If Aid Isn’t the Answer to Poverty, What Is?

Profs. Vaccaro and Lago on developing emerging markets

13/04/2016 Barcelona

Poverty Inc.

Alejandro Lago: "Saying aid hasn’t worked is as naïve as saying policy hasn’t worked. It’s the way we’ve been using it up ‘til now that hasn’t.” / Photo: Ismael Martínez

With over 20 to 30 years of giving aid to emerging countries, what have we learned? What’s the best approach to eradicate poverty?

“We can see now that giving aid is not enough – we have to focus on long-term development to support developing markets.”

So says IESE Professor Alejandro Lago, co-director of the IESE Africa Initiative, who along with IESE Prof. Antonino Vaccaro addressed this and other key issues emerging markets face, at IESE Barcelona after the screening of the documentary Poverty Inc.

The documentary, which has already been screened in Harvard and MIT, shares narratives from people around the world affected by foreign aid and its unintentional side-effects on emerging local economies and families.

What we’ve found is that long-term donations don’t work,” says Vaccaro.

As the Academic Director of IESE's Center for Business in Society and of the Social Innovation and Social Entrepreneurship Platform, Vaccaro leads many ventures with MBA and EMBA students to promote entrepreneurship in developing economies.

Act Local for Real Impact

“Imagine if we start donating shoes, what happens to the local cobbler? Who’s going to buy shoes if they’re given for free by foreign aid?” This was one example in the documentary that Vaccaro also uses in his class with second-year MBAs.

“We need to focus on building up local businesses from the grassroots level,” he says.

“The poor aren’t needy,” says Vaccaro. “They can – and want – to produce their own shoes locally,” agrees Lago. And to do this they need local businesses.

So what’s really holding Africa back? Lago says it’s the lack of local leaders. And IESE has been working for the last 15 years on educating leaders in Africa.

“Of course, it’s much easier for me to just go in and teach in Africa,” says Lago, “just like it’s much easier to send shoes, or clothes. But that doesn’t solve the real issue. African professors need to learn how to educate African leaders to build local African businesses. And take them global.”

Three Barriers to Break Down

Lago and Vaccaro identify three main poverty barriers that need to be addressed.

Firstly, there’s the lack of access to finance for mid-sized companies. “And these are the companies that create jobs and growth. Employing more than 20 or more people from the local community really makes a difference to the economy,” says Lago.

“I’ve seen a lot of MBA projects during the Nairobi module run into brick walls when they find that big banks only deal with governments or large corporations. And micro-finance NGOs only work with small enterprises.” This means that mid-sized companies get “stuck” and can only grow if family members or friends lend them money.

Lago points out that we’re all happy to donate money to Africa, for food, clothing or education. “But how many of you are willing to lend money to an African entrepreneur?” He says this calls for a massive shift in mindset and expectations from giving aid.

Secondly, property ownership and land is a very complex and uncertain territory, with virtually no legal documentation or registration of land agreements. “You might be able to buy or rent the land from the tribe’s chief – but without the paperwork, banks won’t lend you money.”

Another example of legislation being out of touch with reality is that “shanty town” buildings can’t be registered, as they are not made from official materials. This means that if your business is in a shanty town, you can’t register it because the building doesn’t officially exist.

The final barrier, says Lago, is the lack of facilities and resources to create businesses within the existing legal structures. Complex red-tape and bureaucracy hinders local entrepreneurs and startups from getting their business ideas off the ground.

So what is the role of aid – and what can you do to really help local communities in emerging markets?

Aid and Economic Development: an Odd Couple?

While the documentary provides a very polarized approach to aid, Lago argues that this isn’t about who is right or wrong. “We should all reflect on why aid and local economic development are incompatible in emerging markets.”

“Saying aid hasn’t worked is as naïve as saying policy hasn’t worked,” says Lago. “It’s not that aid isn’t working – it’s the way we’ve been using it up ‘til now that hasn’t.”

And if you’re thinking of making a donation, advises Lago, you should look at the content of a project and think about how it will affect the local market in the long-term.