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Finance & Development
A quarterly magazine of the IMF
September 2006, Volume 43, Number 3

To the Editor

Need to boost aid to the private sector

We enjoyed your series on "Understanding Growth" (March 2006), but a crucial element is missing: stronger support for the private sector. In the past two decades, the international community has focused on infrastructure financing, debt cancellation, and the provision of social services—health care and education in particular. As for the private sector, support by the major bilateral and multilateral funding institutions focused on strengthening the business climate. The approach has been to improve the macroeconomic and institutional environments, reduce the cost of doing business, reform investment codes, and build up infrastructure. While no one can doubt the need for these actions, an increasing number of development partners today acknowledge the importance of channeling more resources, more directly, toward the private sector.

The private sector plays a crucial role in development. Global experience demonstrates that a dynamic local private sector is the basis for fast-growing economies. But the private sector in developing countries needs better access to finance. The solution is for donors to make capital more directly available. Although the international development community has put substantial effort and funds into financial sector development, as well as into small and medium-size enterprises and microfinance, there is still a long way to go. Direct refinancing mechanisms for local private financial institutions have to be further promoted, and new instruments like regional microfinance initiatives, local currency financing, guarantees, and insurance products should be introduced and extended.

The private sector can also be more directly involved in the provision of public goods through public-private partnerships (PPP) that transform private businesses into contractual agents in the implementation of public infrastructure, social services, and environment-related projects (such as the management of national parks and forestry schemes). New methods of PPP financing have become available and deserve support from the international development community, both through financial sector development and direct lending and cofinancing schemes. Aid can and should also be used to increase incentives for businesses to be responsible corporate citizens.

While the private sector is a much-talked-about category of international aid, more resources need to be dedicated to it, including support for new instruments to help private businesses. The time has come for the international community to reassess its assistance to business and make it as vital and structured as its assistance to states.

Philippe de Fontaine Vive
Vice President, European Investment Bank
Wolfgang Kroh
Member of the Board of Managing Directors, KFW Bankengruppe
Jean-Michel Severino
CEO, Agence Française de Développement

AIDS data falling short?

In allocating scarce resources for public health it is essential that decisions be based on unambiguous epidemiology. While the fiscal data that Maureen Lewis uses in her article on "A War Chest for Fighting HIV/AIDS" (December 2005) are trustworthy, the data from UNAIDS on case numbers are not. The World Health Organization, at Bangui in 1985, devised an AIDS definition for use in countries lacking facilities for diagnosis. This definition does not require an HIV test and allows AIDS to be diagnosed with weight loss of more than 10 percent, and fever and cough for more than one month. These are symptoms of diseases of poverty. Thus, the huge totals reported from developing countries are largely unvalidated. In all the developed countries of North America, Europe, and Asia the spread of AIDS is completely different and consistently linked to high risk homosexual, bisexual, and drug-related behaviours.

Registrations of HIV/AIDS as a "single, devastating disease" in developing countries, on the Bangui definition, comprise a considerable proportion of the 40 million cases for whom antiretroviral drugs are deemed needed. Alternative wisdom, that its spread can be minimized or arrested by condom use and avoidance of risky behavior, is still ignored by UNAIDS and most health authorities, while resource allocation continues to be prioritized based on inaccurate information.

Barrie Craven
Reader in Public Accountability, University of Northumbria
Gordon Stewart
Emeritus Professor of Public Health, University of Glasgow

Barking up the wrong tree

It was interesting to read Raghuram Rajan (March 2006) on microfinance. Essentially, he says, do not kill the industry with "kindness." Surprisingly, he doesn't quote World Bank studies that show that microfinance institutions do not reach the very poor. But that isn't even the real problem. Because of all the hype, many countries (often supported by donors) have used microfinance when it is not necessary. It's worthwhile to quote an extract from Paul Streeten's review of Dr. Yunus's biography Banker to the Poor. "I have observed a project in which the poor underwent training in the hope of obtaining credit afterward, but later found the credit to be unnecessary. With the knowledge of simple bookkeeping and cost accounting, they were able to increase the profits of their microenterprises enough to dispense with credit." So we have to be sure that we are barking up the right tree.

Padmanabhan Iyer
Former Rural Finance Advisor to the Government of India,
New Delhi

We welcome letters. Please send no more than 300 words to or to the Editor-in-Chief, Finance & Development, International Monetary Fund, Washington, D.C., 20431, USA. Letters will be edited.