This article was originally published on Balloon Ventures Blog
By Alex Sanderson
What is foreign aid, and is it a failed strategy for Africa?
International aid is any form of needed assistance provided by one country, or multilateral institution, to another. Foreign aid is commonly provided as official development assistance targeting poverty reduction and the promotion of economic development. Other forms of aid include humanitarian emergency assistance, food aid, and military assistance.
Foreign aid, in the case of the former, is increasingly being seen as a failed strategy:
- Aid is linked to corruption: aid flows destined to help Africans end up supporting bureaucracies and dictators. Roughly $100 billion of the World Bank’s loan funds, intended for development, have ended up in the pockets of crony capitalists.
- A constant stream of aid eliminates the responsibilities of a government; it eliminates incentives for governments to seek other, better, and more transparent ways of raising finance. As a result, bad governments often stay in power.
- International aid often causes economic stagnation, rather than growth. International material donations, more often than not, destroy local businesses. For example, clothes donations from the West put local traders out of business and causes local textile industries to decline. Kenya alone imports 100,000 tonnes of second-hand clothes a year, and 70% of Oxfam clothing donations end up in Africa.
- Corruption, bad governance and economic stagnation results in a reliance on aid that has trapped developing nations in a cycle of aid dependency, market distortion and more poverty, leaving only the need for more aid.
Foreign aid appears to hurt rather than help Africa: huge aid flows have failed to reduce poverty or increase economic growth. More than a quarter of the countries in sub-Saharan Africa are poorer now than in 1960, despite the continent receiving $55,793 million in overseas development aid in 2015.
What are social enterprises?
Social entrepreneurship is a variation of traditional entrepreneurship; both create value from new business opportunities. However the primary value for traditional enterprises is profit, whilst for social entrepreneurship it is social impact. In effect, social enterprise (SE) combines philanthropy with business strategies.
In developing countries, the SE model provides a framework to cope with economic, social, and environmental problems. This framework revolves around local participation, empowerment and support. In summary, SEs:
- Empower locals by focusing on skills development and job creation, whilst supporting and up scaling grassroots, home grown talent. These enhance local innovation and creativity and, as a result, foster economic and sustainable growth.
- Are best positioned to understand what the local problems are, and the best ways to solve them. The majority of SEs are built to address unmet needs in communities. Unmet needs reflect both a lack of necessary service provision and an untouched gap in the market, and are therefore both business and philanthropic opportunities for SEs.
- Use innovative solutions to create social value. SEs use technological and social innovations in order to solve social problems, generate financial returns and protect the environment.
- Have the potential to create systemic change. Rather than responding to the problems that current systems create, SEs have the capacity to change institutionalised systems and behaviour so the problems do not occur in the first place.
As a result, the SE model is an integrated, innovative, and systemic approach to development.
Are social enterprises a viable alternative to international aid?
Where international aid has failed, SEs are delivering. SEs are generating positive economic, social and environmental impacts in Africa: boosting economic growth, decreasing unemployment and reducing poverty. As a result, there is an increasing move away from the use of foreign aid as a development tool, and towards the enterprise driven model of development.
However, SEs also have weaknesses. In particular, SE’s often face a lack of appropriate market incentives, limiting their potential to solve major development challenges. In contrast, foreign aid, when properly designed and delivered, is able to address major development challenges with significant success.
For example, foreign aid has funded huge health initiatives resulting in a drop in malaria deaths and 10 million HIV-infected individuals now receiving life-saving, anti retroviral medicines across Africa. Foreign aid has also included debt cancellation under the IMF and World Bank’s Heavily Indebted Poor Countries initiative, improvements in sanitation, infrastructure and more, across the continent.
Additionally, SEs are unable to provide immediate and effective assistance in humanitarian emergencies. Humanitarian aid, driven by large-scale donations, can save lives and alleviate suffering during the immediate aftermath of a crisis.
Overall, neither foreign aid nor an entrepreneurial bottoms-up structure is sufficient as development models on their own. Ideally, we should utilise the strengths of both in order to successfully address the problems currently being faced in African countries.