An Interview with R. Glenn Hubbard
The following is an interview with R. Glenn Hubbard about his new book The Aid Trap: Hard Truths About Ending Poverty.nnQ: What is the Aid Trap?nnR. Glenn Hubbard: The road to hell is paved with good intentions. The vast majority of aid is well intentioned, but it works against the prosperity of poor countries. Conventional aid sounds worthy, but it’s a trap; it crowds out, suppresses, or corrupts the local business sector, which is the source of mass prosperity everywhere in the world.nnQ: Isn’t this yet another book about private sector-led development? What is new, fresh, or innovative here?nnRGH: The big idea is this: the local business sector should receive most aid, versus government and NGOs, or even foreign business. Our book is the first to say that, and it says how. It’s true that more and more people have heard the idea that the local business sector is important for poor countries, but the aid industry does not accept the local business sector as the target of most aid. What the aid industry had done is to add local business as another “program” among dozens of others. So the World Bank has a health program, an environmental program, an education program, a forestry program, an agriculture program, and so on—and a local business program. All the other programs just listed fund government agencies and NGOs, not local business. So the total aid package of the World Bank and other agencies ends up around 5% local business and 95% NGO–government. But the percentage should be 50–50. Worse, the 95% “non-business aid” perpetuates the suppression by local government of the local business sector, as the World Bank’s own Doing Business reports indicate. Bill Easterly and Dambisa Moyo are alone in pointing that out in popular books, but they argue that the remedy is to stop aid. We argue to shift it —that’s new.nnQ: Do your ideas pit the conservatives versus the liberals?nnRGH: The original “conservative vs. liberal” divide dates from the early nineteenth century, when the conservatives wanted to preserve feudalism in Europe and the liberals wanted to replace it with private enterprise. Business as the source of prosperity is a liberal idea. All mainstream liberal parties in the democratic world accept business as the source of prosperity, including the British Labour party and the American Democratic party. Our model, the Marshall Plan, was the product of a Democratic administration – Harry Truman’s.nnQ: Why the Marshall Plan?nnRGH: History is the best guide to the future. All successful innovations build on the past. Everyone in aid recognizes the Marshall Plan as the most successful aid program in history. What few realize is how the Marshall Plan actually worked. It made loans to Europe’s private businesses, who repaid them to a national fund, which spent the money on commercial infrastructure like ports and roads. It worked. In the decades after the Marshall Plan, aid went astray and funded government and NGO projects instead, which didn’t work.nnQ: The original Marshall Plan worked because western European nations had the institutions and infrastructure that made it possible. How will developing countries that lack such basic systems institute the Marshall Plan?nnRGH: Forty years of aid, and poor countries lack basic institutions and infrastructure—isn’t that a bitter indictment of the current aid system? We need an alternative. Greece before the Marshall Plan lacked basic institutions and infrastructure. When Greek farms and factories repaid their Marshall loans, the national fund used the money for basic institutions and infrastructure. It worked. Greece was poor and war-torn — like many poor countries today. Let’s give them a Marshall Plan too.nnQ: You seem to be advocating a reduction in traditional aid? Could this have come at a worse time, when African countries in particular are already suffering from the impact of the global economic downturn? It sounds “antihumanitarian.”nnRGH: Most aid is not humanitarian. Food, clothing, shelter, and medicine for poor people is humanitarian aid, and many NGOs do that very well. By all means, that should continue. Developmental aid is something else: economic development projects run by government agencies and NGOs, which don’t work. That money should go to a Marshall Plan instead.nnQ: What is wrong with the current system of NGOs being responsible for dispensing aid for economic development?nnRGH: The most important reason is simple: it doesn’t work. What does work is jobs in the private sector, especially small and medium-sized enterprises. That’s true all over the world where poverty has given way to prosperity, first in Europe and most recently in India and China. What most people don’t realize is that most poor countries suppress their local business sectors: the World Bank’s Doing Business rankings show that a local person in a typical poor country has to wait months and months and pay huge fees and bribes just to open a business, hire workers, get loans, and so on. Meanwhile, in that same country NGOs run economic development projects. Under the Marshall Plan countries only qualified for aid if they adopted basic measures to let their local business sectors operate normally. We propose the same approach today.nnQ: Shouldn’t the developed world first raise people out of poverty before focusing on developing local business?nnRGH: That’s a great idea, in theory. In practice? After forty years and three trillion dollars of trying to do that, we see the evidence: It doesn’t work. Now let’s look at the history of how people actually rose out of poverty throughout the world. The answer is always the same: the local business sector. That’s how people rise out of poverty. What most people don’t know is that poor countries have suppressed their own local business sectors over those forty years, in favor of governmental and NGO aid instead. It’s not that business hasn’t worked in poor countries, it’s that business never had a chance in poor countries. Let’s provide that chance.nnQ: African economies in particular have been growing faster in the last decade than in previous decades. Doesn’t that mean that the current aid system is working?nnRGH: African economies have been growing in total terms simply from a boom in prices in oil, coffee, and cocoa. Because all that money goes to governments and foreign business, local Africans do not benefit. So poverty has not decreased. If you want poverty to decrease, you need local businesses to grow and employ more people. It’s as simple as that.nnQ: Doesn’t the financial crisis point to dangers of overreliance on financial markets and the private sector, particularly for developing economies?nnRGH: Note the response of all rich countries to the current crisis: to shore up their local business sectors. They all agree that private business is the source of their own prosperity. How you regulate that private business is controversial. In the absence of a private sector, you are certainly safer from such shocks. But does anyone actually argue that countries should remain poor because they are thereby safer from financial shocks? The income of rich countries will fall about 10% this year. Nevertheless, rich countries are still many times richer than the average poor country. Which do you prefer: grinding poverty safe from shocks, or prosperity with occasional shocks?nnQ: Is there a role for individual involvement in your plan?nnRGH: Chapter 6 of the book gives a lot for you to do. It points to aid programs that you can contribute to that are trying to help the local business sector. If you want to volunteer, they can point you to local businesses to help rather than NGO and government projects. But the most important role for individuals is to stop supporting the current aid system through donations, volunteering, and votes for public programs.nnQ: Is your plan particularly appropriate for Africa or does it have applicability to other developing regions as well?nnRGH: Most poor countries are African, so it applies most there by definition. But we can also imagine a Marshall Plan for the Caribbean, for the Middle East, and so on.nnQ: How does microfinance, which has been effective in India and other underdeveloped countries, fit into the Aid Trap‘s premise? nnRGH: Microfinance is the only successful large-scale aid program, and it supports the local private sector. The original and most successful microfinance program is the Grameen Bank—that is, a local business, not a government agency or NGO. But some government and NGO microfinance projects work well, and that’s fine.nnThe problem arises when microbusinesses that benefit from microfinance get large enough to get regular commercial loans. Then they must register as formal businesses, which is when their government suppresses them. The government doesn’t see microfinance as a threat, because the scale of business it supports is tiny. To qualify for the Marshall Plan, governments in poor countries will have to stop squelching local businesses one step above microfinance. Small and medium-sized businesses (not microbusinesses) furnish the route to mass prosperity. But microfinance is a great thing, and leads naturally to the Marshall Plan as a next step.nnQ: What sea change has to occur for countries to become economically self sustaining? Or, how do we know when “aid” or the Aid Trap premise has worked? What defines success?nnRGH: There is no mystery to how countries become economically self-sustaining. The sea change happened in Europe, when feudalism began to give way to private business. It took Europe a century to make the change. India and China have done it much faster in recent decades, but they are large and have good natural resources. Most smaller poor countries will need perhaps fifty years. Conventional aid has made no progress in forty years—people are just as poor now as they were then. Fifty years to go from poverty to prosperity is quite good. The marker of success will vary from country to country, but the percentage of population out of poverty is the best indicator. Meeting such an indicator will not end economic aid. That will end when the country can raise funds normally on the world market. We’re just offering a mechanism to get from here to there.nnR. Glenn Hubbard is dean of Columbia Business School and the Russell L. Carson Professor of Economics and Finance. He was chairman of the Council of Economic Advisers from 2001 to 2003 and has published more than one hundred articles on investing, banking, energy economics, and public policy. His most recent book is the bestselling Principles of Economics.
