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October 18, 2013

How the Private Sector Boosts Emerging Markets

Posted by Upendra Kohli (View Profile | View All Posts) at 6:25 AM

Gates: 'No Doubt' Wealthiest Have to Pay More Taxes [Source:http://www.youtube.com/watch?v=a1oVeU3igrY]

For decades, public aid agencies have raised money and attempted to boost the economies of emerging markets. Their formula was fairly standard: They donated funds to non-governmental organizations (NGOs) that in turn funded various local projects.

But two things happened. First, the global economy soured and a lot of the money raised by public aid agencies dried up. Second, NGOs began to see the limitations of what public funds could do to make a difference in the emerging markets. That's because public sector funding usually involves a specific goal like professional training in a certain industry.

Public efforts obviously had the best of intentions. But economists will tell you that an attempt to build a market artificially by training people for a certain task only goes so far. It's more effective to allow the forces of supply and demand to take hold. One of the reasons the emerging markets have become so vibrant is that private funding is becoming more popular. Unlike public sources, private funding usually targets an economy in such a way that it creates demand for goods and services.

As the Infosys Foundation has demonstrated, private sector funding places more emphasis on raising the overall standard of living in a particular region. When people are learning skills across the board and earning more money, they naturally demand more products and services. That's when global enterprises fill the void by entering those markets. The result is that the local economy has grown organically. It's not dependent on more outside funding because the companies that have entered that market have a vested interest in making sure a local market remains strong by their sheer presence.

Another advantage of private sector efforts is that enterprises in the emerging markets become all too aware that they must improve themselves both financially and technologically if they are to compete effectively for contracts. When multinational companies enter a particular market, they often prefer to partner with a local organization because its executives know the lay of the land. But sometimes the multinational is hesitant because the local company's management techniques or technological prowess are not up to par.

Even after an NGO or corporate foundation has left a region, the effect of private funding lingers on, say experts. If a bunch of local companies are vying to win a lucrative contract to work with a global company, that suggests they've been influenced by the market-making powers of private funding. In the old days, public agencies would train people for specific tasks, leave the region, and then those people would be left with their new-found expertise -- but nowhere to utilize those skills.

I heard about an amazing example in an African country. Private sector funding of NGOs helped stimulate the local economy in such a way so that after about five years there were more than 100 contracts up for bids. In turn, a host of local African companies raised the level of their game in an attempt to win those contracts. One study estimated that the process helped create more than $250 million in economic activity, no small feat in a frontier market like sub-Saharan Africa.

Another advantage of private corporate foundations is that they tend to work with people on the ground. Who do you suppose knows more about the needs and concerns of a region's local businesses - a businessman from that country or the head of a public agency who sits in London or Washington?

Western companies are finding it increasingly challenging to expand rapidly in developed markets like North America and Western Europe. So it's in their best interest to ensure that the emerging markets have the proper economic infrastructure to support their expansions. Some authorities say that as much as 80 percent of NGOs are funded by private concerns, up from 10 percent just a couple decades ago. That shift is an indication that the exciting story of the emerging markets has just started to play out.

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