Abstract: Private sector development (PSD) is back on the donors’ agenda. In Norway, PSD aid and aid funded loans have increased more than five-fold during the last decade and the government has promised further expansions. To guide the efforts, a new White Paper was submitted to the parliament mid-2015. We discuss the literature on the most relevant topics and instruments and discuss their likely effectiveness and which are most suited for Norwegian aid. Our conclusion provides a set of principles and instruments for Norwegian PSD aid to be effective in poverty reduction. One key recommendation is to set up a challenge fund to stimulate recipient country companies to search for innovative profitable investment opportunities.

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