For a healthy private sector, there needs to be a healthy domestic macro-environment, which includes sound macro-economic policies, stable political environment, peace, transparent governance, predictable, and friendly policies. These however are lacking in developing countries. Developing countries are more susceptible to coups due to the nature of their unstable governments and this tends to make it hard for investors, as the incumbent governments may not recognize agreements between the past government and the investors. Transitions of governments in developing countries are usually violent. Lack of peace makes the environment not conducive for business thus investors tend to shy away from investing in such nations (Undp.org, 2004).
Lack of both economic and political decentralization is a huge obstacle to the growth of the private sector. This is because many factors will go in favor of the government thus weakening the private sector. On the other hand, decentralization of the economy would be huge benefit to the whole public in general. This is because it would lead to the creation of more jobs thus offer competition to the government in terms of job creation. Moreover, the power of democracy would rule because the private sector would be able to fight for the rights of the public and manipulate the job market due to the competition it offers to the government (Undp.org, 2004).
One of the critical obstacles against the development of the private sector in the Third World countries is the lack of physical and social infrastructure. Physical and social infrastructure includes basic education of the society, roads, state of telecommunications, amount of power, state of ports and health. The presence of an improved physical and social infrastructure not only makes the environment conducive for business, but also tends to improve the standards of living in the respective countries directly. It is estimated that poor infrastructure results into lump sum amounts in losses. These tend to be half the budget for financing infrastructure. The investors and especially the small-scale businesses are the ones who mostly incur these costs. Lack of proper infrastructure is a common occurrence in the undeveloped countries. This feature tends to escalate the costs in business and consequently lowering the profits. This means that operating the same business in a developed country is more profitable than in an undeveloped country. Lack of good roads can completely shut down small firms and cause other companies and businesses to lack basic products (Mrcglobal, 2007).
Another critical obstacle that is against the development of the private sector in the Third World countries is the lack of business friendly laws and policies. The lack of a transparent legal framework and a just judicial and administrative system tends to hamper the growth and development of the private sector. The governments should enact laws and policies that reduce transaction costs. The laws and policies enacted that influence the business market should be predictable and enforceable. The laws and policies that influence the private sector include commercial laws, custom laws, and the laws governing contracts among others. Laws and policies regarding property rights can either foster or be an obstacle against the development of the private sector in the Third World countries. The existence of numerous legal requirements to start a business is a great obstacle in the development of the private sector. Investors tend to shy away from countries that impose numerous legal requirements. Confusing and contradictory legal systems often render it impossible to run formal businesses. Hefty taxes, customs, and duties that are evident in developing nations often make investors shy away from them (Worldbank, 2000).
Another obstacle that hinders the private sector from being an economic alternative in undeveloped societies is the lack of access to financing. Most of the undeveloped countries lack domestic financial institutions that can be up to the tasks of effectively managing risks and providing capital to viable investments. This greatly hampers domestic investment as foreign direct investors can access finances from other financial institutions worldwide. Although these foreign investors play a crucial role in the development of the private sector, it is impossible for the private sector to develop completely without the inclusion of domestic investment. There are high risks involved in the running of small-scale businesses in undeveloped economies. This makes it necessary for the small-scale investors to have risk capital but the sources of such capital are limited. There is the lack of entrepreneurs who can leverage assets especially of small-scale investors as collateral. This makes it impossible for the investors to access capital through classic debt financing.
One of the most critical obstacles against the development of the private sector in the Third World countries is the lack of decentralization. Decentralization is the process of breaking down power and governance from the monopolization of the government to the people. Through this, ordinary citizens who are not necessarily in government have the ability to provide essential goods and services to the public. The areas of decentralization include the engineering sector, management science, political science, political economy, sociology, and economics. Through decentralization, more players are able to enter the market and thus job creation is brought about.
Economic and political decentralization are both essential to the enhancement of the private sector. Decentralization of the economy allows the private sector to be an actual competitor with the sector and even with the government. The outcome of such competition includes jobs creation and democracy. Undeveloped countries however lack of economic and political decentralization, thus most of the essential goods, services and decision making processes are provided by the government. Through this unhealthy business, practices such as favoring business people who finance the government representatives are practiced. Through decentralization, this does not happen as the power is invested in the people and not on some few individuals. It is usually hard for private firms to compete with the ones owned by the government as the latter can access stimulus packages and funding from the government and thus are able to operate on very low profit margins unlike the privately owned ones (World bank, 2000).
Mrcglobal. (2007). Private Sector Development in Developing Countries. Retrieved from www.mrcglobal.org/private_sector
Undp.org. (2004). Constraints on the private sector in developing countries. Retrieved from www.undp.org/cpsd/documents/report/english/chapter2.pdf.
Worldbank. (2000). Private sector participation in developing countries. Retrieved from siteresources.worldbank.org/INTUSWM/Resources/psp_english.pdf
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