TCS Daily

We Can't Live With or Without Aid, So What Now?

By Apoorva Shah - July 24, 2007 12:00 AM

Since this June's Technology, Entertainment, Design conference in Arusha, Tanzania, critiques of official development aid to Africa have re-emerged full-force in the development blogosphere. Consider the recent rash of attacks against Bono[i] and Jeffrey Sachs[ii]. Such caustic criticisms are frequent, but the alternatives offered are often vague and poorly developed. The need for more "entrepreneurship" and "innovation" is frequently mentioned. Others call for more trade and increased and private equity flows to local business. Financer Idriss Mohammed said, "Forget making poverty history. I want to make Africans rich."

But with such exaggerated statements, aid-skeptics are falling into the same trap as Bono and Sachs. Catchphrases like "make poverty history" and "make Africans rich" make for captivating headlines but less than pragmatic policy implications. "Trade not aid" can only work if Africans are able to effectively produce and market things to trade. So the question is not whether there should be more innovators and entrepreneurs in Africa, but how? What concrete steps must be taken in order to develop the business sector?

The importance of governance, financial institutions, and the overall "enabling environment" has already been proven by the widely referenced World Bank Doing Business Reports.[iii] By measuring the difficulty of starting and sustaining business, the report allows for governments to know where to direct and manage reforms. However, an assessment of business know-how and expertise is less frequently discussed, and some over-enthused optimists, especially those on the micro finance bandwagon, insinuate that skills like balancing a checkbook or managing organizational structure are inherent in all entrepreneurs, even budding ones in Africa and South Asia.

Yet studies show that many times it is not the availability of funding or even government reforms that hold back business development, but simply business expertise. Management skills are especially important when entrepreneurs look to scale their businesses and employ more workers.

An example: a 2005 Brookings Institution assessment[iv] of small and medium sized enterprise (SME) finance in the developing world expresses the concern that loan programs funded by development finance institutions like the World Bank suffer from "lack of utilization and high default rates." These equity investments generated "poor returns and many business failures," so the incentive for the unsubsidized private banking sector to loan to SMEs was subsequently limited. The authors link these discontents to several factors, many of which are again governance and institution-related. However, when the enabling environment was present, lenders still had to cope with weak managerial capacity, limited marketing and product development strategies, and a plethora of other technical shortcomings. Without basic technical assistance and business know-how, SMEs were hindered in their ability to grow into larger, employment-generating ventures.

A news article[v] from the super-reformer Republic of Georgia[vi] echoes these concerns. After listing grievances of the challenges of the informal sector and that banks have chosen to lend to bigger, more reliable businesses, a Credit Access Manager with the SME Support Project in Georgia notes the challenges faced by SME owners:

"Most keep financial accounts in notebooks. Sometimes they look quite funny, they just write: 'I sold this item and bought that item.' They lack systemization as a rule."

The severity of this problem in Africa is reflected by a simple statistic: while India has over 1,000 business schools and the U.S. has about 1,200, Africa has under 50. The consequences of such a discrepancy cannot always be observed in the short-term, but the development world cannot underestimate the importance of formal business education. The Association of African Business Schools[vii] (AABS), organized by the International Finance Corporation's Global Business School Network, is a quiet but crucial voice in a sector where passions thrive on shirtsleeves and megaphones. The AABS member schools collaborate to improve the standards and increase accreditation of business schools in Africa. Right now, only one school, the University of Cape Town in South Africa, ranks within the Top 100 Business Schools on the 2007 Financial Times Global MBA[viii] Index.

But more entrepreneurial Africans in the middle and lower-middle classes should also have the opportunity to attend decent business schools close to home, preventing brain drain and catalyzing larger-scale local business development. As the AABS addresses the quality of business schools, private donors can look to increase the quantity of these schools. Organizations such as the Skoll Foundation, Gates Foundation, and other private sector donors have continued to demonstrate their desire to engage in more intelligent and active philanthropy. They take vested interests in the creation and implementation of projects funded by their organizations, and they continually search for unique and innovative opportunities. It's now up to vocal stakeholders, such as those who criticize existing development aid, to provide the private donors with realistic alternatives to ambitious but wrongheaded projects a la Millennium Villages[ix]. Building more business schools is one such alternative.

Imagine professorships and schools in the developed world endowed by the next generation of eager and invested donors. The Chair of Organizational Management sure has a nice ring to it.

But business schools are by no means a panacea, silver-bullet, or cure-all-pill to any problem, just a step in a more important strategy to effectively fulfill the calls for entrepreneurship, innovation, and trade from developing countries. Funding them is also a way to redirect aid away from governments, a frequent call among the critics. Pushing back at Bono, et al. with more unsubstantiated rhetoric and grandiose slogans will only make the pendulum swing farther in both directions. Change only happens with realistic, incremental reforms. Perhaps Bono, during his other - and arguably more successful - job, said it best: in development, we still haven't found what we're looking for.

Apoorva Shah is a research intern in development policy at the American Enterprise Institute. He has worked with small business entrepreneurs in Santiago, Chile.











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