It is an irony of U.S.
that those most responsible for crafting strategy to help countries jump-start their economies have the least experience in the private sector. The net result has been an embrace of false conventional wisdom and expensive failure. The U.S. Agency for International Development, for example, oversees a budget of $41 billion, much of which it pledges to finance self-reliance.
To do this, successive USAID leaders trumpet their efforts to empower small and family-owned businesses. Visiting Zambia earlier this month, USAID Administrator Samantha Power spoke about jump-starting small and medium-sized businesses. The organization trumpets its microfinance program in
. Between 2004 and 2009, USAID provided $300 million in
microloans in Iraq
to jump-start its private sector. In Iraq and Lebanon, that was money down the drain, even if USAID continues its flow. Few if any of the private sector success stories in either country have roots in American assistance.
While there has been some
that microfinance isn’t what it was cracked up to be, Power and her predecessors have not asked a basic question: Does a foreign aid focus on small business really create stable economies?
The experience of the developing world suggests the opposite: The key to long-term, stable growth is bringing in large if not multinational firms.
Consider Berbera, the main port of Somaliland. Crumbling mansions and warehouses are a testament to the distant past when the city was an important trading post for Red Sea and Indian Ocean trade. While the town served as capital of British Somaliland from the late 19th century until World War II, it was only during Somaliland’s brief period of Soviet domination (when Somaliland had joined Somalia) that the city gained new strategic and commercial relevance when Soviet engineers built a modern container port.
Somaliland survived state failure by annulling its marriage to Somalia, but the port fell into disarray, eclipsed by a larger, more advanced facility in Djibouti. That changed in 2016 when DP World took over the port. At first, Berbera’s workers feared they would lose their jobs amid upgrades, but the Emiratis took a different approach, closing the port for retraining and increasing the salaries of the workers. I have visited Berbera four times since the DP World takeover, and each time, the city’s development grows more noticeable: New restaurants, hotels, and mom and pop shops abound as new houses push the city’s perimeter increasingly further down the Gulf of Aden coast.
The reason for such development is not direct investment by DP World, though their support for basic infrastructure helps. Rather, two other trends unique to large corporations make Berbera such fertile ground for development. First, large corporations provide upward mobility in a way that a small family business or stall in a bazaar cannot. Talented Somalilanders at DP World can rise quickly into supervisory or middle management positions. As important, DP World employees create demand: They must eat lunch or shop for work clothes. Visiting businessmen need hotels. All this provides opportunities for small businesses to thrive where they could not without a large or multinational anchor.
What works in Berbera also works in Cairo, Colombo, or Cuernavaca. The key to sustainable development is to create both demand beyond a single business and enable broad upward mobility. How unfortunate it is then that so many within the aid community misunderstand cause and effect. While capitalism is the engine that catapulted America’s economy to global supremacy in the 20th century and lifted billions out of poverty over the past three decades in Asia, Africa, and Latin America, too many decision-makers treat American industry and America’s largest companies as something to be embarrassed by rather than promote.
The Development Finance Corporation does marry investment and development but for too long has played second fiddle to a USAID apparatus wedded to an inefficient development model that simply does not work. To eliminate poverty and catalyze the middle class, it is time Washington thinks Berbera rather than replicates its failures in Beirut and Baghdad.
Michael Rubin (
) is a contributor to the Washington Examiner’s Beltway Confidential. He is a senior fellow at the American Enterprise Institute.
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