Economic growth is a precondition for development. There are no examples of countries that have achieved lasting improvements of living conditions without economic growth, and there is a strong correlation between economic growth and positive social development in the form of factors such as lower infant mortality and higher life expectancy. Norwegian history is a case in point. Poverty was only eliminated after a long, continuous period of economic growth following World War II, when the social conditions improved for the majority of the population.

During recent decades large parts of the world have seen economic growth rates that are without precedent, and the number of poor people has been strongly reduced. According to the World Bank, the percentage of people who live in extreme poverty – with an income of less than USD 1.25 per day – fell from 52 per cent in 1981 to 26 per cent in 2005. However, there are major differences between countries, and there are examples of countries where the growth is so unevenly distributed, or based on short-term exploitation of natural resources or environmental degradation, that it fails to contribute to social or economic development for large segments of the population. Fortunately, these are the exceptions. Even in countries such as China, where income differentials have increased during the last three decades, the number of extremely poor people fell from 835 million in 1981 to 207 million in 2005.

We find many African countries where the benefits of growth are distributed equally unfairly as they are in China. A key issue in these contexts is whether we will be able to change the mode of distribution in society by supplying development assistance and investment. History shows that the factors that decide income distribution in a country are associated with deeper cultural issues, well-established institutions and power relationships. In isolation, aid can only alter such factors to a limited extent, unless it succeeds in generating economic growth that gives rise to more profound social change.

Many African countries have gradually come to the realization that the struggle to overcome poverty must be won by establishing profitable businesses and attracting foreign investments. At the same time, it is crucial to pave the way for domestic saving and a local business sector. Fifteen years ago, business in Africa was dominated by public enterprises. Today, the private sector is gradually taking over, in the same manner as previously observed in Asia and many other regions that have subsequently seen strong economic growth. The lack of venture capital and skills remains an obstacle that hinders development of profitable businesses. With the exception of the largest developing countries and some countries with large deposits of natural resources, only modest amounts of global capital flow to the developing countries.

Norfund, along with the other Development Finance Institutions (DFIs), is currently the most important development policy instrument for creating a profitable business sector and attracting more private investment to countries that lag behind in the international development process. The development effects of the investment to which Norfund contributes are mainly associated with the individual project, in the form of jobs, tax revenues, transfers of skills and technologies, improvement of the environment or social conditions and a number of other dimensions that are conducive to positive social development. The basic precondition for achieving these development effects is to have profitable and sustainable individual enterprises that in combination can contribute to economic progress in the country.

Watch Hans Rosling from Gapminder and his TED lecture about the linkage between economic growth, electricity and development: