Private Sector Development Strategy

Private Sector

 Development Strategy

Paul Holden

The Enterprise Research Institute

Introduction

There is a growing awareness of the need to improve the investment climate in Latin America and the Caribbean region. Annual gross capital formation in Latin America and the Caribbean amounts to nearly US$400 billion, most of which has to be financed through the private sector.  Such sums require financial flows that dwarf the potential contributions of donors. Only the private sector has the resources to finance this amount of investment.  

The private sector, however, will not offer these resources unless the business environment provides opportunities for profitable long term investment.  Where the investment climate is high risk, long term investment will not occur.  Where equity investors have weak and uncertain rights, they will not buy shares, new offerings will not come to market and valuable investment opportunities that could raise long run growth rates will remain without financing.  Where lenders cannot collect their debts, lenders will not lend. Where intellectual property rights are not protected, cutting edge firms will be reluctant to make direct foreign investments. This list only touches the surface of issues that have been identified by both national and international observers as being critical for the long term growth on which poverty alleviation depends.  Reform of the environment for private sector activity, not resource transfer, will ultimately be the key to the ability of countries in the region to sustain long term growth.

Agreeing with the point that these reforms have a high priority in the development agenda, however, still leaves open many questions about how these reforms should be undertaken. The balance of this chapter raises these questions and, to a lesser degree, sketches out some possible answers.

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