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September 28, 2009

A New Solution for Poverty?

Catherine New
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Is it time for a new approach to solving world poverty? That question is at the heart of a new book, The Aid Trap, by Dean Glenn Hubbard and William Duggan, a senior business lecturer at Columbia Business School. In it, they argue that direct loans to businesses similar to the Marshall Plan is a more effective way to help sub-Saharan Africa pull out of poverty, rather than direct aid from charities and NGOs.

Hubbard and Duggan argue the current economic aid system — where non-governmental organizations run development projects — isn’t working effectively and there needs to be a “reorientation” of aid directly into the business sector. In many poor countries local business sectors are suppressed, they say, and that leaves economic development to either NGO-type entities or large multinationals. Their answer is to open up the middle of the economy for local business in order to have long-term sustainable growth.

“The question is mid-sized businesses. If you look at growth in the U.S. over the past two centuries or the industrial revolution in Western Europe, it was centered on growth of mid-sized enterprises,” Dean Hubbard said in a recent video interview at Forbes.com. “Mid-sized businesses need a very different credit structure than either microfinance or large multinationals, and that is missing in much of sub-Saharan Africa. A business focus on aid could get that going.”

Read more about The Aid Trap and in a Q&A with Dean Glenn Hubbard.

Comments

by Kalyan Pisapati | September 28, 2009 at 11:50 PM

Having come from a developing country, I see the point that authors have tried to convey. One should think whether it is better to empower the middle class by encouraging entrepreneurship or leave the fate of the people in the hands of NGOs. Local businesses provide better employment opportunities in small towns and provide a way for poorer sections to come out of poverty and join the middle class.

by Mirana Rajoharison | October 05, 2009 at 3:42 PM

It reminds the NEPAD purpose...And allocating aid in social sector (aids, malaria, primary health...) seems more sexy than allocating to economic sector (it is really difficult to get aid in investment and business climate improvement) Hope your advocacy willbring change...

by Catherine New | October 13, 2009 at 2:56 PM

In an October 13 article in Fortune.com, Dean Hubbard examines the aid trap in the context of foreign investment in Africa, namely from China. "Foreign companies are lining up to pump African oil, dig African minerals, build and run African ports, export African coffee and cocoa. But what about local companies?" he asks. read more

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