How targeted government policy can help entrepreneurs in developing countries

Added 23 May 2013

A recent study co-sponsored by the United Nations Conference on Trade and Development (UNCTAD) and the German Federal Ministry for Economic Cooperation and Development (BMZ) highlights several policy decisions that governments can make in terms of public purchasing to foster the growth of domestic industries and services. The focus of this study is the Information and Communication Technology (ICT) sector. However, many of their recommendations are transferable to other sectors.  

For several years now Eurodad has noted that harmful procurement practices by donor countries have limited the potential impact of Official Development Assistance (ODA) on the local economy of developing countries. Other evaluations, for example on Haiti, have demonstrated that only a small amount of resources used for development purposes impact local firms and suppliers. Eurodad and others have also noted that public procurement can be targeted effectively to achieve development goals and implement national industrial and development policies. However, donors have consistently pushed for procurement liberalisation, which tends to favour large international companies and firms based in donor countries.    

The UNCTAD/BMZ study targeted three countries that have implemented policies designed to promote the local ICT sector: Sri Lanka, Kenya and Senegal. The recommendations put forward are quite comprehensive and worth taking a look st. There are several suggestions that are directly in line with recommendations put forward by Eurodad.

Key recommendations

One of the key criteria for successful implementation of a procurement policy that can impact local actors, particularly micro small and medium sized enterprises (MSMEs), is to ensure that the sectors targeted are in line with common public policy objectives. Developing country governments need to mainstream industrial and development priorities throughout their ministries in order to ensure their success.

Furthermore, in order to promote local industries effectively, the constraints and capacities of local actors must be identified to ensure that the sectors targeted are strategic and achievable. For these actions to be successful and sustainable, the domestic marketplace needs to be targeted in order to create local demand for these sectors. Domestic resources finance the largest share of demand in developing countries. This is why local industry and service promotion cannot only be export oriented. Domestic resources can and should boost demand for the domestic goods and services that local industries supply.

Constraints to developing procurement policies that would target local firms were also identified. The World Trade Organization’s voluntary Agreement on Government Procurement (GPA) prohibits the use of domestic preferences in public tenders. This is negligible for developing countries as most are not signatories to the agreement. However, many donors are and this is reflected in their development agencies’ procurement policies. Domestic preference is for the most part discouraged and international competitive bidding is required for projects over a certain price threshold. The study warns against excluding firms from other countries, but notes that there are ways around this by allocating preferential marks for firms with certain kinds of capacities (local language skills, local presence etc.).

Ultimately the study demonstrates that sound government procurement policies can work to achieve development objectives and support local firms. However, there are still many barriers to implementing such policies. If we are serious about creating a thriving marketplace within developing countries, we need to look at the constraints imposed upon domestic actors and how to empower these actors.