In an effort to alleviate poverty, the United States government spends billions of dollars annually in foreign aid. Additionally, many private corporations, foundations and nonprofits are actively involved in providing assistance to alleviate poverty. Unfortunately, not all aid is used effectively.
Recent research indicates direct monetary aid to governments increases dependence, corruption and poor rule of law. Even well-meaning charitable aid can inhibit economic growth through poor strategic and tactical choices made by the donor. If so much aid goes to waste, should we continue to provide assistance at the levels that are being given? Would it be better to change the way aid is given and help find better long-term solutions for people in countries where many suffer?
What these questions ultimately create are more queries about how aid should be packaged. Although universal solutions may not exist, there is a growing consensus about the types of aid that are most effective. Providing skills and opportunities to individuals is near the top of this list.
Opportunities come largely from entrepreneurship and job creation. Meltwater School for Entrepreneurial Training (MEST) is a prime example of an institution that teaches young college graduates and then helps them incubate and create companies.
Started by Jorn Lyseggen, founder and CEO of the Meltwater Group, MEST has graduated more than 100 young African technology entrepreneurs from its Accra, Ghana, campus. Across a small bridge bypassing a drainage ditch next to the campus lies MEST’s incubator, which has spawned a number of companies, some of which have now received venture capital from U.S. firms, created employment and/or have been acquired.
The best types of aid provide individuals with skills and opportunities rather than goods and services. Private corporations and nonprofits are particularly suited to this type of aid because they can identify and address specific needs efficiently. For instance, Elevita is a nonprofit that buys products from women-owned businesses in nations around the world and resells them over the Internet. The women who run Elevita donate the profits of their organization to build school dormitories to make it possible for girls in some of the same countries to go to school safely. This business model also supports long-term economic growth.
Some other types of aid are less effective in providing skills and opportunities. Charitable donations bring goods and services to the needy but generally fail to provide skill development, employment and/or entrepreneurial opportunities. Consequently, the benefits of these types of aid generally disappear as soon as donations cease. These contributions generally have little positive economic impact because the aid that’s provided does not build sustainable systems that can function independently.
To be clear, there are times when donations of food, blankets, clothing and emergency supplies are absolutely necessary. No doubt, after earthquakes, floods, droughts and other natural and man-made disasters, donations of goods are made. But, for the most part, government and nonprofit aid should move away from giving these types of foreign assistance.
In the past 22 years, the global extreme poverty rate has been reduced by 50 percent. Even so, about 1 out of 5 people on the planet still live in poverty. Recent research and business examples have shown that there are more effective ways to combat poverty than traditional charitable donations.
Business has created most of the progress. In China alone, roughly 600 million people have come out of poverty since Chairman Mao died in the summer of 1976. Similarly, 200 million have made the transition out of poverty in India. In both countries, it has mostly been job creation through the private sector that has made the difference.
If these modern aid strategies and business-based means of economic assistance are more widely implemented, perhaps some of us will witness the end of poverty in our lifetimes.
John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the School of Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Richard Payne, Hoffmire’s colleague at Progress Through Business, did the research for this article.