I recently came across a very interesting online article from German magazine Spiegel, titled “For God’s Sake, Please Stop the Aid!“. In it, James Shikwati, a Kenyan economics expert, details how massive foreign aid to African nations is not only ineffective, but damaging to the receiving countries.
Mr. Shikwati says that aid money creates an environment of bureaucracy and corruption in Africa, enriching dictators and thieves while the needy continue to starve. It also does something more insidious: It removes the incentive for local entrepreneurs to innovate and solve their own problems.
So, what’s the solution to this problem? Stopping financial aid to African nations would obviously be the ideal route to go, but I don’t see that happening anytime soon thanks to politics. The best pragmatic solution I can think of is to bypass the corrupt all together, and go grassroots instead: get investment money directly to the people who need it to fund new businesses. Fortunately, there’s already a great system in place for this: Microfinance.
Microfinance, also known as microcredit or microloans, is an organized way for people to lend small amounts of money to the poor, who typically don’t have access to traditional loans. For example, you might lend someone $25 to purchase a cow, or $50 to buy a sewing machine. These amounts seem too small to be effective, but they’re often enough to help get a small business up and running in a developing country.
The best way I’ve seen to help you make microloans is through an organization called Kiva. They have a bunch of local partners who work with loan recipients, plus the ability to stay involved with the lending process by reading progress journals on their website. This Venture Voice podcast with Premal Shah of Kiva does a great job of explaining the origins of the organization, and how it all works.
So, if you were thinking about making a donation to the U.N. World Food Program or another aid group like it, you might want to consider offering some money as microfinance instead. Chances are it’ll really make a difference that way.