Incentives to the Private Sector and Early Recovery

Question

Provide examples where donors have tried to influence the incentives facing the private sector to support early recovery. Focus particularly on direct interventions to support businesses, rather than support to the investment climate. How successful have these efforts been? Are there any general lessons about the kinds of incentives that work in particular contexts?

Summary

This report assesses examples of donor interventions designed to influence the incentives facing the private sector (PS) with the overarching aim of supporting early recovery. For the purposes of this report early recovery will be understood as ‘a multidimensional process of recovery that begins in a humanitarian setting’ (CWGER 2008, p.9).

This report will focus primarily on direct interventions that seek to provide incentives to the private sector or to encourage the growth of the formal sector, in order to promote growth and employment in a post-conflict or post-crisis context. The report focuses on programmes that are based on the assumption that while it can be beneficial to provide direct support to particular firms or sectors, interventions should be based on market analysis (SEEP 2007).

Donors have directly sought to influence the incentives facing PS actors to support early recovery in a number of key ways, including by:

  • providing Financial Incentives (providing microfinance, wider support for the financial sector, enterprise challenge funds)
  • picking Winners (providing firm- or sector-level assistance to business, matching grant schemes, support to the agricultural sector)
  • practising Market-Integrated Relief (ensuring that relief programmes support rather than distort local markets)
  • incentivising Foreign Investment (linking local businesses with foreign companies, providing political risk guarantees, investment roadshows, public private partnerships, providing investment support facilities)
  • providing Capacity Building Support (enterprise-based training, business incubator programmes).

Since interventions to support the private sector in early recovery contexts are varied, it is difficult to draw any general conclusions about their effectiveness. The report identifies a range of successful and unsuccessful examples of each different type of intervention. A few key lessons about the kinds of intervention which tend to be most effective can be drawn from these examples:

  • Market Analysis: Interventions that were based on poor market analysis tended to fail (Wilson 2002), while those that were based on good market analysis tended to be successful.
  • Many successful cases place a strong emphasis on capacity building of local institutions.
  • In general there has been a lack of monitoring and evaluation of these interventions, which has meant that many programmes fail to keep up with rapid changes in the economic environment (USAID 2009).
  • A bottom-up approach to designing incentive programmes appears to be more effective.
  • Integrated programming that tackles both supply and demand constraints has proved successful.
  • Programmes that have a flexible design tend to be more successful (Wilson 2002).

Most donor interventions to support livelihoods or PSD in post-crisis or post-conflict environments are poorly evaluated. Most evaluations surveyed for this report assessed programmes’ potential to boost incomes or create jobs in the short term and were usually assessed at or near the end of the project. Further, sometimes donor attempts to influence the private sector have generated a number of perverse incentives.