Why has the continent been left out of the business revolution?
By William Duggan
Africa today has the most extreme poverty in the world. How has the West responded to this 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. And Warren Buffett 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 charity, not business as an event in itself.
It’s a noble effort, but does it work? Last year, the UN came out with its first five-year report on the 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. However, the UN report did include one encouraging note. 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. 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.
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 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.
What’s the implication of all this for multinational corporations? Their greatest contribution would come in the form of regular business dealings with the domestic private sector in poor countries. It would be even better if corporations also joined in the global battle of ideas to return the private sector to the center of development.
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. 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.
William Duggan is associate professor of management at Columbia Business School. This article first appeared in Columbia Business School’s “Ideas @ Work.”