The World Bank has yet to pin down a working definition of what it calls private sector development (PSD). This lack of clarity has permitted changes in what the World Bank treats as PSD and what PSD operations are expected to achieve. Both problems have grown worse as the World Bank puts increasing emphasis on private sector development to create jobs. An estimated 1.2 billion young people are expected to enter developing-country workforces over the next decade, and virtually all the jobs they will occupy must be created by private firms.
This paper starts with a definition of what a PSD operation is supposed to do. This paper uses a narrow definition: A private sector development operation is one where public capital enters a market served by private suppliers to correct a market failure. For operations that fit that definition, it then asks whether World Bank involvement is justified, and whether it is additional to what would otherwise occur in the market. To pass, the operation must clear three hurdles: Does the appraisal document identify a market failure that justifies intervention? Does the instrument change behavior where the market failure occurs rather than compensating affected parties for the cost of that failure without eliminating the underlying constraint? Where the World Bank takes risk or provides a subsidy, does the appraisal establish additionality of that support?
Ideas matter. Part of why there is no definition is that intellectual fads—orthodoxies—pulled PSD work to periodically focus on different issues and strategies. Between FY1975 and FY2025 the World Bank cycled through five approaches to private sector work. It started with directed credit and moved through adjustment and privatization, investment climate, jobs and inclusion, and most recently the Cascade. There is little evidence that these changes in focus and strategy responded to worsening performance of the approach being replaced. Ratings by the Independent Evaluation Group (IEG) never strayed far from the midpoint on a six-point scale. No discernible signal from the ratings preceded the adoption or the abandonment of any of the five orthodoxies. Managers changed what PSD meant without much evidence from internal ratings that performance justified the change.
Definitions still matter. The lack of clarity about where PSD starts and ends shows up in current operations. Four people (the author plus three large language models) agreed in advance how to decide if 30 World Bank operations belonged in PSD. Everyone made the same decision in only nine cases. The FY24–25 portfolio provides another look. World Bank staff classified 156 operations as PSD. Of those 156, 45 have no appraisal-stage document that passes the coding protocol applied below and 82 fall outside the definition this paper uses or are designed to meet additionality requirements different from those applied here. That leaves 29 operations, of which 21 fail the additionality test outlined above. Sixteen fail the hurdle for justifying Bank involvement, four because the instrument does not change behavior where the market failure occurs, and one more on financial additionality. Eight pass all three hurdles. Twenty-one failing operations account for US$3.20 billion in total commitments, of which US$1.17 billion supports activity in markets that also supply commercial clients.
The paper’s conclusions lead to one recommendation: Make the case for intervention an approval requirement under a World Bank Operational Policy; price any subsidies through competitive allocation; make additionality an obligation. The point of each is to establish a common test that does not depend on which flavor of PSD is in fashion at the time. The paper applies, in much compressed form, the three-hurdle welfare test developed in It Adds Up: A Welfare Framework for Additionality Testing and provides an operation-level protocol the other multilateral development banks could use to implement the 2018 harmonized additionality framework.
