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Tuesday, August 7, 2007

Foreign Aid Will Not Make Poverty History

There is an innate paradox in the global conversation about poverty alleviation that eludes even the most astute scholars. Proponents of foreign aid are advocating for a big push, featuring an increase in foreign aid through which billions of dollars could be transferred to the poor. Yet $2.3 trillion in foreign aid and nearly sixty years later, over one billion people around the world are still hungry, infirm, illiterate and homeless.

According to Prof. Sachs, out of every dollar of aid given to Africa, an estimated 16% went to consultants from donor countries, 26% went into emergency aid and relief operations, and 14% went into debt servicing. How much of the remaining 40% escaped corrupt officials to benefit the intended recipients is unknown. The challenge is to make sure that aid reaches the poor. Otherwise the new epoch of global compassion toward the poor will be a repetition of the experience of the last six decades.

Proponents of aid believe that the poor cannot create wealth. Hence the need, they argue, to give aid, an act of wealth substitution. An alternative, less popular view, advocates for wealth creation through the development of market-oriented ecosystems comprising producers, small and medium enterprises (SME), large enterprises financial institutions, multinational companies, research organizations, foundations and aid agencies.

Innovative engagement with markets can stimulate wealth creation, especially if the focus is on a creative combination of quality service, local capacity and local needs. Whenever a high willingness to pay intersects with affordable costs for a commodity or a service, markets will work for the poor.

Rural Kenya is festooned in the colours of the two mobile telephone companies. Today in a country of about 34 million, nearly 9 million use mobile phones. The bottom of Kenya’s economic pyramid is part of this consumer group. As a result, smallholder farmers can find out the market price their produce with a text message or phone call. Cash transfer across the country can be done painlessly via text message. This perspective gives poverty alleviation a new dimension.

The private sector has successfully created a market-oriented ecosystem for cell phone connectivity. Why not market-oriented ecosystems for affordable health services, reliable safe water and clean energy supplies? Entrepreneurs can catalyze sustainable economic growth by identifying market opportunities and business models that meet the needs of underserved communities in emerging economies. In essence, entrepreneurs can be true allies in poverty alleviation through market solutions, employment and wealth creation as opposed to aid and subsidies.

Proponents of foreign aid often think of poverty as a technical problem they can be solved using a universal blueprint or Big Plan and huge dollars in financing. If it were that simple poverty would be history. Efforts to alleviate poverty must recognize that poverty is a complex labyrinth of social, institutional, political, historical, geographical and technological factors.
We must refrain from seeing foreign aid and charity as the only way out of poverty. We must test other approaches. Wealth creation through entrepreneurship must replace wealth substitution through foreign aid. We need to regard the poor as “undercapitalized and unsupported entrepreneurs,” and view poverty as the absence of opportunity and growth.

A coalition of local entrepreneurs, NGOs, multinational companies, foundations, aid agencies, and governments can create a market-oriented ecosystem, providing poor people with skills, technology, information, credit, infrastructure, and markets necessary for sustainable development.

An evolutionary perspective can help to clarify the meaning of sustainable development. Sustainability can be viewed as the capacity to differentiate, select and maintain adaptive capability. Development is the process of creating growth and maintaining opportunity. Hence Sustainable development is the goal of fostering adaptive capabilities, creating growth and maintaining opportunities.

Alleviating poverty through wealth creation is essentially an evolutionary process. It proceeds through differentiation of homegrown solutions, selection according to a criterion of fitness, and amplification or scaling up of successful solution to the next level-creating growth and maintaining opportunity. In this context, fitness can be viewed as value-adding economic transformations and transactions that produce goods and services that meet the needs of the poor.

It is time to question the role of foreign aid in stimulating and sustaining economic development. However, I do not think that there are no circumstances when aid is appropriate. Smart aid that is strategically targeted will undoubtedly alleviate distress among many desperate people. But clearly, foreign aid is not the universal panacea for poverty alleviation.

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