Sustainable Socioeconomic Growth in the Developing World
Nick Schubert - May 2011
The impact of foreign aid to developing nations has been debated by leading economists from the IMF, World Bank and leaders of industrialized nations for the last 100 years. While it is commonly agreed upon that foreign aid has had significant benefits to the least developed nations when appropriated correctly, the method in which sustainable economic growth flourishes in nations ravaged by poverty is widely debated. This paper aims to analyze the systemic change needed in order to develop sustainable economic development in the most impoverished nations. For the basis of this analysis, arguments and examples from leading schools of thought and ideologies will be examined as well as examples of changes countries have made that have created the opportunity to emerge from poor socioeconomic conditions.
The disparity of wealth between nations and indeed within a nation’s own population is staggering. The United States accounts for less than 5% of the world’s population yet controls nearly 25% of the wealth. As disproportionate as this figure is, looking further into the disparity of wealth among US citizens gives an even more profound look at the lopsided distribution of wealth in the world. The top 20% of US citizens, approximately 70 million people, control 93% of the financial wealth in the country. Even more, the top 1% of the population controls nearly 51%. Taking a look again at the macroeconomics of this gross inconsistency, less than 4 million people (0.05% of the world’s population) control nearly 12.5% of the world’s wealth1. Knowing that this disparity of wealth exists in a country that is ranked near the top in almost every
socioeconomic measure leads to the question of what is the status of the poorest nations on earth? A closer look at underdeveloped nations, home to the poorest of the poor, provides a glimpse into the desperate situation over 1 billion people find themselves in.
In 2011, a United Nations study found that 1.44 billion people live on less than US$1.25 per day with the vast majority of these people living in sub-Saharan Africa and central Asia. Ravaged by a combination of the factors that Paul Collier defines as the limitations to economic growth in his book, The Bottom Billion, these countries often confront conflict and civil war, geographic limitations, inappropriate utilization of natural resources and poor governance. Collier argues that a country facing just one of these situations is enough to keep a nation from climbing out of poverty, yet many of the world’s poorest nations are faced with several of the limiting factors at the same time.
Combining the disparity of wealth in the world, limiting factors that keep countries from sustainable growth and the social injustice that exists in watching countries fall victim to poverty leads to a call to action. The question remains; how can the developed world assist the poorest nations on Earth in developing a sustainable growth model to pull away from the grips of poverty?
Hierarchy of needs
Abraham Maslow published his groundbreaking work in a 1943 paper titled "A Theory of Human Motivation”. Maslow argues that humans have a hierarchy of basic needs that must be fulfilled before moving on to other needs and wants. The most fundamental of these needs are defined as “psychological” and are essential to human survival. These include the need for air, food, water and sleep. Maslow argues that until these needs are met, humans will not be
motivated to reach for the next level which he refers to as “security” needs, such as shelter from the environment, access to health care and employment. Additional levels of Maslow’s hierarchy include “social, esteem and self-actualizing” needs that can only be reached upon fulfillment of each preceding level.
The Role of Foreign Aid
While it can be argued that some nations have worsened their plight through civil war and poor governance (usually a combination of the two), it is nevertheless important to provide a clear plan of action to develop sustainable economic growth. As indicted by Maslow’s hierarchy, the world’s poor will seek first to secure the vital aspects of survival. Arguments against foreign aid to developing nations contend that it is not sustainable and often misappropriated through corrupt governments. While in theory this argument is rational, it does not take into account the fact that once there is access to clean drinking water & an ample food supply and adequate shelter & sufficient health care, humans will look to seek employment and improve upon the next level of needs. At the most basic level, one cannot be expected to develop a functioning economy when lacking food, security and plagued by disease. Foreign aid, when accompanied by a government free of corruption or bypassing government altogether, can help the poorest nations meet these basic needs. Many programs organized in conjunction with the United Nations’ World Food Program & UNICEF have delivered aid in the form of food and clean drinking water to the poorest nations in hopes of fulfilling the sustenance needed for survival. The argument that it is not sustainable can be disproven once a nation has reached a plateau where human survival is not their number one priority and a cycle of continued economic growth and investment in the nation has been reached.
One of the most widely recognized proponents of aid is Jeffrey Sachs. He contends that an increase in aid can be rationalized through a cost effective argument to the world’s global economy. While the aid figures Sachs projects will be required to end world hunger are staggering, he bases his argument on the assumption that this amount of money will be needed over the next 30 years to reach a level where people can focus on economic growth instead of finding food for survival. His argument assumes that after this level has been reached, aid will not be needed as countries will be able to support themselves. There are many who disagree with Sachs’ view and argue that foreign aid is in fact detrimental to the long term viability of a poor nation.
The key to appropriating foreign aid correctly is to ensure that the mere presence of aid does not create dependency. If the world’s poor have no incentive to bring themselves out of poverty (i.e. perpetual civil war, corruption and poor governance) aid will not incentivize a country’s people to work toward sustainable growth. Instead, it will have the adverse effect of creating complacency with aid and accepting that, without governmental reform, striving for a better lot in life is a hopeless dream. Creating an economic culture that encourages the growth of small and medium sized enterprises (SMEs), attracts multinational corporations (MNCs) and allows entrepreneurship to flourish provides hope for a better way of life.
The Role of Non-governmental Organizations
Many of these countries often lack a major industry to provide the impetus to job creation. Even if a nation had met the basic needs of its people so that they were able to seek
employment, there are no jobs to be found. Entrepreneurship is a key success factor to building a sustainable growth model. An ideal solution is to create a system that simultaneously meets the basic needs of a poor nation while creating jobs.
One way to encourage economic growth while supplying the basic physiological needs to the world’s poor is through non-governmental organizations (NGOs). Largely funded by western philanthropists and grants, the most effective NGOs work to make systemic change through a sustainable model that requires the local people to contribute to the success of the program. Successful programs take a holistic approach to mitigating factors that preclude the world’s poor from basic human needs while providing an opportunity for economic growth. Examples of these programs include micro-financing and micro-consignment models. These programs provide seed money for local entrepreneurs to meet the needs of their country such as irrigation pumps to increase yields to sustenance farmers, water filtration devices that provide access to clean drinking water and the development of health education programs that train locals and shift the responsibility of delivering care and prevention to the local residents.
The premise behind these models assumes that once the local people have reached the plateau of meeting their basic survival needs, they will have the opportunity to seek employment or provide additional income that can be used to invest in new businesses in their home country. The biggest hurdle to overcome in this model is the need to reach a critical mass where a sufficient number of people within a community have met their basic needs and can begin the process of economic development. This tipping point can be met through the creation of a value chain that provides employment opportunity to others in the community. As local entrepreneurs grow and expand their business through the help of NGOs, additional
opportunities for employment and new firms are created furthering the cycle of systemic growth.
Muhammad Yunnus founded the Grameen Bank on the premise that the world’s poor are capable of developing economic growth if given access to credit free from exploitation by traditional lenders. His goal was to “reverse the age-old vicious circle of ‘low income, low saving & low investment’, into virtuous circle of ‘low income, injection of credit, investment, more income, more savings, more investment, more income’” His initial experiment in the late 1970s has turned into a success story that has now financed loans to over 8 million individuals and 3 million enterprises with a 97% pay back rate on the loans disbursed. The enterprise loans have been used to finance small and medium enterprises while ensuring accountability and negating what many see as the main problem with aid. This model creates the ideal situation of putting the responsibility and accountability for success on the local communities.
Similar programs that use Yunnus’ Grameen Bank philosophy have been started in poor countries throughout the world. New models such as Greg Van Kirk’s and George Glickley’s Micro-Consignment Model and Matt Flannery’s Kiva.org provide the type of essential assistance that encourage the participation of locals in developing economic footing while improving the lives of their neighbors. Tens of thousands of SMEs have stimulated growth and provided jobs in developing nations through these programs and ancillary projects that have been developed as the normal course of economic growth has demanded the creation of new firms and the creation of a value chain. Once a certain level of socioeconomic improvement has taken place, the people of these nations can become a part of the global economy as MNCs recognize the
opportunity to grow their business by selling to what C.K. Prahalad coined the ‘bottom of the pyramid’.
Prahalad defines the bottom of the pyramid as the 4 billion people living on less than $2.00 per day (2004 $USD). He contends that businesses must view these people as customers and entrepreneurs capable of cultivating business and demanding value from the goods sold to them. While Prahalad makes a rather large assumption in stating that a total of 4 billion people are able to provide this benefit to MNCs, his point at a macro level provides MNCs the framework to expand into the world’s under developed countries. He states that MNCs must reexamine their business model and change how they go to market when selling to the bottom of the pyramid. Further, MNCs must examine the impact that their products and their packaging will have on the environment in respect to a lack of infrastructure for trash disposal, clean drinking water, cultural differences and preferences and a lack of brand recognition.
Prahalad’s model assumes that the world’s poor pay a ‘penalty’ as a result of local monopolies and stagnant beliefs that there is not a market for the goods that MNCs produce. Bringing a MNC’s products to the world’s poor and providing options for the bottom billion is yet another step in economic development that breaks the cycle of poverty. As important as it is to develop and market products to the people at the bottom of the pyramid, multinational corporations can play an even larger role in encouraging growth through foreign direct investment.
The Role of Multinational Corporations
While non-governmental organizations contribute significantly to the successful development of poor countries, there are alternatives and additional step that can be taken to expedite the growth. For years, multinational corporations have looked for ways to lower costs and gain a competitive advantage through the use of low cost labor. This has been seen in US firms outsourcing manufacturing jobs and certain services to the fastest growing BRICS (Brazil, Russia, India, China, and South Africa) nations. It is not coincidental that this foreign direct investment took place after substantial government reform that permitted citizens of these countries to meet their basic psychological needs. In the absence of major government reform, of the sort seen in China in the late 1970s and early 1980s, MNCs can still play a role in helping to develop sustainable growth in the world’s poorest countries.
Assuming a country’s citizens have an education level that is required for low skill labor, MNCs can do their part in contributing to the growth of poor nations through foreign direct investment. Combined with Prahalad’s focus on selling to the bottom of the pyramid, MNCs can further help in the socioeconomic development of a nation by creating jobs and developing the market itself through the establishment of infrastructure, investment in plants and factories and meeting the basic survival needs of the people it aims to market to.
Corporate social responsibility (CSR) has been a major focus for many companies in the last several decades. In the United States, CSR has been focused on the green movement, local philanthropic work and safety. In developing nations, CSR can go far beyond giving back to a community; it can help build a community. As seen in GE Healthcare’s goal of developing medical devices and instruments that are made for and by the locals in developing countries,
large MNCs see the value of selling to the world’s poor. Devices such as GE’s portable ultrasound and heart monitors were developed to be used in rural India and China. These devices not only provide opportunities to sell low cost goods in rapidly growing economies, these products break from the traditional model of tailoring goods that have been developed for western markets to meet local preferences. GE’s new model based on CEO Jeff Immelt’s goal of organic growth provides the type of systemic change needed in poor nations. Once developed and sold locally with full P&L responsibility, these products are then marketed in developed nations as low cost alternatives. The creation of these devices brings jobs to local economies and develops new markets for GE while simultaneously giving GE an advantage when competing with foreign competition.3
The debate over the best way to develop sustainable socioeconomic development will undoubtedly wage on for years. Aid alone is not sustainable, MNCs still have to meet analysts’ expectations and many NGOs can function only as long as they have access to funding. To gain traction in the fight to end poverty, long term visionary leadership must be at the forefront of business and economic policy in order to influence comprehensive change in the world’s poorest countries. This leadership combined with aid, foreign investment, local governmental reform and a spirit of entrepreneurship are essential to sustaining growth and bringing the least developed countries to the point where they begin to flourish. It was not that long ago that the BRICS nations were impoverished and in similar conditions to what is seen in the poorest
countries today. It is important to remember that there is a time and place for all of the ideas and concepts discussed in this paper. Appropriately disbursed aid cannot come before governments are free of corruption just as MNCs cannot market non-essential goods before there is a minimum level of income and people are not worried about their next meal. The key to development is utilizing the right tools at the right time to generate sustainable growth and provide the building blocks for the next step in the process.
Caught in the viscous cycle of poverty, despair and hopelessness remain prevalent among the world’s poor. Even with billions of aid annually, tens of thousands of NGOs working to meet basic survival needs, MNCs expanding operations in under developed markets and the prevalence of globalization, Sub-Saharan Africa and Central Asia today remain among the poorest locations on Earth. While only future generations will know the actual path that led to sustainable economic growth in these countries, the ideas, concepts and ideologies set forth in this analysis provide a logical framework and natural progression to achieving this end.