WSJ.com - Aid is Not the Answer

This is a must-read editorial in today's WSJ imo for anyone interested in international development--it summarizes the main points of Mr. Prahalad's excellent book "The Fortune at the Bottom of the Pyramid," which I have referenced numerous times on this blog...

WSJ.com - Aid is Not the Answer: "
COMMENTARY


Aid is Not the Answer

By C.K. PRAHALAD
August 31, 2005; Page A8


The G-8, led by Tony Blair and supported by Jeffery Sachs and Bono, believe that debt relief and a doubling of aid from rich countries to poor, especially in Africa, is the way to go. A less popular alternative focuses on the involvement of the private sector in poverty alleviation through the development of market-based ecosystems.

Irrespective of which route we take, we need to build an infrastructure to deal with poverty. There is an implicit aid overhead. According to Prof. Sachs, out of every dollar of aid given to Africa, an estimated 16% went to consultants from donor countries, 26% went into emergency aid and relief operations, and 14% went into debt servicing. How much of the remaining 40% escaped corrupt officials to benefit the intended recipients is not known.

Take America's approach to aid. Of the $1 billion in food aid provided by the U.S. in 2004, 90% of it was spent on U.S. produce. George Bush's plan for AIDS required that all groups receiving cash for drugs use FDA-approved drugs (typically expensive branded products) rather than invest in generic drugs and prevention programs likely to work in a specific country. The poor (the intended beneficiaries), or the NGOs and foundations working with them, receive a small percentage of the total aid and have very little say in how it is used. Aid may benefit aid givers and aid administrators as much as aid recipients.

In contrast, private sector investments must focus on making a return on investment. While building an infrastructure -- in this case a market-based ecosystem -- managers recognize that the percentage of funds allocated to overheads and non-revenue-generating investments must be stringently controlled. Because of the accountability for profits, private sector investments tend to be subject to less corruption.

Proponents of aid recognize, rightly, that the poor do not have access to even the basics of an acceptable quality of life. Somewhat syllogistically, they conclude from this that the poor cannot create wealth. Hence the need, they argue, to give them something -- an exercise, in essence, of wealth substitution...

When established private sector firms (including multinationals) start to look at those at the bottom of the economic pyramid -- about five billion people in all -- as potential consumers, the entire process of poverty alleviation takes on a new perspective. The motivation of entrepreneurs and the private sector is profit. They recognize that there is money to be made by serving consumer needs in the poorest countries in the world. And they are right...

Global firms increasingly realize that the bottom-of-the-pyramid markets are a source of innovation in business models -- potentially, even, of "breakthrough" innovation. Innovations in technology, capital intensity, delivery, governance (e.g. in collaboration with civil society organizations) and price-performance levels are all needed to create a market at the lowest-income level. To "make poverty history," leaders in private, public and civil-society organizations need to embrace entrepreneurship and innovation as antidotes to poverty. Wealth-substitution through aid must give way to wealth-creation through entrepreneurship.