The discovery of secondary benefits

The views of Germany’s development minister on cooperation with the private sector are not beyond public controversy. For instance, the weekly Die Zeit wrote: “He tells business people that earning money is a legitimate goal. In interviews, he underscores the German interests in commodities: ‘There is nothing evil or obscene about being interested in raw materials. We really need them.’ He clearly distances himself from the charitable thinking in development matters … saying, for instance: ‘It is simply more honest to admit that we too have interests.’”

The article quoted here was published in Die Zeit of 31 January 1975, and it was not about the current minister, Dirk Niebel of the Free Democrats, but about Egon Bahr, a Social Democrat. The article shows that the recent interest in cooperation with the private sector expressed by Germany’s Ministry of Economic Cooperation and Development (BMZ) is neither new nor dependent on party politics.

This interest was re-stated in the coalition agreement of 2009, in which the Christian Democrats and their junior partner, the Free Democrats, wrote that “development policy has to take appropriate account of the interests of German industry, especially of small and mid-sized enterprises” (SMEs).

Here they come once more – the notorious “secondary benefits” of development cooperation (DC). DC is not only supposed to contribute to reducing poverty. For 40 years, it was also meant to keep socialism in check, and today its purposes include fighting terrorism, mitigating climate change, keeping migrants away, securing the supply of raw materials, creating new jobs at home and taking appropriate account of the interests of German SMEs. Most of these things serve German interests – no wonder development aid is less successful in fighting poverty than we all would like.

In the eyes of the German non-governmental organisations (NGOs), that are involved in development, the success of German aid must not be measured by the volume of contracts for German firms, but rather by the extent to which it reduces poverty or, perhaps, fosters better governance. Other government departments handle Germany’s foreign trade interests.

Of course, German NGOs will appreciate any German firm – including SMEs – that makes money in Burkina Faso or Haiti by creating long-term, dignified jobs and boosting tax revenues there. Yet – do they really need BMZ subsidies for doing so?

Foreign trade promotion must not be an objective of development policy. On the other hand, it would matter to assess the developmental impact of German institutions that do promote foreign trade, such as the Hermes guarantees, for instance. Do some investments do more harm than good? Do they crowd domestic companies out of the market? Do they employ domestic workers, and are they paid good wages? Does the company invest in staff training? Is the host country’s tax revenue growing? How otherwise does it benefit? These are the questions that development agencies should tackle.

The BMZ is running a number of cooperation projects with German and European firms. From the NGO viewpoint, useful criteria for assessing such projects include whether they distort markets, whether the companies involved make substantial contributions and whether the German government’s developmental principles are complied with. Unfortunately, it’s unclear whether these criteria are being monitored at all. We argue that donor aid in support of private enterprises should be limited to those countries and sectors that need such support because they would otherwise not attract any private investors.

When a donor government starts a partnership with a private sector firm, moreover, the internationally agreed standards of aid must be applied, including the Paris Declaration on Aid Effectiveness, for instance. Moreover, we reject tied aid in any form. Last but not least, we would like to see BMZ’s public-private partnership programmes to include far more companies from developing countries.

NGOs and companies growing closer

From the NGO viewpoint, job creation in the private sector is a central requirement for development – there is no other way to overcome poverty. If states do not collect taxes and spend money, how are public goods and social services to be funded? Foreign aid cannot go on forever.

In developing countries, it matters especially that domestic firms create jobs. This is a new field, opening up for German development aid. Germany should, for instance, promote the creation of value chains involving local firms in developing countries and world regions.

A pro-business development policy must be geared to improving the national and international business environment. Relevant goals include fighting nepotism and corruption, creating fair conditions for trade and better regulation of those activities that hamper development, such as index speculation on agricultural commodities markets. In the WTO context, for instance, it would also make sense to ensure that
– poor developing countries are not forced into predatory competition but are allowed to protect domestic markets that are not competitive yet, especially when it comes to food, and that
– the competitiveness of domestic production is increased under such temporary trade protection to stimulate pro-poor growth.
Obviously, development policy should also contribute to making more use of the great opportunities that regional trade offers, for instance in Africa.

For a long time, relations between NGOs and the private sector were marked by a sense of mutual lack of trust. But nowadays, NGOs agree that crucial development targets will not be reached without greater commitment from the private sector. There is also a consensus that economic investments in developing countries must be based on social, ecological and human-rights standards if these investments are to improve long-term poor people’s standards of life.

In the past few years, many NGOs have gained experience in cooperation with private sector companies as well as in critically monitoring economic activity. In particular, NGOs have built up competence in the fields of microfinance and assisting production and marketing of small businesses and farmers. They are closer to poor target groups and therefore better able to give them advice on market opportunities and risks. These NGOs promote and support processes of change. Companies can learn from their experience – and they are increasingly prepared to do so.

For NGOs, the core issue is how to involve the poor strata in political, social and even economic processes. Accordingly, many private companies’ corporate social responsibility programmes include cooperation with NGOs. If, however, companies do not observe social, ecological and human-rights standards, NGOs act as watchdogs and make scandals public – as has happened often in the past.

Private sector companies focus on individual interests. Policymaking, however, is about the common good, and that is particularly so in the field of development – or, at very least, it should be. Policymakers must increase the overlap between individual interests and the common good – and defend the common good where there is no overlap. The German government’s coalition agreement does not do that.