Extreme Measures for Dire Poverty

• Author: Wendy Smith
• Position: Author, Give a Little: How Your Small Donations Can Transform Our World

The Aid Trap

Hard Truths about Ending Poverty

Columbia University Press, New York, 2009, 198 pp., $22.95 (cloth).

In The Aid Trap, authors R. Glenn Hubbard and William Duggan, both of Columbia University’s Business School, put forth a radical solution for ending extreme poverty. The authors believe that the current systems of development aid and the nonprofit sector in emerging economies keep the poor poor and that the only sustainable means for eliminating extreme poverty is a thriving business sector.

Traditionally, aid to developing economies is described as taking one of two forms: top-down or bottom-up. The authors of The Aid Trap find fault with both approaches. Top-down aid is often delivered to governments and siphoned off by corrupt leaders and bureaucrats.

Bottom-up aid crowds out market-driven businesses by providing free but unsustainable services that create dependency. The authors cite the Millennium Development Goals and related "village development projects" as the current favorite but ultimately doomed fad of bottom-up aid distribution.

The authors praise the pro-business and wildly popular microlending boom; yet even microloans, they believe, have limitations. Microbusinesses typically remain micro, often because their growth is curtailed by governments that fear business-driven prosperity will cause foreign aid to dry up.

Hubbard and Duggan propose an alternative approach based on the Marshall Plan, which successfully revived the decimated business sector in western Europe following World War II. Hubbard and Duggan’s modern-day Marshall Plan for developing countries would provide loans to local businesses whose governments agree to reform their business-suppressing policies. These loans would be repaid to local governments, which would reinvest them in infrastructure that further supports business development. Growth of the business sector would generate income taxes needed to fund critical social services such as health care and education.

The authors rightfully refer to their plan as "strong medicine" for both developing and rich nations. Developing countries would have to opt in or forgo aid of any kind except for basic humanitarian assistance. Wealthy nations would have to adopt policies that support free and fair trade, which could eliminate, for instance, subsidies for some U.S. farmers who are producing surplus crops sent as food aid to poor countries.

In the short term, local businesses are favored over stronger...