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November 13th, 2009 at 9:07 am

More discussion of The Aid Trap

Interest in R. Glenn Hubbard’s The Aid Trap: Hard Truths About Ending Poverty continues to grow as evidenced by his recent appearance on CNBC with Maria Bartiromo and a recent and much-discussed Wall Street Journal op-ed.

Here is Hubbard discussing making aid go farther and his book on CNBC:

As mentioned above, Hubbard’s Wall Street Journal op-ed from earlier this week on the anniversary of the fall of the Berlin Wall generated a lot of discussion. In the piece, The Berlin Wall of Aid: When Will It Fall?, R. Glenn Hubbard asks:

The fall [of Soviet dominance] marked the end of Eastern Europe’s failed system of state-run economic development. But systems of top-down economic development continue in most of the poor countries of the world, where aid donors continue to fund government development projects despite their decades of failure. Why is this so? Why has the “Berlin Wall of Aid” not fallen despite its record of failure?

Hubbard calls for an end to the present system of aid, replacing it with one that places greater emphasis on helping small businesses rather than relying on aid to government or NGOs. The new system should replicate the original Marshall Plan which sought to help local businesses in war-torn Europe.

Hubbard concludes the piece writing,

Can the aid system shift, or is it too inflexible – like the Soviet system was – to adapt to a new Marshall Plan? We can find some encouragement in two changes in the aid system over the past two decades: it has accommodated NGO projects and microfinance alongside government programs. Humanitarian aid especially works best through NGOs, and microfinance has helped millions of poor people start and run micro-businesses across the world. These major shifts over the past two decades show that the aid system has some ability to adapt beyond its traditional form of government development projects.

But NGOs can’t raise people out of poverty — only local business can do that. And microfinance operates in most poor countries below the radar with unregistered companies that can’t get formal loans or join the normal business sector. Small and medium-sized businesses, not microfinance, generate the jobs and demand that lift poor countries out of poverty. That’s how it happened in Western Europe, the United States, East Asia and now China and Eastern Europe.

A Marshall Plan would continue aid to poor countries, but directs it in a way that can actually lead to prosperity. The growth of NGOs and microfinance show that the aid system can adapt. But the shift to local business will be harder, because it is a more fundamental change of the economic system. NGOs and microfinance can operate alongside government development projects while local businesses are a direct alternative to them.

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