When I worked in Zaire (as it then was) in Africa for the UN, I had a friend who was a businessman. He was conscientious and honest, and made every effort to invest his money not only to earn a return, but to achieve good things for the population. I remember that he wanted, for example, to purchase a machine to make milk out of soybeans and distribute it as a low-cost high-nutrition food supplement to ill-nourished populations.

One day a Zairian general arrived at this businessman’s home, which was in a spectacular location. He looked around, liked what he saw, and announced that the businessman had three days to vacate the premises, after which the general and his family were moving in. No discussion. No compensation. When he told me this story, there were tears in his eyes, even though it had happened many years earlier.

That may explain why this irrepressible man was one of the very few legitimate entrepreneurs I met in my sojourn in that unhappy country. In circumstances like these, who would invest their hard earned capital, let alone wish to draw their activities to the attention of state authorities, which is what you do when you try to register your business in the formal sector? And yet without the private sector – entrepreneurs, management skills, incentives, trade, the profit motive and all the rest – the world’s huddled masses can have no hope of a better life.

As a paper for the World Bank established a few years ago, economic growth is the best pro-poor policy there is. If we are to have any hope of pulling large swathes of the world’s population out of grinding poverty, they must attain domestic growth rates on the order of 8-10% annually. China and much of the rest of Asia is proving both that such growth rates are possible and that the result is a tide that truly lifts all boats.

The existence and size of black and grey markets in many of these countries shows that the problem is not a lack of energy or entrepreneurial acumen. Nor is it merely a question of removing barriers to local businesses moving into the formal sector, such as the lightening of the regulatory and tax burden. The fundamental challenge for business in the Third World is that in many places we cannot assume that the state is benign, let alone helpful. On the contrary, the predatory state is the biggest obstacle to formal private sector activity and growth.

Thus the priority for Canada, which is laudably pondering how to help develop the private sector in developing countries, must be on pressing local governments to create the safety, security and predictability on which investment and effort depend. That means robust and secure property rights, so that people know that if they invest and work the fruits of their efforts cannot be arbitrarily seized; the rule of law, so that businesspeople have access to honest and low-cost courts for enforcement of contract and protection of property; and anti-corruption policies, so that government services and regulatory requirements are applied fairly and predictably.

Finally, we have to open our own and other industrialised country markets to Third World exports. But access to our markets is something Third World governments really want, so we should use it to reward those who undertake domestic reforms to root out corruption and introduce the rule of law. Canada should also require developing countries who want our aid to sign investment protection agreements that ensure that foreign direct investment (from Canadian and other sources) is fully protected.

Canada should also encourage its own large companies to use the attraction of their potential investment dollars to wring from local governments stronger commitments to secure property rights, fair courts and the rule of law. We also need to be much more active in weaning our own economy from subsidies and other forms of protection (e.g. in agriculture) that are creating political resistance here at home to market opening for the world’s poorest nations.

There is no mystery as to what makes business work, in the Third World or any other. Rich country development policies that turn a blind eye to ravening local governments, and try to make up for the damage caused by those governments by supplying capital and other services that properly functioning markets would easily provide on their own, are doomed to failure. We should concentrate our efforts on finding ways to get local governments to behave in ways that are less destructive and corrupt and more open and accountable.

Canada has a reputation for honesty and probity; the best way to get top value for our private sector development spending in the Third World is to demand the same standards from local governments, and to reward those that meet those standards.

Brian Lee Crowley is president of the Atlantic Institute for Market Studies (www.aims.ca), a public policy think tank based in Halifax. E-mail: brianleecrowley@aims.ca