Forbes Magazine
Published: January 12, 2010
By: Phillip Vassiliou
President Obama recently nominated Dr. Rajiv Shah to lead the U.S. Agency for International Development. Dr. Shah's appointment will hopefully inject a fresh perspective into USAID. It will also give the international aid community an opportunity to rethink its approach to poverty reduction.
Over the past few decades, it's become evident that traditional "top-down" development, in which large amounts of aid are distributed to governments in the developing world, is ineffective. Africa, for instance, has taken in $568 billion in economic aid over the past 42 years. Yet per capita economic growth for the median African country has remained stagnant.
Meanwhile, once-poor nations receiving comparatively little aid, like India, have experienced immense growth. Since the mid-1990s, the Indian economy has grown over 7% almost every year, and its poverty rate has fallen dramatically. This year, India's economy is on track to grow by about 6%--an incredible figure given the global downturn. There is a great deal further to go with market liberalizations that will assist the millions of people in India living below the poverty line, but the foundations are being laid to provide for sustained economic and social development where people are given a "hand up" rather than simply a "handout."
Poverty statistics from the World Bank tell this story best. In 1981, 1.9 billion people lived on less than $1.25 per day. By 2005 that number had dropped to 1.4 billion. Most of that reduction, though, can be attributed to economic growth in East Asia. In 1981, 80% of East Asia's population lived below the poverty line. Today it's just 18%. In Africa the poverty level hasn't changed in 25 years.
Adjusting international development policy to encourage entrepreneurship would go a long way toward helping the poorest countries pull themselves out of poverty. This was India's strategy--and it is paying off.
Consider cellphone penetration in India. When the Indian government opened up its wireless spectrum in 1992, a handful of entrepreneurs jumped at the opportunity, even though conventional wisdom predicted that mobile service would never become a profitable enterprise in India. Today the nation is home to more than 200 million mobile users, and service has reached the most rural of villages thanks mainly to entrepreneurs who facilitated the use of prepaid charge cards. Recent studies have shown that increasing cellphone penetration by an extra 10 phones per 100 people can lead to as much as a 0.6% increase in a country's GDP.
The impact of cellphone penetration in India continues to grow thanks to innovators like Ravi Inukonda. Ravi saw India's rural cellphone subscribers as an untapped market. So he is developing mobile phone applications to help rural villagers keep up-to-date on water and power shutdowns, produce prices and weather forecasts. This is just one example of the innovation that markets inspire and how the profit motive increases prosperity for entrepreneurs, consumers and producers alike.
Africa as a whole can certainly take steps to encourage a business-led approach to achieving sustainable development.
Every year, the World Bank releases an "Ease of Doing Business" report, which ranks 183 countries by how conducive their regulatory environments are to the operation of business. In the most recent edition, just three African nations--Mauritius, South Africa and Botswana--made the top 50. Among the 25 countries at the bottom of the list, all but three are in Africa.
Some African nations have already started shifting from relying on handouts from Western countries to creating policy environments more conducive to business, entrepreneurship and long-term economic growth. Botswana is a good example. Forty-five years ago, it was one of the poorest nations in the world. Yet between 1966 and 1999, Botswana had the highest average economic growth rate on the planet. During that same period private-sector employment in Botswana rose by an average of 10% per year.
The case of Botswana reminds us that good business is good development. Relative to other African countries, Botswana enjoys strong property rights, economic freedom and a fair judicial system. The country's friendly economic environment has attracted foreign investment from companies such as Heinz and Hyundai. And the Botswanan government is the least corrupt in Africa, according to Transparency International.
For centuries, free markets and free people have proved to be the best remedy for poverty. Unfortunately, the Western world's development strategy has failed to properly consider this fact. There is no reason why that can't change. It makes sense, for instance, to apply the lessons learned in India's telecommunications sector to the developing world's need for clean water and electricity.
For many years, telecommunications services were run as centralized utilities. This is still the case in many African nations. To most people, this made sense--expanding telephone, mobile phone and Internet service to the developing world's rural areas was perceived as uneconomical.
Today, many entrepreneurs are looking to leverage groundbreaking advances in technology to deliver water and electricity to the world's poorest, given the enormous size of the opportunity and lack of any scalable and sustainable solutions. Indeed, light-emitting diodes and thin-film solar cells are already allowing entrepreneurs to provide low-cost power to people living on less than $2 per day. Compared to existing technologies like kerosene lamps and diesel generators, LEDs and solar cells are cleaner, safer and healthier. And often, they are cheaper.
At heart, entrepreneurs are problem solvers--they identify a need and meet it with a product or service. Nowhere are their problem-solving skills more desperately needed than in the developing world. Handouts from the foreign aid community have proved incapable of solving the development issues plaguing the world's poorest. A hand up to budding entrepreneurs may be the development tonic global leaders have been looking for.
Philip Vassiliou is a managing director of Legatum, an investment organization that allocates proprietary capital in the global markets and to programs that promote sustainable human development.
