Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697632819584.pdf (Australia)
Parliamentary Submission on the Role of the Private Sector in Promoting Economic Growth and Reducing Poverty in the Indo-­Pacific Region This submission addresses the following points listed in the Terms of Reference: • Risks related to current and possible future approaches to enhancing the role of the private sector in development, and their management.

• The role Australian and international businesses could play to support development and inclusive growth in partner countries.
The Australian government’s increasing focus on the private sector in promoting growth and reducing poverty in the Pacific region has merit, but currently lacks significant components which are crucial to its potential successes in the region, including: • A lack of focus on developing the local private sector • Skewed emphasis on opportunities for Australian companies, without clear consideration of the impact on local enterprises • A lack of focus on building local entrepreneurial capacity and enterprise development The current Aid for Trade agenda focuses heavily on benefitting the Australian private sector, and less so on enhancing the private sector capacities of Indo-­‐ Pacific countries.
A focus on assisting and developing individual countries’ private sector capacity would foster more sustainable growth, which not only enhances the economies of countries in the Indo-­‐Pacific region, but also ensures stronger trading partners for Australian companies in the long term.

In entering local markets, Australian and international businesses must take into account the role they play in either stimulating or stymieing the growth of local private sector companies and economies.
Creating monopolies that crowd out local enterprises and reduce demand for locally produced products does not encourage economic growth and only ensures ongoing dependency on external aid.

One assumption underpinning the Aid for Trade approach is that increased foreign investment and private sector activity will create jobs and enhance household income, however there is a significant risk that this approach will fail to address poverty unless specific pro-­‐poor strategies are also put in place.
As The role of the private sector in promoting economic growth and reducing poverty in the Indo-Pacific regionSubmission 106 numerous reports and research have demonstrated over the last decade, the trickle-­‐down effect cannot be relied upon to address poverty on its own and can even create additional problems associated with increased inequality within regions.
The World Banki for example has critiqued the Washington Consensus position that the benefits of increased economic growth will trickle down to reduce poverty directly.

They instead argue that governments play a greater role to ensure the benefits of growth are shared equitably and that specific strategies are implemented to stimulate grassroots, local economic development.
Similarly, the OECD’s Secretary General Angel Gurría stated at the launch of their 2011 report Divided We Stand: Why Inequality keeps rising “The benefits of economic growth do not trickle down automaticallyii:” The report outlines that greater inequality is not inevitable, and that governments can and do have a role to play, to address rising inequalitiesiii.
Recent evidence points to a need to direct efforts towards ensuring the growth of small-­‐to-­‐medium sized enterprises (SMEs) – the oft quoted ‘backbone’ or ‘engine’ of a resilient economy that generates the vast majority of job opportunities and is “central to the larger equation of development” iv.
In addition to generating the majority of employment opportunities, SMEs tend to be more integrated within the local community and thus may have increased accountability to local communities in terms of both social and environmental impacts.
There is the risk that if Australian and other companies move into emerging markets without proper regulation and concerted efforts to develop the local private sector, they will inhibit the emergence and growth of local SMEs and damage long-­‐term chances of reducing overall poverty rates.

While donor supported efforts are being made to stimulate local economies through SME development, training and resourcing gaps remain across the Indo-­‐ Pacific region.
Most programs focus on stimulating enterprise development by increasing access to financial assistance, equipment, and technical and business training.

Recent research conducted by the Centre of Social Change has revealed that these approaches face a number of limits to their effectiveness to generate sustainable enterprises, including: • A reliance on classroom based training activities which are inappropriate for countries with low levels of literacy and numeracy.
• Many group based enterprises failing because of problems with group dynamics and organisational structure.

• Many new enterprises are initiated with little or no attention given to local resources, skills and market demands and thus encounter difficulties in both producing and selling their products.

• A lack of resources to ensure ongoing support and monitoring of newly established enterprises by intermediary organisations.
• As a large proportion of local populations are engaged in subsistence farming they have little or no business experience or ‘entrepreneurial spirit’.
The role of the private sector in promoting economic growth and reducing poverty in the Indo-Pacific regionSubmission 106 • Many government agencies tasked with business development lack the skills and knowledge to adequately support local business • Enterprise development models are based on Western, individualist and competitive business models that do not take into account local cultural and economic dynamics.

New approaches are needed to business development that can address these challenges.
One approach that has been successfully applied by the Centre for Social Change in Indonesia, the Philippines and Fiji is the Community Enterprise Program (CEP).

The CEP differs from enterprise development approaches by integrating the principles of community development with an understanding of business, to develop grassroots level enterprises that build on both the strengths of a particular region and existing local economic practices.
Building on the local economy ensures long-­‐term sustainability of any business developed through the process, especially in areas where cash is scarce and people rely on subsistence agriculture.
Emerging evidence suggests that by enabling people to keep their ties to the informal economy, grassroots economic development approaches such as the CEP open up more opportunities to develop businesses that complement rather than replace subsistence agriculture, enhancing household resilience to external shocks such as those experienced during recent global economic crises and natural disasters.
In addition to increased efforts to support SME development, further investment is needed to strengthen the capacity of local and national government agencies to create an enabling environment for all forms of business activities, whether local or international.

An important aspect of this task involves long term investment in basic infrastructure, such as: roads, energy and water systems, which all contribute to developing the ecology necessary for small, medium and large scale businesses to flourish.
Social infrastructure, such as support for local chambers of commerce and good governance training is also important in developing an economic system that can support a diverse range of business activities.

Without these efforts, the operations of any large scale industry or corporation leaves communities vulnerable to corruption in the form of rent seeking and other challenges to good governance.
Finally, whether to enhance the operations of local or international business, ongoing assistance, resources and investment is required to develop the knowledge and skills of local populations through vocational education programs, university scholarships and internships.

i World Bank (2004) Economic Growth in the 1990s -­‐ Learning from a Decade of Reforms.

p. 12. ii OECD, Gurría, A.

(2011).

Speech at launch of report, Divided We Stand: Why Inequality keeps rising.
http://www.oecd.org/els/soc/dividedwestandwhyinequalitykeepsrisingspeech.htm iii OECD (2011) Divided We Stand: Why Inequality keeps rising.

p. 4 http://www.oecd.org/els/soc/dividedwestandwhyinequalitykeepsrising.htm iv IFC (2011) Small and Medium Enterprises: Telling Our Story.

Volume 5.

Issue 1. p.2.

The role of the private sector in promoting economic growth and reducing poverty in the Indo-Pacific regionSubmission 106