Only local business can end global poverty — R. Glenn Hubbard

In Friday’s Financial Times R. Glenn Hubbard, co-author of the forthcoming The Aid Trap: Hard Truths About Ending Poverty, argues that poor nations need a new Marshall plan that helps stimulate local businesses.

As Hubbard points out the original Marshall plan did not simply give “away food, medicine, and clothing, on one hand, and rebuilt government infrastructure such as ports, railroads and water systems, on the other.” Instead the plan “made loans to European companies, which repaid them to their governments, which then spent the funds on infrastructure. To qualify for the plan, countries had to enact certain pro-business policies to make sure that their local businesses could use the loans well.”

Thus what is needed today for sub-Saharan Africa and other regions in dire poverty is not the large, macro aid development programs supported by the UN and promoted by prominent public figures such as Bill Gates, Jeffrey Sachs, or Bono. Instead aid should focus on supporting local businesses.

Hubbard concludes by writing:

Let us draw a parallel with philanthropist Bill Gates’s own line of business and divide aid into two parts: hardware and software. The hardware is the ports, railroads, and water plants of the Marshall plan, or the medicines, fertilisers, and boreholes of the current aid system. The software is the loans and funding mechanism of the Marshall plan, or the government and NGO project mechanism of current aid. The clear difference is that the Marshall plan software works, but the current aid software does not.

The UN is right, of course, to target the dire poverty in sub-Saharan Africa. But it needs to take a different course. We need policies that make a difference to the software of prosperity – the rules, policies and institutions that govern how business operates in each country, and the mechanisms of aid funding that either help or hurt that local business sector.

The global financial crisis is clearly a software problem. That is what everyone is trying to fix for the prosperous countries of the world. Poverty is also a software problem, but the aid system has been trying to fix the hardware instead, and got the software wrong. The Marshall plan got it right for postwar Europe. It is not too late to correct the error and get it right for the poorest countries.