A New Marshall Plan: A Market-Driven Solution to Global Poverty

Special from The Record

Jan. 27, 2010Bookmark and Share

In 1948, as Europe struggled with famine and economic collapse after World War II, the United States created a sweeping strategy to help rebuild the war-torn countries. The Marshall Plan—named for Gen. George C. Marshall, the secretary of state who proposed it—challenged European countries to design their own plans to rebuild, rather than issuing blank checks to individual countries. The four-year, $13-billion program is credited for getting a devastated Europe back on its feet.

Now, another region of the world is in desperate need of a “new Marshall Plan,” says William Duggan, senior lecturer at Columbia Business School. This time it’s Africa.

The Aid Trap

Recent efforts to combat global poverty have failed, says Duggan. And the long-accepted orthodoxy of funding government agencies and non-governmental organizations (NGOs) in poor African countries has proven futile. The United States should use the Marshall Plan as a template for rechanneling foreign aid into the African business sector.

That idea is at the heart of a new book, The Aid Trap: Hard Truths About Ending Poverty, which Duggan co-wrote with Glenn Hubbard, the Russell L. Carson Professor of Finance and Economics and dean of the Graduate School of Business. Businesses in developing African countries cannot compete with free services offered by NGOs or government programs, they say. When government services fail—or when aid money runs dry—there is no private sector to fill the void, which drives poor countries deeper into poverty.

“Local business has been the source of economic development throughout all time, across the entire world,” says Duggan. Nevertheless, less than 5 percent of all U.S. foreign aid supports local businesses, he says.

Duggan has firsthand experience with this issue. Before coming to Columbia, he spent two decades working in the African nonprofit world—three of those years were spent in an impoverished village—and ran the Ford Foundation’s operations in West Africa. “Trying to enable NGOs to lead economic development is a wonderful step in the wrong direction,” says Duggan, who holds three Columbia degrees and learned two languages during his time in Africa. “I was living a wonderful, well-intentioned life—and none of it was doing any good at all.”

At the business school, he teaches courses on innovation and the theories behind “flashes of creativity.” He is the author of Napoleon’s Glance: The Secret of Strategy; The Art of What Works: How Success Really Happens; and Strategic Intuition: The Creative Spark in Human Achievement.

Hubbard and Duggan’s own strategic intuition in The Aid Trap is that aid should be modeled after the original Marshall Plan, which pulled Europe out of poverty with undeniably effective results. In their proposal, each poor African country would oversee a fund that diverts foreign aid to local businesses and entrepreneurs, with the support of homegrown watchdog accountants and judges. Once businesses see profits, the original loans would be rechanneled into government infrastructure projects. This strategy has proven effective in India and China and could create new jobs and a thriving middle class in Africa, the authors theorize.

Duggan knows from experience that the status quo is something poor governments are reluctant to change. Take Mozambique, where mosquito nets are known to prevent malaria. Because nets are freely dispensed by the government, entrepreneurs, no matter how eager, cannot launch mosquito-net businesses. The government, Duggan says, keeps the current system alive because its leaders benefit from the existing system.

Published last September, The Aid Trap is one of Columbia University Press’s best sellers. “[It] provides the outline of a solution that can work. … The world must pay attention,” wrote Muhammad Yunus, an economist who won the Nobel Peace Prize by developing the concept of microcredit. The Economist says the book “articulates a constructive set of ideas about how to reform foreign aid.”

Still, the book’s main point—which amounts to upsetting a very large apple cart—makes many humanitarians uncomfortable, including Columbians such as Earth Institute director Jeffrey Sachs, the Quetelet Professor of Sustainable Development and a professor of health policy and management, who is widely hailed for his work helping citizens of Third World nations.

Sachs is currently in Africa and unavailable for comment, but he wrote, in response to a Financial Times op-ed piece by Hubbard, that “there is no novelty to his endorsement of private-sector-led development, except for…certain challenges such as agribusiness.” Moreover, he added, Duggan and Hubbard’s plan wouldn’t work due to issues such as the control of AIDS, tuberculosis and malaria among the poor.

The Aid Trap may have an academic bent, but the subtext should resonate for all Americans, says Duggan. “Your tax dollar is being thrown away for something that historically doesn’t work,” he says. “It’s one of the great massive misconceptions of world history—and really a tragedy.”

—by John H. Tucker