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It takes more than aid to cure poverty

Marketplace Staff Oct 17, 2006

KAI RYSSDAL: Today’s the International Day for the Eradication of Poverty. There were ceremonies at the United Nations in New York City. And calls for wealthy countries to give more aid to the developing world. Economist and commentator Glenn Hubbard says that’s not enough.

GLENN HUBBARD: Many economists think there’s a slim chance that development aid alone can eliminate poverty. They’re right.

That’s because part of the architecture of prosperity is also the creation of independent courts, investor-protection rules, and reasonable regulation.

The dynamism of capitalism is the fount of economic growth, as the new Nobel Laureate in Economics, Edmund Phelps, suggests.

Social institutions nurture that dynamism, protect private property, and uphold contracts and the rule of law. That’s how rich countries got rich.

Foreign aid can be used to promote good institutions and public health. But it sure wasn’t government aid that helped some poor countries grow rich.

In 1960, Asian and African countries were relatively poor and not so far apart in productivity.

Forty years later, entrepreneurial Asian economies enjoy a commanding lead. Supportive institutional reform has accompanied their entrepreneurship.

This aspect of entrepreneurship has perhaps lacked the appeal of a visible face.

The awarding this past week of the Nobel Peace Prize to Muhammad Yunus of Bangladesh will help change that. Through his famous Grameen Bank, Dr. Yunus leveraged loans of a few hundred dollars into major social change for impoverished families.

Banks wouldn’t lend to these poor Bangladeshis figuring they were a terrible credit risk. But their repayment rate is 98 percent.

Grameen has created a new institution that serves the poor by offering them a real way out of poverty. His innovation has been applied to more than 100 countries, from Uganda to Chicago’s South Side.

Other social entrepreneurs like Hernando De Soto have proposed real property rights for the poor as a way of offering collateral for loans. That’s another way to develop credit-friendly institutions.

There is no silver bullet for ending poverty. But fostering entrepreneurship, even on a small scale, can make a big difference for national economies — and individual lives.

Glenn Hubbard is dean of the Columbia Business School. He’s also the former chairman of the Council of Economic Advisors for President Bush.

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