertise, capital, manpower,, guidance, etc.
A more thorough discussion and analysis of these topics were presented in a
background report for the strategy for private sector development, October 1998
(Norwegian only). However, there is reason to emphasize certain factors as
especially important in this connection.
International framework conditions in the form of access to
international markets, regulations and standards for international trade,
international debt relief schemes and the levels of assistance provided by rich
countries are of major importance for the sales prospects of products marketed
by the develop-ing countries and for access to foreign capital and technology.
Globalization gives rise to opportunities as well as to challenges and
problems. The great challenges associated with globalized and integrated
markets have been demonstrated by the recent turbulence in international
capital markets and economic tremors in a number of developing countries.
The challenges apply mainly to the poorest developing countries, which have
not been able to benefit sufficiently from the welfare enhancements that other
countries have derived from increased trade. It is also important to ensure
that the developing countries have the necessary knowledge of the potential
that lies in international trade agreements and the resources to be able to
make use of this. Furthermore, a regional perspective on private sector
development is gaining increasing relevance, not least in view of the
development of more powerful regional organizations for economic cooperation.
Strengthened regional trade relations and increased South–South trade are
important for improvement of the external framework conditions for promoting
private sector development in developing countries. This is of major importance
for all regions where Norway provides assistance; in Africa, Asia and Latin
America. Where Norway is concerned, the potential for assisting in such a
development is especially relevant in southern Africa, since several of our
most important partner countries are located in this region, and this is a
region where Norway has a major economic and political involvement.
Macroeconomic conditions in individual countries in the form of
balanced public budgets, satisfactory external balance and acceptable rates of
inflation and interest are factors of decisive importance for whether or not
domestic and foreign investors regard the investment climate as favourable.
Satisfactory macroeconomic framework conditions are essential to sustainable
private sector development and to ensuring that other support for private
sector development has a positive effect. The World Bank’s study
“Assessing Aid” from 1998 emphasizes the importance of a satisfactory
macroeconomic framework and sensible economic policies for the efficient
functioning of foreign assistance. In countries where the macroeconomic
conditions for economic activity are a major problem, efforts must be directed
towards improving these. Al-though much has been done to improve the
macroeconomic conditions in many developing countries, continued implementation
of economic reforms is still necessary in most developing countries.
The physical and institutional infrastructure and the degree of good
governance in a country are of major importance for private sector
development. Satisfactory and stable conditions for investments are dependent
on the way markets function, including the capital market, and the existence of
a functioning legal framework. Other decisive factors are the degree of
corruption, the level of physical infrastructure in the country, and whether or
not there are functioning organizations able to strengthen the dialogue between
the business community and the authorities as well as between the social
partners.
In many countries, weak physical and institutional frameworks are the
greatest barriers to private sector development. The financial crisis in Asia
in 1997–1998 can partly be explained by weak institutions, especially in
the financial sector, and has illustrated the dramatic consequences that may
result from poorly functioning institutions, the lack of
“transparency” and corruption problems. Increasing importance is
therefore attached to the need for good governance and the improvement of
institutional conditions in a broad sense. Physical infrastructure, such as
energy supplies, transport systems and telecommunications are still poorly
developed in many countries, and therefore represent obstacles to private
sector development. There is also a need for regulations and government
institutions to be adapted to the needs of a dynamic private sector
development. Stable and predictable legal frameworks for commercial activities
and the necessary confidence in the legal system are still lacking in a number
of developing countries. Donors have probably underestimated the importance of
institutions in the financial sector for the development of a viable and sound
commercial and industrial sector. Support for the development of physical
infrastructure has constituted a major part of Norway’s bilateral support
for private sector development. In future Norwegian development cooperation in
this area, considerably greater importance should be attached to support for
institutional and legal infrastructure.
At the micro-level, it is of decisive importance for individual
enterprises and investors in developing countries that they have access to
necessary technology, expertise, capital and manpower. Measures at the
micro-level in relation to individual enterprises and investors are the most
direct way of supporting private sector development. These are the kind of
measures usually associated with support for private sector development.
Particularly in the case of small-scale producers, which form the backbone of
the economies of many developing countries, poor access to the above factors
constitutes a significant restriction on investments, market entry and
expansion. Support schemes for small-scale producers have often proved to have
positive developmental effects. Various microfinance schemes have also made
commercial activities possible for many people for whom this would otherwise
not have been possible. However, experience shows that the potential
developmental effect of such measures alone is limited. It is necessary to view
them in relation to other measures for the benefit of small enterprises,
including measures for promoting a well functioning financial sector.
Factors at all these levels are of decisive importance for the success of
individual investments and projects and thereby for the possibility of
achieving a dynamic private sector development in a country. In order to
strengthen the possibilities for private sector development, efforts are
therefore in most cases necessary at several levels. If certain factors
particularly hinder private sector development in the country concerned,
efforts should be concentrated on these. Decisions concerning the selection of
concrete measures to be implemented must be based on analyses of the main
obstacles for private sector development in any given country and on how other
countries and multilateral institutions organize their assistance. Decisions
must then be taken as to what channels are most appropriate for dealing with
the challenges and problems given priority.
2.3 Channels for supporting private sector development
Support for private sector development in developing countries can be
provided in several ways and via different channels. The main channels for
Norwegian development assistance are multilateral institutions, bilateral
channels (including NORFUND) and NGOs:
Multilateral organizations such as the UN system, the WTO, the World
Bank and the regional development banks are major channels and partners for
Norwegian development assistance, also in relation to private sector
development. Cooperation with these organizations takes a number of different
forms, e.g.
- Participation in international negotiations
- Active participation in the governing bodies of individual organizations
to influence the organizations’ general policies and strategies, e.g. the
World Bank’s private sector strategy and its policy on support for
economic reforms and good governance
- Participation in and support for special programmes and coordinating
mechanisms under the auspices of multilateral organizations
- Assistance to developing countries to enable them to participate actively
in relevant international organizations themselves
- Support for the activities of the organizations in individual countries:
- at the overall policy level, by providing support for economic reform
programmes, development of good governance and planning of sectoral policy in
different areas
- in relation to improvement of the framework conditions for commercial
activities;
- through support of the organizations’ individual projects within
capacity building, infrastructure, microfinance, etc.
Bilateral channels, which in practice means Norway’s assistance
via NORAD, can be used for:
- Dialogue concerning priorities and policy of indi-vidual recipient
countries in areas of major importance for private sector development
- Support for individual projects or programmes within infrastructure,
capacity building and support for small and medium-sized enterprises, including
microfinance and business counselling.
The role of NORFUND is to supply capital directly to individual projects in
developing countries through joint ventures between enterprises in
Norway and enterprises in developing countries, and indirectly through
contributions to local investment funds in developing countries, which then
invest in individual projects.
NGOs can for example be used to carry out income-generating projects at the
micro-level in developing countries and as a channel for support to
microfinance schemes.
2.4 Criteria for selection of aid channels
A number of factors must be taken into consideration when selecting channels
for assistance for private sector development.
The following types of effort clearly belong in specific channels:
- Efforts to improve international framework conditions and standards are
primarily appropriate within the framework of the WTO, the Bretton Woods
Institutions and different parts of the UN system.
- Efforts to motivate and stimulate Norwegian enterprises to involve
themselves in developing countries belong mainly in NORAD and NORFUND. The
guarantee scheme of the Norwegian Guarantee Institute for Export Credits (GIEK)
for export to and investment in developing countries will also be an important
instrument for reducing the risk involved for Norwegian enterprises.
With respect to other types of measures covered by the strategy, the choice
of channel is more open:
- Investments in local investment funds that parti-cipate with risk capital
in investment projects can, for example, be made via NORFUND, the
Inter-national Finance Corporation of the World Bank (IFC) or the regional
development banks’ private sector initiatives.
- Capital transfers, technical assistance and other support for small and
medium-sized enterprises can be given under the auspices of the IFC, the World
Bank, the regional development banks, the UN organizations and via NORAD’s
various schemes.
- Support for capacity building and institutional development that is
important for private sector development may be provided via the World Bank,
the WTO, the UNDP, NORAD or NGOs.
In the latter cases, selection of channels and mechanisms should be based on
assessments of the comparative advantages of the various channels and
mechanisms used to determine where the greatest effect can be attained.
However, it is often difficult to determine whether an organization in one of
these fields is preferable to others. Furthermore, there may be good reasons
for providing some types of assistance through several channels, for example
investment support, microfinance, etc. In such cases, efforts must be made to
attain the greatest possible synergy effect between the efforts via various
channels.
Support for private sector development can be provided related to the
different levels described in 2.2, above, and via the channels described in
2.3. Possible measures and mechanisms for support of private sector development
can therefore be classified and illustrated in relation to the four levels and
the various channels described above. The figure on page 17 illustrates the
relationship between the selection of level and channel. The figure is greatly
simplified and in no sense gives a complete picture of the mechanisms that
exist, but provides examples of mechanisms and measures for support of private
sector development in relation to the various levels and channels.
The strategy is largely concerned with the choice of levels and channels
appropriate for the bulk of Norwegian investments, and the types of investment
and support that shall be given priority at each of the levels.
3. Norwegian efforts to strengthen private sector
development in developing countries
3.1 Main priorities
Norwegian development cooperation for private sector development has
previously taken the various channels within Norwegian aid as its principal
point of departure before considering what can be done within each channel. The
new strategy is based on considering the needs of the developing countries
before selecting appropriate channels and instruments. Within bilateral
development cooperation, a country-specific analysis of the most important
obstacles to private sector development will form the starting point for
considering where development assistance can and should be provided. At the
various levels, an assessment must then be made of what Norwegian development
assistance must do more or less of and what must be done differently. This
applies to content, as well as to the selection of channels and support
mechanisms. Strong emphasis must be placed on the priorities of the recipient
countries, on other countries’ development assistance and on the wish to
strengthen donor coordination.
The approach adopted in the strategy reflects a recognition of the fact that
effective support of private sector development in the developing countries
requires a broad approach and is not a matter of isolated initiatives in
relation to specific chapters of the budget. It is important to make use of
relevant multilateral institutions and to cooperate with these in order to
achieve objectives at both global and national levels. However, Norway cannot
do everything in all countries. The limited funds that Norway is able to
contribute should go to selected priority areas. The strategy has the following
main priorities:
- Reduce marginalization: Help to improve international framework
conditions and reduce the marginalization of the poorest countries, thereby
reducing the risk they run of failing to benefit from the development potential
that lies in globalization.
- Strengthen South–South trade: Strengthen the regional
perspective and trade between developing countries, which is an underexploited
potential.
- Make comprehensive efforts at country level: Estab-lish a
comprehensive country-specific perspective for support of private sector
development based on identification of bottlenecks, needs and priorities in
individual countries. Improve the consistency and synergy between efforts at
different levels and through different channels.
- Improve framework conditions: Continue to support macroeconomic
reforms, while placing greater emphasis on supporting the development of good
governance and improving institutional conditions, such as a well functioning
financial sector as well as organizations and trade unions.
- Promote investments: Actively promote investments in developing
countries, particularly in the poorest countries. Stimulate long-term
investment and involvement by Norwegian and international commerce and
industry.
- Promote trade with developing countries: Strengthen current
arrangements for import from developing countries to Norway and increase the
priority of general measures to increase the export and trade of developing
countries.
- Support untying: Continue active Norwegian support for untying of
development assistance, both in the OECD/DAC and through the gradual untying of
Norwegian development assistance schemes in step with other donor countries
active in this process.
- Increase the use of local procurement: Promote local procurement in
aid-financed projects.
- Make active and targeted use of Norwegian expertise: Actively
utilize the Norwegian resource base, including Norwegian commerce and industry,
when this meets identified and expressed needs in developing countries.
Strengthen the dialogue between Norwegian development cooperation authorities
and Norwegian commerce and industry concerning private sector development and
investment opportunities in developing countries.
To follow up these overall priorities, choices and priorities are made at
different levels as part of the strategy concerning the kinds of measures that
should be given priority and the criteria that the selection of channels shall
be based on. The strate-gy is not intended to present a detailed list of
measures within specific mechanisms and channels. To the extent that this is
mentioned, it is intended as examples of what the new strategy will entail in
practice.
3.2 Priorities in different areas
3.2.1 Reducing marginalization and improving international framework
conditions
Factors outside the borders of the individual development country are of
decisive importance for the potential for private sector development. Norway
will therefore give high priority to efforts to improve external framework
conditions within the strategy for private sector development both at global
and at regional levels. The improvement of international framework conditions
must primarily take place via the multilateral system, with an emphasis on
improvements in regulations that apply to trade, investments and financing,
paying particular attention to the interest of the poorest countries. Norway
will increase its support of the poorest countries’ interests in
international negotiations concerning these issues in appropriate fora.
The developing countries still have a disproportion-ately small share of the
world’s trade in goods and services. Improvement of this situation is
dependent on access to markets, provision of development assistance and
implementation of the WTO’s provisions concerning special and differential
treatment. As far as market access is concerned, there is still a need for
reductions in tariffs and non-tariff barriers, via the GSP systems of
individual countries and/or via WTO-committed schemes. Particularly within the
agricultural sector, the poorest developing countries see a consider-able
export potential that can constitute a valuable contribution to private sector
development in developing countries.
However, the developing countries must also improve their ability to exploit
the export potential that exists, which will require coordination of national
reforms, development of the necessary infrastructure, training of manpower and
targeted development assistance. Both Norway and different international fora
place increasing emphasis on directing technical assistance in this area
towards the factors that prevent the exploitation of export potentials.
The WTO’s agreements include a number of provisions concerning special
and differentiated treatment of the developing countries. There are also
special provisions concerning the least developed countries. Within the WTO,
requirements thus vary concerning what shall be implemented and how rapidly the
implementation shall be carried out. There is currently a debate going on the
implementation of WTO agreements. As part of this work, it is natural to
consider the need for a clarification of the WTO’s references to the need
for special and differentiated treatment of the developing countries, so that
the agreed positive special treatment can be implemented as effectively as
possible. In addition, Norway is making efforts to bring about a discussion in
the WTO on the relations between fundamental labour standards and trade.
As well as working to improve the general framework conditions, it is
necessary to support more direct measures in the form of trade-related
technical assistance to the poorest countries so that they can make full use of
current schemes. In this connection, six international organizations have
established what is known as the “integrated frame-work” for
trade-related technical assistance to the least developed countries (LDCs).
Norway has given its support to the joint integrated technical assistance
programme for selected Sub-Saharan African countries, which is part of the
integrated framework. It would be natural to continue and extend this type of
measures. Norway has announced in its development aid budget for 1999 that it
will support the establishment of an independent legal advisory centre to
assist the poorest develop-ing countries and others in trade disputes, so that
that they can better utilize the WTO dispute settlement mechanism.
An important part of the efforts to integrate the poorest developing
countries into the world economy is the continued work to enable these
countries to achieve real and increased shares of the Norwegian market. The
Norwegian GSP system plays a major role in this respect. Tariff reductions or
exemption granted by the GSP scheme are used to stimulate increased imports
from the developing countries, and particularly from the least developed
countries.
As regards foreign direct investments in develop-ing countries, these have
so far been regulated via Bilateral Investment Treaties (BITs). Approximately
1,800 such agreements have been concluded, mainly between an OECD country and
countries outside the OECD area. More uniform international regulations for
investments would create increased transparency for investors and provide more
stable and predictable conditions. In this connection, it would be important to
look more closely at how the interests of the developing countries,
particularly the poorest countries, could be attended to within a framework of
multilateral regulations in the investment area. The WTO has commenced work on
trade and investments, where the issue of whether investments should be covered
by WTO agreements is a topic for discussion.
3.2.2 Strengthening the regional perspective and South–South
trade
Increased trade and closer economic cooperation between developing countries
represent a considerable potential for development, but realizing this
potential represents a major challenge. Support for regional measures that
create a common frame of reference across national borders would establish
favourable conditions for regional trade and integration, and should therefore
be given priority. Institutional and political reforms in individual countries
will also play a significant part in reducing the barriers to economic
relations between poor countries and regions. Positive developments in this
direction have already taken place in many regions. It is moreover important
that efforts for private sector development in individual countries are
assessed also in a regional perspective. This applies for example in connection
with the implementation of economic reform processes in these countries.
Support for such measures is recommended first of all in southern Africa,
where measures to strengthen the economic and industrial policy should be given
priority. This may involve measures within the development of infrastructure as
well as measures to reduce trade barriers and increase competitiveness through
standardization and quality assurance. On the basis of experiences gained in
this region, Norway should consider how to support the region’s own
initiatives, for example within the framework of SADC, which may help to bring
about more balanced development. One of the priority areas for future
cooperation between Norway and South Africa is regional cooperation, and this
work can function as one approach for supporting such initiatives. Measures
within the framework of SADC’s cooperation in the area of finance and
investment and in other relevant areas should also be considered in this
connection.
3.2.3 Promoting integrated efforts at country level
The process of formulating the strategy has illustrated the need for a broad
range of instruments to deal with the challenges and prospects faced by each
individual country. An integrated perspective on efforts at different levels
and through different channels is of decisive importance for the results
attained. At country level, the strategy must be implemented on the basis of
country-specific needs and in response to the wishes expressed by the
developing countries themselves. This will be achieved by:
- analysing the weaknesses and bottlenecks that hinder the development of a
dynamic private sector in the country concerned,
- agreeing with the country’s authorities, the private sector and other
bilateral and multilateral donors on the measures that shall be given priority
in order to stimulate private sector development and, on this basis,
- selecting priority areas, mechanisms and channels for Norwegian support of
private sector development.
These activities will be fundamental in the preparation of integrated
private sector development programmes in those of our partner countries where
this is appropriate. The programmes will form an integral part of NORAD’s
activities in individual countries, and will primarily be concerned with the
most serious obstacles to private sector development in these countries. This
does not imply large independent Norwegian programmes, but activities that are
coordinated with the efforts of the authorities themselves and with other
donors in the area. In some countries, it may be appropriate to channel funds
via other bilateral donors and multilateral institutions. What is essential is
that Norway is realistic in selecting functions and tasks to embark on, and
that Norwegian efforts form part of an integrated approach, which will ensure
better coordination of the efforts in individual countries through different
channels and mechanisms, while strengthening the synergy effect of the measures
that are carried out.
This approach does not automatically imply an increased emphasis on private
sector development in all Norwegian development cooperation programmes, but is
rather intended to form the basis for a more integrated approach.
In connection with the aid budget for 1999, it was proposed to start pilot
programmes to implement the new strategy in selected countries where
circumstances are favourable. This activity will enable the immediate testing
of some models for implementation of the strategy and involvement of the
authorities of the partner countries as well as commerce and industry.
Integration of the main elements of the strategy into development cooperation
in general is planned to take place during the course of two to three years.
Pilot programmes may also provide a basis for testing the possibility of
achieving better integration between productivity-promoting activities, for
example within agricultural production and mea-sures for export and market
access for such products. At the same time, it will be important to stimulate
Norwegian commerce and industry to involve itself actively in the planning as
well as the implementation of pilot programmes.
3.2.4 Improving macroeconomic framework conditions
Macroeconomic framework conditions still need to be improved in many
developing countries. Priority will therefore still be given to supporting the
implementation of economic reform programmes. Donors can support reform
processes, but without ownership by recipient governments and without a
willingness on their part to implement reforms, the efforts of external players
will be of little use. The implementation of the Norwegian debt relief strategy
makes an important contribution to the improvement of the investment climate in
indebted developing countries by improving the balance of payments and reducing
the debt overhang. In this way, Norway will help to improve the framework
conditions for private sector development in indebted countries.
In order to ensure private sector development as a result of economic reform
programmes, it is important that they are more explicitly focused on
establishing favourable framework conditions for private sector development. In
a number of cases, the programmes have focused too much on stabilization,
resulting in too rapid liberalization of imports. This has often failed to
enable local enterprises to adjust gradually to new framework conditions. The
sequencing and timing of economic reforms may therefore be of decisive
importance for the potential for private sector development in many countries.
At the same time, it is important to be aware that economic reforms may also
have considerable regional effects in the area of trade.
Such issues must therefore be followed up in discussions of individual
countries’ Policy Framework Papers in the World Bank and the IMF (PFP) and
country strategies in the Bank’s board and, on a more general level, in
fora such as the World Bank’s Special Programme for Africa (SPA), a donor
forum for economic reform programmes in African countries. In its continued
support for the implementation of economic reform programmes in developing
countries, Norway will assist in safeguarding and reinforcing the focus of
these programmes on favourable framework conditions for private sector
development.
3.2.5 Improving institutional and physical infrastructure and good
governance
At the institutional level, development cooperation may help to promote good
governance and support institutional reforms and capacity building in areas
important for private sector development.
In this connection, an important role is played by measures that promote
good governance, a well functioning legal system, necessary transparency in
decisions and transactions and reduced corruption. Well functioning industrial
and labour organizations form a significant part of a country’s
institutional infrastructure. In this connection, experience from Norway should
be put to good use. Norwegian industrial and labour organizations are a
valuable resource base for strengthening corresponding organizations in
developing countries.
In Norwegian development cooperation there has traditionally been a strong
focus on “physical” infrastructure and less focus on the
institutional framework that must be in place around infrastructure investments
for them to be able to contribute to private sector development. Norwegian
support for infrastructure development should therefore focus more on the
essential institutional framework around the physical infrastructure
investments, such as the country’s sectoral policy , payment systems for
infrastructure services, maintenance systems, etc. However, development
assistance still has a role in the financing of necessary physical
infrastructure investments.
In countries where poorly functioning capital markets constitute a
considerable bottleneck, Norway will support measures and programmes for
reforms within the financial sector. Here the World Bank plays a very important
role. A significant element of this involves viewing support to micro-finance
institutions as part of more coherent efforts to strengthen a country’s
financial sector for the benefit of small and medium-sized enterprises.
In the continued follow-up, it will be important for Norway to give
increased priority to measures for improving the institutional infrastructure
of Norway’s partner countries, including a well functioning financial
sector and industrial and labour organizations.
3.2.6 Strengthening and focusing efforts at the micro level
The selection of activities and programmes at the micro level must be based
on surveys of enter-
prises and potential investors to identify the main barriers to increased
activity from their viewpoint. Such surveys are often carried out by local
industrial and trade organizations or by institutions within the UN system and
the World Bank. The main points from such surveys must be included in the
country-specific analyses that are to form the basis of the Norwegian private
sector development activities in individual countries.
On the basis of such analyses of the most important barriers for private
sector development, several types of activity are possible at the micro level.
It will often not be necessary or desirable to establish separate Norwegian
programmes, but more appropriate to support existing national programmes or
measures under the auspices of other donors and multilateral institutions. The
main emphasis shall be placed on what is most effective and not on making
Norwegian efforts as visible as possible.
Support for small and medium-sized enterprises often has a favourable
developmental effect. On the basis of current measures and “best
practices”, the ground shall therefore be prepared for broader and more
effective support in this area. Appropriate priority areas are support for the
transfer of technology, training and competence building, financing, and
supervision, for example, in relation to marketing and export training. In this
area, a distinction is often made between ‘financial’ and
‘non-financial’ instruments. International experience shows that the
lack of necessary competence and vocational training to represent serious
constraints for private sector development. These are issues that will be
emphasized in the educational focus that is planned. Insufficient knowledge at
enterprise level of different aspects of business operations is a major
limitation for private sector development in poor African countries. Efforts in
such areas must therefore be reinforced. It is often a risk that too much
attention is given to financial instruments, while there is often a lack of
satisfactory measures in other areas.
However, access to adequate and appropriate financing is also necessary for
market entry or extension of activities. Examples of financing mechanisms are
microfinance, risk capital, loan schemes and guarantee schemes. Microfinance
schemes have proved successful in many connections, but the impact on private
sector development varies considerably. Such schemes must be viewed as part of
the broad support given to small and medium-sized enterprises and as a stage in
the development of the financial sector to cover such needs as well. This type
of scheme must also make use of the considerable experience that has so far
been gained in this area and which is, for example, exchanged within the
framework of the CGAP (Consultative Group to Assist the Poorest). Support for
local investment funds (venture capital funds), where financing is also
contributed by others, is given high priority by NORFUND. The introduction of
an untied loan scheme is among the measures that will be given immediate
consideration as a follow-up of the strategy.
The use of guarantees to reduce risk is an important supplement to loan
schemes, and may in some cases serve as a replacement for public loan schemes.
Well functioning guarantee schemes will enable the securing of capital access
for projects many times greater than the need for allocations. The use of
guarantees – within given risk limits – is therefore probably a
cost-effective instrument for stimulating trade with and investments in
developing countries. A review is to be made of investment support schemes. In
this connection, an assessment will be made of how the guarantee scheme for
export to and investments in developing countries of the Norwegian Guarantee
Institute for Export Credits (GIEK) should be developed in order to function as
the most appropriate instrument.
Norwegian industry produces a number of goods of interest to the developing
countries. These consist of both finished goods and material inputs for further
processing. Further development of trade between Norway and the developing
countries is desirable for the broadening of economic relations. Trade between
countries normally results in increased insight for both countries into the
potential and limitations of the trading partner. This sometimes creates the
basis for long-term economic relations, for example investments. Furthermore,
trade and potential future investments in developing countries normally result
in the transfer of technology and expertise, which thereby gives rise to new
growth opportunities in these countries.
Since the introduction of the “Helsinki Package” of 1992, the
scope and content of tied loan financing have changed considerably. In
international terms, the proportion of this type of financing schemes has been
greatly reduced. The schemes have gradually been adjusted in the direction of
closer compliance with the main priorities of Norwegian development cooperation
policy, for example the focus on poverty. In the light of this, an evaluation
is planned of Norwegian mixed credit arrangements. The evaluation will review a
number of aspects of the effectiveness of this form of assistance, at both
micro and macro levels. An investigation will also be made of whether the use
of export support schemes results in a gradual increase in long-term
investments by Norwegian enterprises in poor developing countries. A main
concern will be the assessment of the developmental effect in relation to the
poorest countries.
There is often a need for marketing and export training. It will therefore
be appropriate to support schemes that promote sales and exports by enterprises
in developing countries in general and import to Norway in particular. Such
support for increased exports may include production assistance, product
development, measures to improve quality, etc. Norwegian expertise may be
particularly relevant here, since our experience as a small player in a global
market has many features in common with the current situation of developing
countries. In this connection, it will be appropriate to make use of the
Norwegian Trade Council as a national resource centre for exports and
internationalization.
Norwegian development assistance via country programmes and regional
allocations has only to a limited extent been explicitly directed towards
private sector development in Norway’s partner countries. At the same
time, commercial and industrial schemes have essentially been subject to ties
with Norway. Local private sector development measures with no Norwegian ties
have therefore been difficult for Norway to support. It may therefore be
necessary to reserve funds within regional allocations for private sector
development purposes. The mechanisms selected as channels for Norwegian
assistance in these areas may be under the auspices of national institutions or
other donors, including multilateral institutions, but will primarily consist
of flexible arrangements that may be used to finance measures that would
otherwise easily fall between two stools.
Norwegian development assistance at the micro level for private sector
development must reflect the continued domination by the agricultural sector of
the production structure in a number of poor developing countries. Partly owing
to the desire for improved standards of living for the poorest, development and
increased production in the agricultural sector will be important. In order to
be competitive at the international market, the agricultural products must be
produced in compliance with international environmental requirements.
Increasing demands are placed on environmental factors at all stages of the
production process. An attempt will therefore be made to strengthen the
agricultural sector in partner countries within both primary production and
further processing so as to meet these new challenges. In this connection, an
assessment should be made of how agriculturally based private sector
development can be strengthened.
3.2.7 Promoting investments in developing countries
The developing countries attach high priority to attracting increased
investments from Nordic countries, and foreign investments play an important
role in the generation of incomes and jobs. The most important factor for
attracting investments is a generally favourable investment climate in the
country. It may also be necessary to adopt investment stimulating measures both
in recipient countries and in investor countries. The strategy’s emphasis
on improving the framework conditions for commercial activities in the
developing countries will be a positive move in this connection. More direct
support for investment promotion measures in our partner countries will also be
given consideration. Through NORAD’s private sector schemes and the
establishment of
NORFUND, Norway has a number of mechanisms aimed at stimulating Norwegian
enterprises to invest in developing countries.
The strategy emphasizes the need for an increased focus on investment
promotion in developing countries. A review will therefore be made of the
different investment schemes. The intention of the review will be to identify
the most important barriers to Norwegian investments in developing countries,
suggest improvements in current schemes and new measures to promote Norwegian
investments in developing countries. In this connection, exchange of
information and experience has been indicated as an area where a strengthened
focus is needed. Long-term developmental effects in the developing countries
will be a key criterion for assessing new measures. At the same time, the
review will prepare the ground for better coordination of the efforts of the
different institutions in this area. Norwegian commerce and industry will be
involved in this work. A number of Norwegian institutions outside the
development cooperation authorities, including the Norwegian Trade Council, can
play a role in the task of providing Norwegian enterprises with information on
the business and investment potential in the developing countries.
There is also room for increased support via multilateral institutions.
Plans in this area include the strengthening of cooperation with the IFC and
the private sector initiatives of the regional development banks. In connection
with the development aid budget for 1999, it has been proposed thaT Norway
shall become a member of the IDB’s institution for this purpose, the
Inter-American Investment Corporation (IIC).
As reflected in Proposition No. 1 to the Storting (1998–99), NORFUND
plays a major role in the work of promoting Norwegian investments in developing
countries. A gradual strengthening of NORFUND’s capital base therefore
represents an important part of the strategy’s focus on investment-related
measures. As in the case of other countries’ funds, e.g. the Commonwealth
Development Fund, the long-term objective will be untying of NORFUND’s
activities as well. However, it is important to note that, since most other
OECD member countries already have their own funds for this purpose and NORFUND
is small compared with corresponding funds, NORFUND’s strength will
initially lie in mobilizing Norwegian investors. It has moreover been
registered that a considerable part of NORFUND’s resources (46 per cent on
31.12.98) are in reality already untied via loans to local financing
institutions. It should be noted that NORFUND’s financial participation
and representation on the boards of such local investment funds may provide
Norwegian enterprises with new partners and investment opportunities in these
countries.
3.3 Increased use of local and regional procurement
Goods and services from developing countries are still only used to a
limited extent as inputs in development projects. This is often because the
developing countries do not produce the goods and services that are in demand,
but the donors’ tying of development assistance is also an important
reason why developing countries are losing in the aid market. This is a major
argument for the untying of official development assistance..
Increased local and regional procurement will constitute a valuable measure
in the promotion of private sector development in developing countries, a fact
which was strongly emphasized and required to be followed up in connection with
the Storting’s deliberations concerning Report No. 19 (1995–96) to
the Storting, cf. Recommendation S No. 229 (1995–96), spring 1996. It is
an aim of the strategy to follow this up and thereby promote South–South
trade. As regards bilateral assistance, with the exception of tied schemes, a
gradual transfer of the responsibility for procurement to the recipient
countries has in practice eliminated direct procurement from NORAD. At the same
time, it is clear that efforts must be made to achieve greater openness. As far
as the support via NGOs is concerned, the organizations themselves are
responsible for procurement. In this connection, the emergency preparedness
system NOREPS should be mentioned which is based on cooperation between
Norwegian authorities, commerce and industry and NGOs on international
emergency relief and humanitarian assistance. The scheme is under review and,
in this connection, an assessment is made of how the potential for increased
local and regional procurement of input may be better exploited.
Procurement of goods and services financed through the United Nations and
the multilateral financing institutions is carried out in compliance with the
regulations of these institutions, whereby procurement is generally carried out
under the auspices of the recipient country. However, the situation in this
area is not particularly well documented and there is a need for clarification.
In this connection, a survey will be made of the procurement practices of
multilateral institutions and of NGOs that receive Norwegian support. It is
also necessary to establish the proportion of total Norwegian development
assistance that is currently de facto handled by the authorities of the
recipient countries, the type of regulations that underlie the recipient
countries’ procurement practices and what may be done to strengthen the
potential for increased local and regional procurement.
In this area, much has been achieved by placing the responsibility for
procurements in the recipient country. The fact that a significant share of
procurements is handled outside the recipient countries arises from a number of
factors. One reason is that, as long as other donors continue to practice a
considerable degree of tying, recipient countries have difficulties relating to
Norway in a different way than to other donors. We must therefore make more
conscious efforts on this issue vis-à-vis the authorities of the
recipient countries. Of vital importance in this connection is the OECD’s
work on untying all development assistance to the least developed countries,
where procurement policy and training/consciousness raising are among the
issues addressed. These issues will also be followed up on the bilateral side.
Another factor is the need for a commercial and industrial sector more capable
of producing goods and services of a competitive quality and at competitive
prices. The general approach of the strategy is to work towards the realization
of this in the longer term.
3.4 Use of Norwegian resources and Norwegian commerce
and industry
The measures proposed in this strategy represent major challenges for
Norwegian commerce and industry. In the future, private sector development in
the developing countries will be a more prominent area of Norwegian development
cooperation. At the same time, it is proposed in the strategy that considerable
changes be made in the application of instruments affecting schemes used by
parts of Norwegian commerce and industry. The emphasis on tied schemes
associated with the export of goods and services is now being reduced, while
the emphasis is increased on schemes that stimulate investments in developing
countries.
In the work on developing country-specific private sector development
programmes, Norwegian commerce and industry can contribute expertise and
experience that will help in identifying bottlenecks and concrete obstacles to
private sector development. Norwegian companies will also be able to provide
insights gained from their experience of internationalization and export
orientation. Within the framework of this work, the recipient countries’
authorities and private sectors will be able to use the help of Norwegian
commerce and industry and other relevant institutions in meeting challenges
within private sector development. The basis for this is that Norwegian
commerce and industry as well as Norwegian institutions possess relevant
private sector competence of interest to the authorities and commerce and
industry of the developing countries. In this connection, a survey should be
made of Norwegian experience within private sector development that may be
directly relevant for private sector development in developing countries.
It is important to stress the increased potential for Norwegian commerce and
industry that will result from the increased general emphasis on the private
sector in the developing countries. It is not unreasonable to forecast an
increase in the volume of Norwegian commercial involvement in the developing
countries during the years to come. However, the combination of activities will
be different, and will involve different enterprises and different parts of
Norwegian commerce and industry than is the case today. Gradual untying by
other donor countries will also increase the potential to compete for other
countries’ development assistance credits. We acknowledge that this
cooperation will have to take place within long-term and predictable
frameworks, and the strategy provides a basis for establishing such frameworks.
However, the driving force behind the involvement of commerce and industry must
be straightforward commercial motives, and not access to development assistance
funds.
With a view to developing a partnership with Norwegian commerce and industry
and establishing arenas for cooperation, the development cooperation
authorities are open to input and advice from commerce and industry in devising
strategies for future Norwegian assistance. Consultation mechanisms will be
established for involving commerce and industry and for regular exchange of
information. In this connection, activities in pilot countries are planned to
provide opportunities for trying out different models for cooperation. At the
same time, involvement by commerce and industry entails a commitment to show a
responsible attitude and to apply the same ethical and commercial principles
and view of human rights as at home. In this way, Norwegian enterprises can
positively influence developments in the developing countries through practical
work in local enterprises. The checklist for enterprises planning international
activities issued by the Confederation of Norwegian Business and Industry in
November 1997 is a useful tool for enterprises facing the challenges associated
with human rights in developing countries.
Assistance for stimulating trade with poor countries
In order to strengthen the trade-related technical assistance to the poorest
countries, six multilateral institutions, the WTO, the ITC, UNCTAD, the UNDP,
the IMF and the World Bank have established the so-called “Integrated
framework” for trade-related technical assistance to LDCs. The purpose of
the integrated framework is to coordinate the six institutions’ measures
for increasing LDC trade. Via this framework, the poorest countries will be
given individual assistance to enhance their trade opportunities, to respond to
market developments and to integrate in the multilateral trade system. The
integrated technical assistance programme for Africa is part of this framework.
Within this programme, Norway has supported trade-related measures in Uganda
and Burkina Faso. The measures in these countries include assistance at
government level to implement WTO agreements, and export promotion measures at
enterprise level.
Support for private sector development in Tanzania – room for a more
integrated approach?
In recent years, the Norwegian bilateral aid programme for Tanzania has
supported a number of projects that have directly and indirectly fostered
private sector development in the country. However, these measures have not
been developed within the framework of an integrated program.
The majority of such measures have been financed via NORAD’s private
sector schemes. This applies to a number of enterprises in Tanzania with
Norwegian ownership interests, which have benefited from various credit and
grant schemes. NORAD has also supported the project “Computerisation of
Trade Finance Operations” at the National Bank of Commerce. The Norwegian
support for PRIDE Tanzania has directly helped a large number of enterprises in
the informal sector, while a SADC project has supported quality improvements in
a number of private enterprises in Tanzania. Furthermore, NORFUND has become
share-holder of the investment fund, Fedha Fund Limited.
In addition to this, several Norwegian-financed measures within the
state-to-state cooperation have helped to improve the framework conditions for
private sector development. These include the support for maritime safety and
development of the petroleum sector. Rural development programmes have also
played a part in improving framework conditions for private sector development.
Norway has also supported Tanzania’s investment centre which is working to
increase investments in the country. Considerable funds have also been given as
import support to
Tanzania and this was a particularly important form of development
assistance up to the beginning of the 1990s, since there was a considerable
shortage of foreign currency in the country. The support to the Regional
Enterprise Development Institute was given to promote better services within
microfinance, and may therefore improve the framework conditions for this
subsector. Support for coordination, for railway services and for training in
forestry have also helped to improve the framework conditions for private
sector development.
As illustrated above, the Norwegian aid programme in Tanzania has supported
a number of projects and activities of great relevance for private sector
development. However, the measures have been characterized by considerable
diversity, they have not been chosen on the basis of a clear private sector
development perspective and Norwegian commercial interests have influenced the
priorities. The present strategy will give NORAD and the embassy the
opportunity to focus efforts for private sector development on areas
prioritized on the basis of a country-specific analysis and which give the best
possible results.
Regional cooperation on quality: Increased trade and strengthened
competitiveness
Regional projects have traditionally consisted of development and
rehabilitation of infrastructure such as energy, telecommunications and
transport. The “SADC Training Programme on Quality Management and
Assurance” stands out as being a regional project directed towards trade
and industry.
The project aims to strengthen competitiveness while promoting trade and
export for countries in the region, by
- increasing general awareness concerning quality management and the setting
up of quality systems
- building up local resources so that competence can be maintained and
further developed by involving national standards associations, and increasing
the competence of key personnel.
An evaluation showed that the following positive results have been achieved
by a majority of the enterprises in the project:
- Increased understanding and awareness of the importance of quality and
quality management
- The established quality systems function in the enterprises and there has
been an improvement in.communication and cooperation within the enterprises
- Considerable reduction in production errors, resulting in increased
productivity
- A number of individuals have been given expertise in quality management
Economic results are underlined by many enterprises. Ten per cent of the
approximately 100 enterprises have received ISO 9001/9002 certification for
their quality systems. This confirms that the quality systems that have been
developed and implemented are of international standard. In the case of many of
the enterprises, this has ensured access to new markets, both regional and
international, increased their general competitiveness and attracted foreign
investors. After completion of the project, enterprises have continued to
purchase such services on a commercial basis.
The contribution of the Norwegian debt relief strategy to private sector
development in developing countries
Many developing countries are struggling with a considerable debt burden
that hinders economic development and poverty reduction. Debt service binds up
resources that might otherwise be used for development purposes and for
improving framework conditions for private sector development. A country’s
debt burden often prevents investments and private sector development from
taking place, since investors regard the investment climate as insecure if the
authorities have difficulties servicing the country’s debt. The Norwegian
debt relief strategy helps to reduce the debt problems of the developing
countries by writing off developing country debt to Norway, by making financial
contributions to international debt relief operations and by working to improve
the international debt relief mechanisms. By means of these measures, the
implementation of the debt relief strategy helps to improve the investment
climate and the general conditions for private sector development in the
developing countries. (See also the brochure Towards the year 2000 and beyond:
the Norwegian debt relief strategy issued by the Norwegian Ministry of Foreign
Affairs)
More comprehensive and coordinated efforts in the energy sector through
ESMAP
The “Energy Sector Management Program” (ESMAP) of the UNDP and the
World Bank was established in 1983 to assist the developing countries in
carrying out feasibility studies for high-priority investment projects in the
energy sector. Here, as in other sectors, it has become increasingly apparent
that a lack of well functioning national institutions in the sector, rational
sectoral policy and adequate public administration capacity reduces the effect
of individual investments in physical infrastructure. ESMAP has an important
role in strengthening the competence and capacity of recipient countries to
utilize energy and new technology effectively by providing them with the
necessary financial resources and expertise. ESMAP also plays an important role
in the development of policy and overall plans for the energy sector.
Initiatives such as ESMAP help to strengthen the synergy between bilateral and
multilateral activities, since both parties participate in the programme.
Business linkages in Zimbabwe
Through a project for small and medium-sized enterprises in Zimbabwe, NORAD
has supported the efforts of the Confederation of Zimbabwe Industries to
establish commercial ties between small and large producers (“business
linkages”). In Zimbabwe, economic reforms have given rise to increased
competition, which has resulted in a wish by previously vertically integrated
companies to outsource activities outside their core business areas. Hotels
outsource their laundry activities, forestry companies outsource small-scale
harvesting , etc. This has created major opportunities for small and
medium-sized enterprises and entrepreneurs, which have low fixed costs, are
more flexible and often have more efficient operations. However, these
enterprises meet many new challenges in the initial phase, and face
requirements making it difficult for them to succeed. With limited technical
assistance, many of them can be helped to succeed, among other ways through
‘buyer-mentoring’ and/or through the involvement of local finance
institutions. This project places an emphasis on promoting commercial
connections based on ‘win-win’ situations and on developing
commercial and sustainable relations. Manicaland Business Linkages Project
(MBLP) is a subproject run by the local branch of the Confederation of Zimbabwe
Industries, which over the last two years has resulted in the establishment of
139 new companies representing over 1000 new jobs in the Mutare area. Work is
now under way to develop similar projects in other regions of Zimbabwe.
The microfinance institution PRIDE in Tanzania
Norway supports many microfinance institutions, among them PRIDE (Promotion
of Rural Initiatives and Development Enterprises) in Tanzania. The purpose of
PRIDE is to create jobs and incomes in the informal sector by giving loans to
individuals and small enterprises that do not have access to traditional
finance institutions, generally due to lack of collateral. The loans are
relatively short-term and the interest rate is roughly the same as the market
rate. At the end of August 1998, PRIDE had 22 branches over the whole of
Tanzania and had provided more than 50 000 loans to commercial projects.
Approximately 70 per cent of the borrowers are women, and the rate of repayment
has been 100 per cent throughout the project’s lifetime. The PRIDE concept
has many characteristics in common with
Grameen Bank in Bangladesh. In spite of the high repayment percentage, it is
a challenge to make the activity sustainable over time and independent on aid
transfers to subsidize administrative costs. Moreover, it is necessary to
consider the real and long-term effects on private sector development that can
be attained through such programmes. Such assessments must be made in a broader
perspective and microfinance schemes must be viewed in relation to other
measures of importance to the informal sector and to small and medium-sized
enterprises.
Joint venture for rose production in Uganda
A NORAD-supported joint venture in Uganda is an example of a successful
business cooperation between Norwegian and African investors that has had
positive indirect effects. With the support of NORAD, a Norwegian chain of
flower shops has in cooperation with a local investor invested in a farm in
Uganda for production of roses for the Norwegian market. The support from NORAD
has been given in the form of a loan, support for basic investments, training
support and advisory assistance. The project was started in 1995, production
started in December 1996, and as early as 1998, the company began making a
profit. The production has created 140 jobs, of which 85 per cent are for
women, in an area with unemployment. The activity has not been at the expense
of food production and has resulted in a more effective utilization of the
agricultural land in the area. The project has contributed to the establishment
of a private school and a health centre. The support from NORAD has also
resulted in electric power lines to the district, roads have been built, and
considerable economic activity has been generated in a poor area that was
previously characterized by unemployment. The company plans an extension, which
will create more jobs. However, before finally assessing the developmental
effect of such a project, it is necessary to consider whether operations will
continue to be profitable without the provision of further subsidized aid
funding, and whether the assistance has been applied in a socially profitable
way. However, the project illustrates the opportunities that lie in the
developing countries given an effective and profitable utilization of
agricultural areas for purposes other than food production. In this connection,
Uganda is a good example of a country with great underexploited agricultural
potential.
Joint venture in Sri Lanka with positive indirect effects
A NORAD-supported joint venture in Sri Lanka shows that projects based on
Norwegian expertise supplemented with technical advice can be beneficial for
commercial interests in both countries. The project manufactures furniture for
the local and regional market. The design is inspired by Norwegian design and
experience. The project has provided employment opportunities for women,
reduced local environmental degradation and resulted in a number of positive
indirect effects. The project was started as a joint venture between a local
company and three Norwegian partners. The Norwegian Institute of Technology
(TI) has assisted the project in project development and training since the
start of the project. Since the cooperation started, production has tripled at
the same time as the staff has doubled to a total of 60 employees. Other
indirect effects are that the forestry workers are now better paid because the
rubber trees that are used in the furniture production have increased in value.
The company’s activities have also created a basis for approximately 20
jobs at other suppliers and, with NORAD’s help, improvements have been
made in the road standard connecting the area together. Women in Sri Lanka have
traditionally found work in the public sector. The obstacles to other forms of
employment are both cultural and practical. This project has demonstrated that
women have an aptitude for precision work that is especially valuable in
furniture production. Inadequate transport between home and work was also a
problem, but the employees of the Norwegian company helped out by collecting
bicycles in Norway, which the employees of the company in Sri Lanka now use to
travel to and from work.
Opportunities for Norwegian commerce and industry
The new strategy involves many new opportunities for Norwegian commerce and
industry, which can be summed up as follows:
The general conditions for commercial activities in developing countries
will be improved:
- Private sector development in developing countries is given higher
priority in Norwegian development cooperation.
- Private sector development programmes will reduce the main barriers against
private sector development in Norwegian partner countries.
Active use will be made of the expertise of Norwegian commerce and
industry:
- Commerce and industry will be involved in the prepara tion of private
sector development programmes in selected partner countries.
- An increased emphasis on infrastructure and on institutional aspects
decisive for the success of infrastructure investments. These are areas where
Norway has expertise.
- Focus on support for reforms in the financial sector where it is possible
to draw on Norwegian expertise.
- Development of industrial and labour institutions, where it is particularly
appropriate to draw on Norwegian co-operation models.
Schemes aimed directly at Norwegian commerce and industry:
- A review will identify the most important barriers to Norwegian investments
in developing countries and propose ways of stimulating investments in these
countries..
- Maintenance and extension of current investment support schemes is planned
- NORFUND’s capital base is to be strengthened.
- NORFUND’s investments and participation on the boards of local capital
funds provide Norwegian commerce and industry with contacts and increased
investment opportunities in developing countries.
- The guarantee scheme for export to and investment in developing countries
of the Norwegian Guarantee Institute for Export Credits will be continued, and
an extension of the framework will be considered.
Fora for cooperation and information will be developed: Fora concerning
private sector development in develop-ing countries will be established between
the development cooperation administration and Norwegian commerce and industry
on:
- Policy issues and general information activities
- Development of private sector development programmes in individual
countries.
4. Implementation of the strategy
The strategy implies that the approach taken within Norwegian development
cooperation to promote private sector development in developing countries is
changed in the direction of more strategic efforts integrated with other
development cooperation activities. Efforts through various channels must be
supported to this effect, and the traditional distinctions between bilateral
and multilateral development work must be reduced. This enables the achievement
of the greatest possible synergy between efforts made via different channels.
In implementing the strategy, emphasis will be placed on close cooperation with
other donors and on the wish to provide opportunities for increased donor
coordination.
The follow-up can be divided into two main phases:
- short-term and immediate follow-up; and
- long-term follow-up.
4.1 Immediate follow-up
The immediate follow-up will concentrate on:
· Work on the budget for 2000, particularly on instruments and changes
in the layout of the budget
In the current budget layout, the instruments for private sector development
are concentrated in chapter 0157 and the budget items referred to as commercial
and industrial cooperation. These include tied schemes, which have functioned
as a financing mechanism for projects within infrastructure development and
within the social sectors, and for schemes for institutional cooperation and
transfer of Norwegian expertise. The change of emphasis from export support
schemes to a greater focus on investment schemes and a more integrated approach
has resulted in a need for changes in the layout of the development aid budget.
The Ministry will therefore in cooperation with NORAD initiate a process to
clarify these issues during the course of 1999.
· Continuation of Norway’s active support in international fora
for untying of development assistance.
In close cooperation with like-minded countries, the Government will
continue its active efforts in international fora such as the OECD and the
World Bank to bring about further untying of official development assistance.
· Implementation of measures in pilot countries and continuous
assessment of the experience gained from these activities
During the course of 1999, the Norwegian Ministry of Foreign Affairs and
NORAD intend to establish a broad dialogue with the authorities and with
commerce and industry in pilot countries, concerning how a pilot phase is to be
implemented. In this connection, efforts shall be made to foster cooperation
with other donors and to ensure that activities are in line with the priorities
and plans of the recipients.
· Multilateral initiatives
Immediate consideration will be given to the continuation and extension of
measures that encourage more active participation by the developing countries
in the global economy. This includes Norwegian support for an independent legal
centre to assist the poorest developing countries in trade disputes. During
1999, various initiatives will also be considered within the framework of
Norwegian support for the development banks’ private sector initiatives
and the IFC’s work on promoting project
· Dialogue with Norwegian commerce and industry concerning their
role in the implementation of the strategy
The strategy places new demands on the development cooperation
authorities’ dialogue with and involvement of Norwegian commerce and
industry. A priority task will involve establishing suitable fora for exchange
of information and cooperation in a way that supports the main approach adopted
in the strategy.
· Evaluation of mixed credits
As part of a critical assessment of tied schemes, an evaluation of mixed
credits will be undertaken.
· Studies and reviews on issues of particular importance
It is recommended in the strategy that increased emphasis be given to
efforts in some selected areas. Prior to completion of this strategy document,
it has been neither desirable nor possible to make thorough investigations of
the development of measures and specific recommendations within these areas. It
is therefore necessary that the Norwegian Ministry of Foreign Affairs takes the
initiative in cooperation with the affected agencies to undertake studies of
the following areas:
- Review of investment support schemes with a view to establish well
targeted and strengthened range of instruments (see 3.2.7)
- Study of an untied credit scheme (see 3.2.6)
- Review of experience and frameworks for further support of small and
medium-sized enterprises, including the need for various microfinance schemes
(see 3.2.6)
- Regional cooperation and South–South trade (see 3.2.2)
- Measures to encourage increased local and regional procurement (see 3.3).
The review of investment support schemes will be led by the Norwegian
Ministry of Foreign Affairs with participation by the Ministry of Trade and
Industry, NORAD, NORFUND, the Norwegian
Guarantee Institute for Export Credits and representatives from commerce and
industry. In this connection, consideration should be given to increasing the
limits for guarantees under the Norwegian Guarantee Institute for Export
Credits’ special scheme for export to and investments in developing
countries.
The implementation of the strategy will involve a need for increased
cooperation between the Norwegian Ministry of Foreign Affairs and NORAD.
A working group will be appointed with responsibility for coordinating the
follow-up of the strategy between the Norwegian Ministry of Foreign Affairs and
NORAD, and this working group will appoint subgroups as needed. An appropriate
area for a subgroup is trade-related assistance, an area where work on the
strategy has already created a need for increased coordination. In the future,
it would be appropriate to make use of this group in connection with the
preparations for UNCTAD X and in further follow-up of the work on support of
the poorest developing countries within WTO.
4.2 Long-term follow-up
On the basis of the experience gained, among other ways, in pilot countries,
a foundation will be laid for implementing the recommendations of the strategy
within different areas and agencies.
On the bilateral side, this will be carried out by integrating private
sector development aspects into the work on aid strategies in priority
countries. On this basis, private sector development programmes can be
developed in partner countries.
Based on the recommendations of the strategy, the Norwegian Ministry of
Foreign Affairs will draw up new guidelines for private sector development
measures in developing countries, cf. current Guide-lines for private
sector-related schemes under the aid budget, dated 19.08.97. Based on this,
NORAD will review its instruments and schemes.
Work carried out through international organizations provides excellent
opportunities to increase the influence of the strategy on private sector
development in developing countries beyond what can be achieved via bilateral
programmes. This can be done both by influencing their policies and by
providing support for the organizations’ projects and programmes. A number
of United Nations specialized agencies and international financing institutions
are engaged in issues of direct relevance for the strategy, and policy and
project work in relation to these issues must be continued and developed along
the lines drawn up in relation to the strategy.
Cooperation on private sector development in developing countries with
international organizat-ions and with other donors will contribute to increased
donor coordination and open up possibilities for channelling Norwegian support
via other donors. An example of work that will be continued is the coordination
within the CGAP, including the challenge of communicating international
experience to Norwegian NGOs and other Norwegian participants in the work of
promoting microfinance and small-scale industries.
The strategy indicates a number of areas where efforts must be reinforced.
This particularly applies to the stimulation of Norwegian investments in
developing countries where a broader foundation must be developed for Norwegian
investments. The review of schemes and measures in this area will lay the basis
for new measures and distribution of responsibilities.
In Proposition No.1 to the Storting (1998–99), where further
allocations are made to NORFUND, emphasis is also placed on allowing the fund
to increase its staff to ensure proper management of the fund’s resources
and active efforts vis-à-vis Norwegian investors. In connection with the
above-mentioned review of investment schemes, we will return to the issue of
further assessment of the role to be played by the fund in the implementation
of the strategy.
4.3 Administrative consequences for the Norwegian
Ministry of Foreign Affairs
The approach outlined in the strategy will require increased competence and
capacity within this area in the aid administration both at home and at the
embassies. Much can be achieved through the best possible utilization of
current personnel resources, reinforced by an active and prudent use of
external competence. Further needs must be assessed continuously as the
strategy is put into operation. The Norwegian Ministry of Foreign Affairs must
have the necessary competence at the strategic level to ensure follow-up of the
full breadth of the development cooperation strategy and to have the capacity
to follow up and safeguard the interests of the poorest countries in
international negotiations. The strategy and its approach also require the
necessary capacity to conduct an active and targeted dialogue with commerce and
industry concerning its role in the implementation of the strategy.
On the multilateral side, the Department for Global Issues and the Trade
Policy Department will share the responsibility for implementing the strategy.
It is important here to ensure the necessary competence on private sector
development issues for use within the multilateral system, both in connection
with negotiations concerning the international frame-work and in relation to
the technical and financial cooperation of these institutions. This
necessitates a review of Norwegian policy and support towards multilaterals
with a view to ensuring the best possible compliance with the recommendations
of the strategy. It will moreover be especially important to take into
consideration the strategy’s approach in relation to international
negotiations within multi-lateral organizations and to ensure better
coordination of Norway’s conduct in different connections. This
particularly applies in connection with negotiations concerning replenishments
and capital increases in the World Bank and the regional development banks and
activities within the sphere of responsi-bility of the Bilateral Affairs
Department, which attends meetings in consultative groups (CG meet-ings), the
World Banks Special Programme for Africa (SPA) and country programme
negotiations.
4.4 Administrative consequences for NORAD
A major element of the strategy is the positioning of private sector
development as an integral part of Norway’s total development activity. An
issue that must be discussed is therefore whether the current models for
organization and planning create favourable conditions for such an approach, or
whether other models ought to be considered. NORAD should prepare proposals for
how best to respond to these considerations, including organizational structure
and the situation with regard to staffing.
4.5 Administrative consequences for the embassies
In the recipient countries where Norway wishes to place greater emphasis on
private sector development, this must be discussed with the country’s
authorities and private sector, and be incorporated into the development
cooperation plans. The strategy does not automatically imply an increased
emphasis on private sector development in all country programmes, but is
intended rather to lay the basis for an integrated approach to all our greater
and lesser efforts.
This will result in an increased need for competence and capacity in this
area at the embassies in the form of:
- resources and competence for dialogue with the authorities concerning the
identification of bottlenecks and needs in relation the strengthening of
private sector development in the individual country
- capacity for the preparation of private sector development programmes as
integral parts of country programmes
In the case of pilot countries, the Norwegian Ministry of Foreign Affairs
and NORAD, in cooperation with the affected embassies, will consider temporary
staff reinforcements to set the work in motion and assign responsibility for
duties concern-ing private sector development.
Coordination of support formicrofinance: CGAP
Microfinance has proved an effective instrument in the fight against
poverty. Poor population groups are given better opportunities to involve
themselves in income generating activities. A large number of institutions are
now engaged in microfinance, and Norway supports various microfinance schemes
both via multilateral organizations and via bilateral channels, including NGOs.
However, the sharp increase that we have seen in support for microfinance may
give rise to the danger of an uncritical flow of capital to microfinance
institutions that have neither the necessary capacity nor competence in this
area. The large number of different organizations that finance and operate
microfinance institutions and the challenges involved in making this form of
assistance as effective as possible have created a need for coordinating fora.
The Consultative Group to Assist the Poorest (CGAP) was established in 1995 to
strengthen and increase the efficiency of microfinance as an instrument of
international development assistance. Today CGAP consists of 27 multilateral
and bilateral donors, and the World Bank holds the chairmanship. There is broad
agreement that the success of CGAP has been due to improved donor coordination,
dissemination of information, exchange of experience and increased knowledge of
microfinance. CGAP has also created guide-lines for good microfinance
programmes. As well as improving coordination between donors, CGAP has helped
to improve internal coordination within donor countries since a number of
bodies are often involved in microfinance projects. Norway has been inspired by
CGAP to improve the exchange of information and to carry out a review of the
Norwegian microfinance portfolio, including an assessment of how
poverty-oriented and financially sustainable the various schemes have been.
CGAP is therefore a good example of successful coordination that has improved
the quality of the donors’ efforts and has helped to bring about more
comprehensive and coordinated assistance.
5. Quality assurance, performance reporting and evaluation
As in all areas of development cooperation, private sector development must
be subject to continuous quality assurance, assessment of the extent to which
the strategy has been implemented and evaluation of whether objectives have
been achieved. The preparation of the strategy for private sector development
has clarified both the overall and the more immediate objectives that must be
followed up when evaluating the results of such measures.
The results of implementing the strategy for private sector development can
only to a limited extent be assessed on the basis of statistics concerning
consumption or by aggregating results from the project level. Priority must
therefore be given to systematizing assessments of the policy and the strategy
by means of active and regular reviews, evaluations, studies and research. In
the following, a brief description is given of criteria that should be applied
when assessing the achievement of objectives in this area, and of the
procedures that must be followed within quality assurance, performance
reporting and evaluation.
5.1 Assessment criteria for support for private sector
development
Support for private sector development is defined in the strategy as support
for measures that help to strengthen profitable production, whether in primary
industries, service industries or manufacturing industries. The following
overall objectives for support for private sector development in develop-ing
countries are defined in the strategy, and are thereby the main criteria to be
applied in assessing the success of such support:
- Strengthening of profitable production and activities in developing
countries
- Safeguarding and increasing jobs and incomes, particularly for
underprivileged groups (the poorest population groups in rural areas, women)
- Ensuring that measures within the strategy comply with the general
principles for Norwegian development cooperation, including the environment,
women and human rights.
A number of selected areas are given priority in the strategy (cf. chapter
3.1). These areas may serve as immediate objectives when considering and/or
evaluating measures and performance:
- Reducing marginalization of the poorest countries
- Improving economic relations and trade between developing countries
- Working to achieve more integrated support of private sector development
at country level based on surveys of the main obstacles and prioritized needs.
- Ensuring better coherence and synergy between activities carried out in
different areas and via different channels
- Improving framework conditions for private sector development in
developing countries
- Promoting increased investments of both domestic and foreign capital,
including Norwegian capital
- Promoting trade with developing countries and stimulating their exports
- Working to promote untying of development assistance
- Increasing local procurement within aid-financed projects
- Making active and targeted use of the Norwegian competence base, including
Norwegian commerce and industry.
5.2 Quality assurance
The Ministry is preparing procedures for quality assurance of development
assistance. This work is being carried out in cooperation with NORAD.
By quality assurance of procedures: from prioritizing of projects via
planning, implementation, reporting, reviewing and evaluation, indications will
be made as to which tasks in these procedures that need to be improved and
altered in order to ensure satisfactory performance and a high quality of
performance reporting. Reviews and evaluations will be implemented in relation
to a standard method for reporting. The basis for reporting is to be
established in the planning phase of the individual projects. Development
cooperation will be based on previous experience. Improved performance
reporting is a major priority, and NORAD has established a special unit for
this purpose. An assessment of the experience gained will form the basis for
planning and implementation of projects. After careful assessment, measurement
parameters will be defined for use in later reporting. The quality of the
reviews and evaluations will be decisive for quality assurance and evaluation
of projects in the future.
5.3 Evaluation
An important basis for future evaluation of Norwegian support for private
sector development has been laid through the preparation of this strategy.
Precise specification of objectives and expected results is an important
precondition for later evaluation. The overall objectives and priorities set
out in the strategy will therefore serve as a basis for defining objectives and
expected results, and thereby for later evaluations. Consideration of the needs
associated with future evaluations is also important when planning the
different measures and schemes in the implementation of the strategy.
Before implementing the various measures, realistic descriptions of the
current status should be made available.
It may be appropriate to carry out evaluations at several levels, e.g. at
the strategy level (i.e. evalu-ation of the results of the total Norwegian
assistance based on the strategy), at the organizational level (e.g. support
via the WTO), or at country level (e.g. programmes for Norwegian support to
private sector development in pilot countries).
It will also be appropriate to consider specific private sector support
schemes for inclusion in the new strategy. Evaluation of these will normally
attempt to answer questions about performance, relevance, effectiveness, impact
and sustainability.
An evaluation at strategy level would be a large-scale task that would have
to be based primarily on reviews, reports, etc. and on evaluations carried out
by other organizations. Over time one would also carry out separate evaluations
of individual measures included in the strategy. This would allow systematic
coverage of the most important elements of the strategy during a period of
three to four years.
Reviews and evaluations may also indicate areas where there is a need for
further knowledge and analysis. This may involve both relatively brief studies
of concrete issues and more long-term research aimed at addressing relevant
issues within a broader context. The Norwegian Ministry of Foreign Affairs is,
for example, currently contributing funds to a research programme entitled
Globalisation and marginalisation: Multi- and interdisciplinary research on
development paths in the South. One of a number of thematic aims within this
programme is to acquire more knowledge of economic policy and private sector
development in developing countries. In cooperation with the Research Council
of Norway, the Ministry will facilitate the publication of information by this
programme and by other programmes with the aim of drawing on relevant
researchers and research institutions when needed in connection with further
work on private sector development.
IT Bilateral Investment Treaty
CGAP Consultative Group to Assist the Poorest
DAC Development Assistance Committee (of OECD)
ESMAP Energy Sector and Management Assistance Programme
FIAS Foreign Investment Advisory Services (of IFC)
GIEK Norwegian Guarantee Institute for Export Credits
GSP Generalised System of Preferences
IBRD International Bank for Reconstruction and Development/World Bank
IDA International Development Association (of the World Bank)
IDB Inter-American Development Bank
IFC International Finance Corporation (of the World Bank)
IIC Inter-American Investment Corporation (of IDB)
ILO International Labour Organisation
IMF International Monetary Fund
ITC International Trade Centre
KOMpakt The consultative body for human rights and Norwegian economic
involvement abroad
NORAD Norwegian Agency for Development Cooperation
NOREPS Norwegian Emergency Preparedness System
NORFUND Norwegian Risk Capital Fund for Developing Countries
OECD Organisation for Economic Co-operation and Development
PRIDE Promotion of Rural Initiatives and Development Enterprises
SADC Southern Africa Development Community
SPA Special Programme of Assistance for African Countries
UNCTAD United Nations Conference on Trade and Development
UNDP United Nations Development Programme
UNIDO United Nations Industrial Development Organisation
WTO World Trade Organisation
This page was last May 3. 1999 updated by
the editors
