America brought Europe back to life a half-century ago. Why not give Africa the same chance?
- By Glenn HubbardGlenn Hubbard, chairman of the White House Council of Economic Advisers from 2001 to 2003, is dean of Columbia Business School. With William Duggan, he is co-author of the forthcoming book The Aid Trap: Hard Truths About Ending Poverty.
Just six months into his term, U.S. President Barack Obama is already modeling himself after the country’s most transformational Democratic leader, Franklin D. Roosevelt. As Secretary of State Hillary Clinton visits Africa this month, now would be the perfect time to follow in the steps of Roosevelt — and the most transformational Democratic secretary of state, George Marshall — by announcing a second Marshall Plan. More than half a century after the United States helped rebuild a war-torn Europe, it’s time Africa got the same chance.
The Marshall Plan was fundamentally different from the aid that Africa has received over the past four decades. The Marshall Plan made loans to European businesses, which repaid them to their local governments, which in turn used that revenue for commercial infrastructure — ports, roads, railways — to serve those same businesses. Aid to Africa has instead funded government and NGO development projects, without any involvement of the local business sector. The Marshall Plan worked. Aid to Africa has not. An African Marshall Plan is long, long overdue.
Aid groups will argue that such a plan, grounded in building up the local African economy, can never work. Here are the objections they’ll make to an African Marshall Plan — and why they’re wrong.
"The Market Failed in Africa."
It never had a chance. No lesser masters of the market than Bill Gates and Warren Buffett have declared that the market has failed poor countries. In an era of global trade, most Africans have benefited not at all. Despite a flourishing market in most of the rest of the world, Africa remains a continent of poor villages and sprawling slums. So rather than investing in the continent’s businesses and ventures, these billionaires fund NGOs and government projects for health, education, and technology. And they call for U.S. foreign assistance to do the same.
But take a look at the World Bank’s annual report, "Doing Business," and you’ll realize that many African economies have never had a business market to fail — thanks to their governments’ dense, unnavigable regulations. "Doing Business" ranks countries according to how easy it is for citizens to start and run businesses — things such as registering a company, hiring and firing workers, getting credit, and so on. Poor countries in general and African ones in particular rank at the bottom of the list. The major reason is that their governments have never had an interest in fostering business because favor and aid for government and NGO projects comes so much easier. In essence, the market never failed because it never really existed.
The Marshall Plan in Europe came with conditions: Each country had to adopt policies that allowed its businesses to operate normally. It made the same offer to all of them, and those that refused got no aid. The offer went out to all Europe, but the Eastern bloc, under Soviet threat, declined. Some African countries will also decline. That means they don’t get the aid.
"Strong Businesses in Africa Will Be the New Colonialists."
Yes, but that might be a good thing.A whole contingent of aid advocates admit the faults of African governments, but trace them back to colonialism. Under colonial rule, they say, foreign governments and businesses exploited Africa and left it poor. Pro-business policies, they worry, would lead to a new colonialism, with foreign companies exploiting Africa anew.
This argument flies in the race of reality. First, Africa was poor before colonialism, and for many countries, colonialism may well have made Africa richer. There were some exceptions, such as the Belgian Congo in the early 20th century, where forced labor for rubber extraction made the people poorer. But overall, Africans in 1960 were healthier, lived longer, and had higher incomes than Africans in 1900. Ghanaian economist George Ayittey calls the colonial era the "golden age of peasant prosperity" in Africa, when the vast mass of rural Africans joined the world economy for the first time. By 1960, this was even true in the Belgian Congo. The hospitals, ports, schools, railways, and roads of Africa date from the colonial era. Certainly Europeans benefited unfairly from colonialism, but for Africans the result was still an improvement over their former poverty.
What has not made Africans richer, however, are their countries’ own governments, which have cut off that prosperity in favor of government and NGO assistance and foreign investment that benefits only the elite. Enabling the majority of Africa’s population to access and participate in strong local businesses, through a Marshall Plan, would be a welcome breath of fresh air — not to mention a good revenue stream for the common man and woman. The "Doing Business" rankings show clearly that countries that let their businesses thrive — like Mauritius (No. 24), Botswana (38), and Ghana (87) — do better for their citizens than those that don’t — like Mozambique (No. 141), Zimbabwe (158), and the Democratic Republic of the Congo (181).
"Infrastructure Must Come Before Business."
Wrong. It’s the other way around. The conventional wisdom about the Marshall Plan is that it brought prosperity back to Europe by funding infrastructure. Following that logic, aid to Africa should finance physical infrastructure such as roads, ports, and telecommunications, as well as the social infrastructure of health and education. Only after that infrastructure raises Africa to a viable level can business thrive.
But this story gets it exactly backward. In all rich countries, the development of a thriving business sector came before physical and social infrastructure. In fact, the Marshall Plan worked because it made loans to European businesses first, which then paid money back into a national pot to fund commercial infrastructure. Africa has already demonstrated its potential for achieving the same. In telecommunications, for example, Africa has become the first continent where cell phones outnumber land lines, thanks to many excellent African entrepreneurs (and the many terrible government land-line systems). Besides, businesses that have a stake in the maintenance and viability of a given project are bound to be far more apt at building and maintaining infrastructure than aid agencies, which have been trying to do it and failing for the past 40 years. Given that many parts of the continent still lack basic roads, water systems, electrical grids, and more, isn’t it time to retire the current, aid-driven system?
"Democracy Must Come First."
Then it may never come. A growing number of Africa watchers see the continent’s problems beginning and ending with politics. They argue that only democratic countries can use economic aid well, so aid itself should fund democracy before or in addition to other priorities. In The Bottom Billion, economist Paul Collier even argues that outsiders should invade poor countries to impose democracy at the point of a gun. The model is Liberia, where peacekeeping forces defeated President Charles Taylor and handed control of the country over to an interim government, followed by an elected leader, Ellen Johnson Sirleaf, in 2005. Economic development is impossible under a brutal tyrant like Taylor and is now feasible under a normal democratic system.
But Africa has had many elections during the past 40 years. Democratic governments come and go. Liberia is Africa’s oldest democracy, dating from 1847. The real question is not how to promote free elections — which are certainly a good thing — but how to promote lasting democracy. For that, the answer is very old and common across the globe: a middle class, created by local business. That’s how it worked in Europe, the United States, and in every other enduring democracy on Earth. Liberia may have elected Sirleaf, but it still ranks No. 157 in "Doing Business." Without local business, without a Liberian middle class, how long will democracy last? A vibrant business sector leads to democracy — as in Botswana or Mauritius — not the other way around.
"Microfinance Is Enough."
Not even close. Microfinance loans are meant for small entrepreneurs whose operations aren’t yet large enough to garner the usual business loan. Over the past 20 years that microfinance has joined the mainstream of aid, it has stood out for its success in getting many a microbusiness rolling. The original microfinance organization, Grameen Bank in Bangladesh, started out with 42 borrowers and now has more than 8 million. Grameen’s founder, Muhammad Yunus, received the Nobel Peace Prize in 2006 and this year was awarded a U.S. Presidential Medal of Freedom. Hundreds of organizations have followed Yunus’ lead and now make millions of loans a year to tens of millions of poor people around the world.
But what happens if one of those entrepreneurs is successful enough for a bigger loan, one that microfinance cannot provide? In the current climate, once a microbusiness grows large enough to want to get a regular bank loan — it can’t. The "Doing Business" rankings show that most poor countries put up huge barriers of red tape that prevent citizens from starting small businesses and getting credit for them. Microfinance goes to unregistered businesses, so it stays under the radar. Yet small and medium businesses are the long-term answer to poverty — as they have been in developed countries — and microfinance cannot help them. A Marshall Plan that rewards countries for unshackling their local businesses is the next step up from microfinance to overcoming poverty.
"Anti-Corruption Measures Will Make Aid Programs Work Better."
Hardly. Looking back at the Soviet Union of the 1980s, would you say all it needed was a good anti-corruption campaign? Certainly the Soviet government was corrupt, but the real problem was the underlying economic system. Citizens were not allowed to start and run their own businesses. Aid to Africa for government and NGO projects — even without corruption — has the same problem: It does nothing to help local business.
In Africa today, anti-corruption programs are doomed to failure because they leave the anti-business economic system intact. That economic system is based on aid, where the basic unit is government or NGO projects, rather than local businesses, as it is in prosperous countries. Anti-corruption measures do nothing to correct this flawed equation; in fact, they reinforce it. And no amount of transparency will yield economic growth until the structure of the African economy changes.
If she listens to the current, broken aid system, Secretary Clinton will feed that same, backward system that has helped make Africa what it is today. Instead, she should listen to her long-ago predecessor, George Marshall, who gave the aid world its biggest success story. He did it by working with local businesses and respecting the power of markets. Africa needs nothing less.
Correction: This article incorrectly referred to George Marshall as Secretary of State under President Roosevelt; he was in fact secretary under President Truman. FP regrets the error.