Editor’s Note: A version of this article was originally published in Ideas at Work, a publication of Columbia Business School.
The biggest impediment to the economic development of developing countries is their marginalization and isolation from the international marketplace. They have trouble “getting in the game” because of prejudicial trade policies, tariffs and other restrictions imposed by the developed countries. Changing those policies would allow people in poor countries to utilize their comparative advantages and lift themselves out of poverty.
The other overwhelming need in the developing world is for education and communication. When entrepreneurial people acquire knowledge and the means to communicate, they become economically competitive and can put their skills to work in their own countries. The more the world is knitted together, the more the knowledge that exists in one geographic area becomes available to other geographic areas.
A third area of great import to developing economies is market linkages so that producers of goods and services have contacts with exporters, end users and joint venture partners. As these linkages increase, the rules of economic activity become more transparent, and corruption and illegal activity subside.
So what should the advanced countries be doing to help lift the developing world out of poverty? The aid channels that are most effective are finance and technical assistance to entrepreneurs in the private sectors of the poorest nations. In my work with TechnoServe, what we see in Africa and Latin America and India is a great potential entrepreneurial class that needs to be helped through technical assistance and capital.
Entrepreneurs react to incentives, and successful entrepreneurs become effective cultural and political change agents.
The poorest countries of the world are still primarily agricultural economies. In sub-Saharan Africa, for example, a lot of people are producing crops like bananas, cashews and coffee. We’ve established sector specialists who understand what it takes to grow and process a cashew, for instance, and can apply best practices to countries with slightly different growing seasons or export patterns. In Mozambique, Tanzania and other countries in East Africa, that knowledge transfer has led to great efficiencies in the processing and export of cashews. We’ve tried to do the same thing with coffee and bananas, and we do it in partnership with large companies and successful entrepreneurs.
One thing that does not work is simply throwing money at a problem. Another is making grants without providing the proper training or the controls for monitoring the return on investments. Aid channeled through governments is also often likely be less effective than aid that is given directly to entrepreneurs and private-sector businesses.
When aid is distributed through private-sector venture capitalists or small and medium-size lending or investing institutions, there’s both upside and downside. The applicants for the money are quick to respond, and they get treated more fairly and less politically. Entrepreneurs react to incentives, and successful entrepreneurs become effective cultural and political change agents.
The United States could have a much greater impact in the developing world if we looked at aid as an investment instead of a charity program. The E&E Enterprise Funds that the U.S. government set up in the 1990s to stimulate investment in Eastern Europe provide a successful model for private-sector assistance. Those funds relied on federal subsidies in the early stages and then grew into self-sustaining direct-investment vehicles in countries like Russia, Ukraine and Poland. There is no reason why that approach, with some modifications, could not work equally well in the poorest countries of Africa, Latin America and Asia.