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."

The July 18 issue of the Economist. Photo: The Economist

During the boom years of the 1990s, economists like Alan Greenspan became celebrities. Their speeches and writings were closely studied by those hoping to know where the market was going next. But thanks to the collective failure of economists to predict the worst economic crisis in decades, those shining reputations are now tarnished.

Now the profession of economics is hurting. The July 18 issue of The Economist cautions against an economist backlash, warning against the logic that "if economists got things wrong, then politicians will do better."

In its crudest form — the idea that economics as a whole is discredited — the current backlash has gone far too far. If ignorance allowed investors and politicians to exaggerate the virtues of economics, it now blinds them to its benefits. Economics is less a slavish creed than a prism through which to understand the world. It is a broad canon, stretching from theories to explain how prices are determined to how economies grow. Much of that body of knowledge has no link to the financial crisis and remains as useful as ever.

Despite the vigorous defense of the discipline, the Economist goes on to note that two sub-fields of economics do require reform. Macro-economists, who study the impact of factors like unemployment and inflation on economic growth, use quantitative models to forecast economic trends. The most common models failed to take into account potential failures of the financial system and therefore failed to predict the scale of the recession. Some economists are using complex computer simulations to test and improve existing models.

Financial economists, those that examine the prices of financial instruments like stocks and bonds, need to focus on how risk impacts the financial system, according to another Economist article. The increasing use of psychology in economics provides one opportunity for these economists to better understand risk.

Children learn based on their teachers-- and often national policy regarding education. This month's issue of Foreign Policy explores how the way Germany and France teach economics may spell a dismal economic future.

Millions of children are being raised on prejudice and disinformation. Educated in schools that teach a skewed ideology, they are exposed to a dogma that runs counter to core beliefs shared by many other Western countries. They study from textbooks filled with a doctrine of dissent, which they learn to recite as they prepare to attend many of the better universities in the world. Extracting these children from the jaws of bias could mean the difference between world prosperity and menacing global rifts. And doing so will not be easy. But not because these children are found in the madrasas of Pakistan or the state-controlled schools of Saudi Arabia. They are not. Rather, they live in two of the world’s great democracies—France and Germany.