FCDO PSD Technical Competency Framework: Reading List PSD1

–Trial version for review, May 2021 —

The UK FCDO’s 2020 Technical Competency Framework on Private Sector Development specified key competencies to guide PSD advisors’ recruitment and professional development (2023 version here); these pages signpost recommended reading structured according to the 2020 competencies. These pages have no official status and are offered by the DCED as a resource for the PSD community.

On this page, you will find pointers on competency PSD 1: Economic development, inclusive growth and poverty reduction.

For resources on other competencies, including cross-cutting capabilities, please refer back to the overview page. 

To send comments or suggested additions to the contents below, please contact the DCED Secretariat at Admin@enterprise-development.org.

Competency PSD1: Economic development, inclusive growth and poverty reduction

1.1 Analyse theory and evidence on the relationship between investment, economic growth and poverty reduction in developing countries. Provide advice (including commission research) on opportunities for, and constraints to, generating inclusive growth.

Economic growth is considered by many to be the most powerful instrument for enhancing access to jobs and incomes, reducing poverty and improving quality of life in developing countries in a lasting manner.

Growth does however not automatically lead to poverty reduction, as assumed by traditional ‘trickle-down’ theory.  According to IMF (2015), the benefits of growth within an economy are rarely spread evenly, and an unequal rise in incomes that benefits only the wealthiest 20% of the population can actually slow the rate of economic growth. By contrast, raising the income of the poorest 20% by a single percentage point increases annual growth by 0.4% over the same time frame. Therefore, the precise impact of economic growth on poverty reduction depends on how much the poor participate in the growth process and share in its proceeds.

There are various PSD strategies that aim to achieve pro-poor growth. For example, market systems development aims to enhance the functioning of markets with growth potential that the poor are already active in (see competency PSD 5 for more information). Other strategies focus on creating economic opportunities for the most vulnerable groups, including by removing gender inequalities, ensuring financial inclusion, and policymaking for inclusive labour markets and reducing growth barriers for the informal sector.

The DCED Evidence Framework provides current evidence on the links between PSD and poverty reduction at output, outcome and impact level:

According to the OECD, inclusive growth is “a new approach to economic growth that aims to improve living standards and share the benefits of increased prosperity more evenly across social groups” (OECD,  2015). It refers to both the pace and pattern of growth, which are considered interlinked (see above).

Inclusive growth opportunities will depend on context; developing effective strategies for poverty reduction requires an understanding of who the poor are, the sectors and markets that they participate in, as well as their growth potential (see  ‘Macroeconomic stability, inclusive growth and employment’ from ILO, UNCTAD, UNDESA, WTO, 2012).

Promoting pro-poor growth (OECD, 2007) gives policy guidance specifically for donors. The paper sets out poverty as multi-dimensional, based on the 2001 DAC Guidelines on Poverty Reduction.

Key constraints to inclusive growth in developing countries, and ways to overcome them, are set out,  for example in Poverty and Shared Prosperity Chapter 6 (World Bank, 2016). These constraints can be institutional, cultural, political or social. Reform efforts should focus on the most ‘binding constraints’. While there is no one method for identifying these, growth diagnostics, combined with experimentation and learning, are key to identifying routes to inclusive growth in a specific context (DFID, 2008).

1.2 Explain the roles of public and private entities in economic development, investment and inclusive growth (including with reference to the international architecture). Advise which of these entities and actors are the best placed to lead different initiatives.

It is widely recognised that private enterprise, combined with appropriate regulation and support from the public sector, is a key driving force of economic development, investment and inclusive growth. The specific roles that may be played by private and public entities are outlined below.

Private sector actors, from farmers and micro, small and medium enterprises to large and multinational enterprises, can contribute to economic development and investment in many ways (World Bank, 2005; House of Commons, Canada, 2012). In particular, they

  • invest in innovative ideas and facilities that strengthen the foundation of economic growth and prosperity
  • provide more than 90 percent of jobs worldwide, creating opportunities for people to improve their livelihoods
  • deliver goods and services that underpin modern societies and improve living standards (potentially including areas such as basic services and education, where government capacity is weak)
  • offer skills development and training opportunities
  • represent the main source of tax revenues, contributing to public funding for health, education and other services.

While many of these contributions also foster inclusive growth, private sector firms can also design their core business operations specifically in ways that involve the poor in their value chain – as employees, suppliers, distributors or consumers. Such firms are sometimes referred to as ‘inclusive businesses’, although precise definitions vary (DCED, 2017).

The private sector’s contribution to inclusive economic development is to some extent shaped by the investment climate – which shapes the opportunities and incentives for firms to invest productively, create jobs and grow.

Governments play a key role in creating a conducive investment climate through their policies, regulations, provision of public infrastructure and services, and broader governance features (e.g. corruption) (World Bank, 2005). In broad terms, governments should put in place an enabling environment that allows business activity to flourish, while also ensuring that economic growth and tax revenues contribute to more inclusive societies (House of Commons, Canada, 2012). For more information on investment climate reform, see competency PSD 4.

Some economists however argue that governments need to play a more strategic role in actively promoting economic growth through industrial policy (DCED, 2017). Industrial policy focuses on supporting selected economic sectors with the highest potential for productive growth. Many recent growth successes, including in East Asian economies, are often attributed to industrial policy. Industrial policy can also be inclusive, in particular by generating jobs at scale for the poor in light manufacturing industries or productive agriculture (Dinh et al.(2012)). Industrial policy is however also a relatively demanding approach; critics argue that it rarely works and that critics stress that poorly-designed industrial policies risk worsening countries’ economic situation.

Most donor agencies have placed a strong focus on economic growth and private sector development in their broader aid strategies (DCED, 2018). The most widespread trend among donors is to engage directly with large companies, to harness and increase the impact of their core business operations for development, and to mobilise additional private finance for the SDGs (DCED, 2019). Support to market systems development is also gaining traction; it focuses on stimulating sustainable change in the behaviour of market players – public and private – so that they are better able and motivated to provide economic opportunities for the poor (M4P Operational Guide, 2015). To help achieve inclusive growth, a key focus of many donors is to promote the economic participation and empowerment of women, youth and other vulnerable groups.

Many donors also continue to advise partner governments to help establish a conducive investment climate; donors also help build institutional capacity for implementing reforms as well as managing more demanding sectoral policy interventions that seek to provide incentives to potential high-growth industries (DCED, 2017).

At the global level, bilateral donors engage in many international fora to advance the inclusive growth agenda (and international development more broadly). Examples include:

1.3 Analyse the context and factors which have an impact on economic development, economic participation and exclusion (especially women), and inclusive growth and poverty reduction – specifically including: political and security factors; economic factors (including fiscal and monetary policy); social and cultural factors; environmental and climate change factors.

The most important factors driving economic development and poverty reduction are widely debated (e.g. Handbook of Economic Growth Vol.1 and Vol.2, by P. Aghion). DFID (2008) summarises eight essential conditions for  economic growth and highlights lessons from donor experience, including the need to prioritise binding constraints based on country-specific diagnostic research. Examples of factors to consider by PSD programmes include:

Macro-economic stability is generally seen as a pre-condition for inclusive growth. Fiscal policy can have a direct impact on the poor through the government’s overall fiscal stance and the distributional effects of tax policy and public spending. Monetary and exchange rate policies can further affect the incomes of the poor, either directly (e.g. due to inflation) or through the country’s overall competitiveness and growth. Macro-economic policies however need to be complemented by other supporting policies and a conducive legal and regulatory business environment in order provide the foundations for inclusive growth (see relevant reading under competency PSD4).

Policies and technical solutions to development often fail in practice because of institutional and governance issues – the formal and informal rules and power structures through which state and non-state actors interact. Key implications include (a) basing policy reform processes on a sound understanding of the local political economy and b) integrating economic development strategies with efforts to promote more inclusive and effective governance structures (although evidence on effective practice is still limited).

Some economists argue that security is a pre-condition for growth, while others focus on the linkages between low levels of economic development, inequality and conflict. Practical experiences highlight the role of the private sector in providing an important route out of poverty even during conflict, and its potential to contribute to economic development and stability.

Social factors, including gender norms have an important impact on the formal and informal rules that govern private enterprise and affect prospects for inclusive economic growth. A broad body of research confirms that women’s economic empowerment (WEE) is a critical enabler of business growth and inclusive economic development.

The natural environment is central to economic activity and growth, including by providing the resources needed to produce goods and services. As such, in order to be sustainable, economic development depends on due consideration for the environment, including the causes and consequences of climate change. ‘Green Growth’ strategies seek to address this, although their impact on poverty reduction and inclusion remains debated.

1.4 Advise on the design, management and M&E of economic development programmes and policies that promote inclusive and low carbon growth (and including identifying and mitigating safeguarding risks, particularly the risk of sexual exploitation, abuse and sexual harassment).

For detailed lessons and guidelines on how to design and implement different types of economic development programmes, please refer to the DCED Knowledge Portal on PSD. Specific technical enquiries can also be directed to the DCED Secretariat at Admin@enterprise-development.org.

Effective economic development policies and programmes need to build on sound analysis of the opportunities and constraints facing the private sector.  They should combine evidence from global research with a deep understanding of specific geographical and sectoral contexts.  Lessons from FCDO’s experience with combining central research and country diagnostics to promote economic transformation are summarised in the ICAI review of DFID’s approach to supporting inclusive growth in Africa, 2017.

Policy and programme design also need to align with the strategic priorities of the main stakeholder groups.  Traditionally, economic development initiatives have prioritised job and income generation in developing countries.  However, there is growing focus on moving away from the traditional ‘donor-recipient’ relationship to mobilising a wider range of grant, investment and partnership mechanisms to facilitate mutually beneficial collaborations.  This requires donor agencies to work more flexibly with a wider range of partners.

For detailed lessons and guidelines on how to design and implement different types of economic development programmes, please refer to:

For donor experience with PSD programming, including specific themes such as business environment reform and market systems development, visit the DCED website on evaluations of agencies’ PSD work.

Specific insights into how to incorporate gender-related risks into design and monitoring, refer to the DCED paper on Integrating gender and WEE into PSD programming (DCED 2017).

Regardless of the specific economic development approach, adaptive management of programmes is often considered as an important success factor. Key resources include: Key principles of adaptive management (ILO, 2016); advice on how to procure adaptive programmes (BEAM Exchange, 2020); a working paper on adaptive management for donor projects (Teskey and Tyrrel, 2021); and case studies on using results for adaptive management (DCED website).

The OECD defines inclusive growth as ‘economic growth that creates opportunities for all groups of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society’ (OECD, 2018).  Where this is not the case, increasing inequalities can reduce economic performance and undermine social cohesion.  Growing globalisation and digitalisation may limit the efficacy of national policies for inclusive growth and emphasise the importance of international collaboration.

Low carbon growth is increasingly seen as the only way to slow down global warming and limit the worst impacts of climate change such as extreme weather events, food insecurity and biodiversity loss.  Investing in green technologies and helping developing countries adapt to the changing climate can drive job creation and more resilient economic development.

Additional resources for PSD practitioners can be found on the DCED website on green growth.

Specific insights into how to incorporate women’s economic empowerment objectives into design and monitoring are summarised in the DCED paper on Integrating gender and WEE into PSD programming (DCED 2017). The VAWG helpdesk offers specialist research, analysis and advice related to violence against women and girls in development policy and programming.

The FCDO has issued enhanced general safeguarding due diligence guidance for external partners (FCDO, 2020) as well as specific guidance on child safeguarding (FCDO, 2020).  The BOND network of UK organisations in international development has a dedicated website with resources on safeguarding policies and practice.

For a practical monitoring framework  applied by many market systems programmes in particular, review the documentation around the DCED Standard for Results Measurement – including an introductory video (see below). Note that the term ‘M&E’ may not be helpful, as it conflates two functions: monitoring (performed as a core management function) and evaluation (which is necessarily external).