August 25, 2006

Why Does Africa Struggle?

Why has Africa been left out of the business revolution? William Duggan discusses an alternative to aid for the world's poorest countries.


Africa today has the most extreme poverty in the world. How has the West responded to this human suffering? Thanks in part to celebrities like Bono and Angelina Jolie, calls for increasing aid to Africa are becoming popular, even sexy. Bill and Melinda Gates are using their fortune to fight disease in Africa, particularly AIDS. And Warren Buffett, a graduate of the School, recently announced that he would give more than $30 billion to the Gates Foundation.

There’s also a coordinated campaign to end poverty in Africa and other regions, a project called the United Nations Millennium Development Goals. These eight goals, which the UN hopes to achieve by 2015, include reducing extreme poverty by half, halting the spread of AIDS and ensuring universal primary education. Any role business might play appears only once on this list, in the very last item: a global partnership for development. By this, the UN means encouraging business to help with aid work, not business as an event in itself. The agents that are working towards these goals are governments and NGOs, not companies.

It’s a noble effort, but does it work? Last year, the UN came out with its first five-year report on the Millennium project, and the picture was not very good. The UN has made little progress on any of these initiatives — because it didn’t receive enough money, the report said.

After 40 years of aid that has climbed into the trillions, I think it’s time to say that the lack of money isn’t the real problem. The system just doesn’t work. Sub-Saharan Africa is poorer now than it was in 1960. But the UN report did include one encouraging note about the elimination of poverty. In the last five years, two countries that are not part of the Millennium project showed tremendous improvement: China and India. The reason, the report said, was the development of business institutions and the private sector in these countries.

I am an economic historian by training, and I cannot think of a single country in which the private sector has not been the key to prosperity. Malaria and AIDS have become diseases of poverty. Florida once had malaria, but got rid of it through prosperity. Today, rich countries have protection from AIDS; poor countries get AIDS.

When trying to figure out how to help Africa, it helps to remember the tremendous success of the Marshall Plan. It pumped $13 billion — the equivalent of $80 billion in today’s dollars — into European economies after World War II. The money was used not for charity, but to support the private sector. The plan gave loans to businesses, and when these loans were repaid, the proceeds were used to rebuild the commercial infrastructure. Likewise, South Korea, Japan and Taiwan all benefited from massive private-sector aid programs after World War II.

Back in the 1960s, development agencies tried to figure out how much capital poor African countries would need to finally take off. They came up with an enormous number and calculated further that the private sector was too small or too weak to absorb that capital. So they launched government-sector development programs, and these not only failed but squeezed out the private sector where it was needed the most. The agencies had good intentions, but their strategy was fundamentally flawed.

The World Bank and the International Monetary Fund track business indicators around the world, such as how easy it is to start a business. In Canada, it takes two days. In New Zealand, it takes just two and a half hours. In Mozambique, it takes 153 days. Indicator by indicator, it’s very clear that Mozambique is not interested in the business sector. Like most other African countries, Mozambique is very happy to get governmental and nongovernmental aid.

Many advocates for aid to Africa seem to be unaware of how important the private sector is for growth. The movie studios that made Jolie a millionaire are private companies, not NGOs. So are the record studios that gave Bono his fortune. Gates and Buffett are masters of the private sector. They have forgotten how they themselves became rich.

This isn’t to say that charity has no role in African development. But right now, only a tiny fraction of aid goes toward private sector development. One very simple solution would be to increase that to 50 percent. If half of the aid that currently goes to Africa were spent on the development of the private sector and business institutions, Africa would be in much better shape. Frankly, time is running out.

 

Willam Duggan is associate professor of management at Columbia Business School.

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