To thrive in a world in which common prosperity is as important as corporate profit-making, the private sector must find new, more sustainable ways to operate. But can private businesses really do well by doing good? One option, according to HKUST’s Abhiroop Mukherjee and colleagues, is for businesses to partner with governments to help the poor realize the benefits of infrastructure development. Their study sheds critical new light on the power of such partnerships to build a better, more prosperous world for all—without sacrificing profitability.

For the billions of people worldwide living in impoverished rural communities, access to roads and railways offers the hope of attracting capital and escaping poverty for good. But does financing truly respond to productivity changes, not just for rich households and businesses in developed markets but also for the world’s poor? Private, profit-motivated banks have only recently begun lending in rural areas, where they face various social, political, and economic obstacles. “Whether banks will respond to and facilitate productivity improvements for the rural poor is far from obvious,” the authors warn. Three key conditions need to be met.

First, governments need to be sure that the private sector can be a good partner, capable of recognizing opportunities and stepping in when productivity improves through infrastructural development. In the authors’ words, “could these private sector financiers respond to changing productive opportunities in rural areas in the way policy makers expect them to?” To answer this question, they examine a shock to productive opportunities arising from a national road-building initiative in rural India, “one of the largest rural road programs the world has ever seen.”

Their results suggest that governments can rely on their private partners. “We find that private financing does indeed respond to changes in productive opportunities resulting from connectivity,” the researchers report. In villages prioritized by the road-building program, compared with those just below the threshold, 75% more villagers received loans and their loans were on average 30%–35% larger.

Second, it has to make sense for private businesses to enter into such partnerships; there must still be room for profits in the process of doing good. The researchers’ rural Indian banking data again offer cause for optimism—lending in the newly connected villages was subject to similar interest rates, maturities and default behavior as it is elsewhere.

Finally, governments need to be sure that partnering with profit-making corporations will not worsen existing inequality. If financing does follow infrastructure improvements, will it truly benefit the poorest local people? Or will it disproportionately benefit rich villagers, who already have a foothold in the financial system? Promisingly, the authors’ findings suggest that inequality is not worsened by private lending. Indeed, they explain, “financing flowed not to the local rich but to villagers who lacked collateralizable assets—those traditionally among the most disadvantaged.”

“Overall,” the authors state, “our evidence suggests that financing is important to realize the benefits of connectivity, and that such financing indeed follows rural roadbuilding.” Their paper shows that private sector banks can indeed do well for themselves while simultaneously allowing the rural poor to take advantage of new roads. Such novel insights are more important than ever, as infrastructure investment becomes an increasingly prominent growth strategy across the world, as well as a critical policy focus in programs such as China’s Belt and Road Initiative.