Alex Singleton has an interesting post at the Globalisation Institute: The intellectual revolution in international development:

Three years ago, social justice was a left-wing term, about redistributing income and socialism. Now it means things like welfare reform and community entrepreneurs. That is quite an achievement. And that sort of achievement is what is needed now in the area of international development. The Department for International Development needs an intellectual revolution. We need to turn development policies upside down: we need to change to helping Africa from the bottom up.

Alex is right that those of us who care about international development should embrace practical ways that free markets can help people. 

But I think we need to unpack the following proposition carefully:

These enterprise-based approaches to development are vastly more effective than the top-down help of which the government, unfortunately, is still far too fond.

There are three questions I have about this.

Q1. If we believe that enterprises are the basis of economic growth, jobs and poverty reduction (which I do, as does Alex), does it necessarily follow that aid should be used to support enterprises?

I do not think this follows at all. I have commented before on the irony that those who most support the free market are often vocal in advocating public subsidies for enterprises.   For example, it is far from clear that if we believe in microfinance, we should subsidize it.  We too easily fall into the trap of thinking that because something is important, we should support it. Governments in both rich and poor countries should focus on improving what they are responsible for and which the market will not provide well, and on getting out of doing things that they are not good at.   While private enterprise is the foundation of economic growth, it does not follow that enterprise-based approaches to aid are the most effective use of aid.

Q2.  Are donors doing enough support the development of enterprise and free markets? 

As I pointed out here, the British Government, like other donors, rightly places great emphasis on development assistance designed to improve the supply performance of the economy.  Many of the reforms needed – such as reducing import tarrifs, fighting corruption or commercialising state enterprises – are expensive and require considerable external support, and a large part of our aid goes into just this sort of thing.  In fact, the UK Government is frequently criticized from the left for doing too much of this, by those NGOs who are sceptical about the value of free markets.

It is unfair of Alex to dismiss this support pejoratively as ‘top down’ (in contrast to ‘bottom up’, which everyone is in favour of).  This top-down investment is used to vaccinate children, support scientific research into new crops, build roads, schools, wells and hospitals, reform customs, remove import tarrifs, liberalise telecomms, support teacher training, fight AIDS, tackle corruption, meet the costs of free and fair elections, provide safe drinking water – all things, in fact, that it is necessary for a society to do to enable enterprise and free markets to flourish.

Q3.  Is there evidence that supporting NGOs and small businesses is a more effective use of aid than providing aid to governments?

If there is, I should like to see it.  Some of this so-called bottom-up aid supports fantastic projects which make an enormous contribution to the people to whom they provide services.  But much of it is ill-conceived do-goodery which is not sustainable and has high transactions costs for litle long-run benefit.  (I’m thinking, for example, of the idiotic idea of shipping computers to schools, many of which have no electricity or place to store them safely, let alone anybody who knows how to use them.)  If we are looking for transformation of these societies, and not merely alleviation of the symptoms of poverty, we need to contribute to transformation of systems and institutions.  Bottom up support for NGOs and small enterprises is unlikely to deliver that.

Conclusion

I’m with Alex Singleton in believing in markets and enterprise.  But I am more modest than Alex about my belief in what we can contribute directly to those. Good businesses will succeed, or not, because of the energy and enterprise of those who own them and work in them, not because of support we provide. The role of government is to put in place the conditions that enable those markets and businesses to thrive, such as transport and communications infrastructure, effective courts, and a healthy workforce.  There is, of course, room for debate about the extent of that responsibility – some societies believe that education should be provided collectively, some do not.   But it is not in doubt that many of the preconditions for enterprise are, in whole or in part, public goods, and that governments (and in the case of poor countries) donors may have a role in providing them.

Alex underestimates the extent to which the views he is advocating are already part of mainstream development thinking.  Development will be driven by the people of poor countries improving their own lives, through education, hard work, and enterprise.  There is much we can do, and are doing, to promote an environment in which that bottom-up growth can prosper and accelerate.  But it is at best an oversimplification, and at worst dangerous, to think that because small enterprises are the basis of development that this is where we should put our support.