Economist Glenn Hubbard argues that aid targeting local African business development would help the continent more than infrastructure projects like roads. Photo: Stefan Gara (flickr)

Foreign aid has failed to end poverty in Africa because it often funds the wrong kinds of projects, says economist Glenn Hubbard. As he explains in a recent podcast interview with NPR's PlanetMoney, Africa remains just as poor as it was 50 years ago, despite the $1 trillion in foreign aid that developed countries have spent since WWII.

How to fix this? Hubbard argues that funneling aid money directly to local businesses is the most effective way to promote growth and end poverty, an idea he expands on in his book The Aid Trap. He contends in an interview with Columbia University Press that Western governments could model such an initiative on the Marshall Plan, the foreign aid program that the United States used to rebuild Europe after WWII:

Everyone in aid recognizes the Marshall Plan as the most successful aid program in history. What few realize is how the Marshall Plan actually worked. It made loans to Europe’s private businesses, who repaid them to a national fund, which spent the money on commercial infrastructure like ports and roads.

Hubbard believes that this aid model can also be applied to Africa, since small-to-medium sized business are the engines of any economy. "There is a collective amnesia among prosperous countries about how they themselves rose from poverty: their local business sectors," he writes in an article for CNNMoney. By contrast, large multinationals doing business in Africa rarely impact local poverty levels.

"We can do [this plan] without spending new money," Hubbard says to PlanetMoney, explaining that he just wants to restructure how aid is given. He also believes that "we have a moral imperative to act" to end poverty through aid, in contrast to the prominent economist Dambisa Moyo, who argues that Africa would be better off without any aid at all (see Manasi Sharma's "Is Foreign Aid Helping or Hurting Africa?"). Hubbard tells Columbia University Press that not all aid money should go to business either, since humanitarian aid and microfinance programs are both successful and necessary for the poor.

Hubbard admits to the PlanetMoney team that the idea has some risks, such as the possibility that local elites could siphon off many of the benefits without improving the lives of the poor. However, he says that it's even easier for them to do so under the current system. "The traditional aid has definitely strengthened the elites," he explains.

Despite possible drawbacks, as Hubbard points out to PlanetMoney, it's clear that when one aid plan has already failed, we shouldn't try to duplicate it for another sixty years — we should move on to something new. And as he tells Columbia University Press, "It’s not that business hasn’t worked in poor countries, it’s that business never had a chance in poor countries. Let’s provide that chance."