‘Starting races’: bringing about market systems change using challenge funds

Abstract

M4P or ‘Making Markets Work better for the Poor’ is a market systems approach to economic development that seeks to understand how poor people interact with market systems, and therefore how change can take place within those systems to benefit them. Challenge funds, when used as a tool for private sector development, are typically a mechanism to incentivize and support the private sector to invest in ways which both assist businesses to grow as well as provide wider development benefits. Although challenge funds typically act on only part of the M4P ‘doughnut’ and generally support only one type of market actor (i.e. the private sector and not government or civil society), they can and have worked to achieve systemic change. This paper explores lessons learned on how the design and implementation of challenge funds can be adapted to maximize their impact on market systems and, ultimately, poor people