Foreign Aid, Social Enterprises, and Long-Term Growth
I wrote recently about the growing trend of using social enterprises as ladders out of poverty rather than relying on nonprofits and donations. For a multitude of reasons, social enterprises are becoming increasingly popular among both audiences with big hearts and investors who look for business to turn a profit.
Not only are we learning more and more about the power of the social enterprise, but research starting in the 1990s has demonstrated the hidden evils of foreign aid and how free money intended to help fund growth and infrastructure leads to faulty research, political corruption, and arrested development. Ultimately, well-intentioned policies and practices have backfired, causing a stoppage of medicine and food to those in need, the spread of misinformation, and a false sense of “doing good” on a large scale.
Among the leaders who are bringing issues pertaining to the failure of foreign aid is William Easterly. A veteran of the field of economics pertaining to development and developing nations, Easterly has become a fierce opponent of foreign aid and has released numerous books to that end. Easterly has published a number of academic research papers complete with observational studies and more. In addition to his writings directed at other experts, Easterly is the author of three books decrying the problem of foreign aid, calling it demeaning, ineffective, and quite simply bad. He wrote in his book The White Man’s Burden of foreign aid, “... money should not be spent according to what the West considers the most dramatic kind of suffering.”
Agreeing with that very poignant sentiment is Latin American economist and activist Pablo Yanguas, yet another advocate against simply dumping money on a problem. To him, the issue of aid has more to do with how unmarketable long-term thinking is for raising funds to help developing nations compared against big tragedies, which always garner large levels of donations.
Businesses, be they social enterprises or not, need to have some sort of long-term growth plan to remain viable. No matter what they’re selling, businesses must find new ways to innovate and adjust their pitch to changing markets and demands in a way that keeps them afloat and continues to meet their mission. Yanguas argues that those same market forces that keep businesses on their toes are the ones that do nonprofits in because they simply aren’t as marketable.That is, nonprofits do not “turn a profit” by definition, so they are reliant solely on altruistic donations and compassion, forces which simply aren’t as effective at driving human behavior as the profit motive is.
Think about the last time you made a spur-of-the-moment donation to a cause. Was it because of a sudden tragedy or breaking news story? Or was it because you were made aware of a deep systematic issue that will take 20 years to resolve? Chances are, you donated to the first category. From natural disasters to warfare, most aid goes to the issue that can grab the most headlines and garner the most social media shares. Yanguas argues that it’s this mentality -- the swoop in and fix it model -- actively prevents aid from going where it can fully fix issues, not just temporarily patch them up.
Yanguas argues in his new book The Lies We Tell About Foreign Aid that pressure to see immediate results from aid money force recipients to behave in ways that are counterproductive to development and permanent ladders out of poverty. If they fail to produce evidence that their aid money is “helping” quickly, they risk donors pulling funds altogether and reallocating them. Yanguas says this myopic view of the efficacy of aid money is what’s causing foreign aid efforts to fail. Unfortunately, they’re simply not designed for transformation. They’re designed for a quick-fix rather than sustainable growth and development.
All these things that cause foreign aid to fail will help social enterprises succeed. Social enterprises, by nature of being businesses, have to prove sustainable in a way that charities and NGOs do not. Social enterprises provide the framework for a long-term alleviation of poverty rather than an untenable band-aid solution. In so doing, they catalyze the growth of human prosperity in a way no other institution can. Value for value exchange will, in the end, prove a more realistic long-term strategy for success.