Because of the nature of government, some of it works, but much of it gets sucked up by either the bureaucracies or corruption of both the giving and receiving countries.
The World Bank is plagued by the same problems:
Kickbacks, payoffs, bribery, embezzlement, and collusive bidding plague bank-funded projects around the world, a U.S. News analysis shows. The scale of the problem is enormous: Knowledgeable analysts believe corrupt practices of one type or another may be associated with more than 20 percent of the funds disbursed by the bank each year.
Today at NYT, Nicholas Kristof files an inspiring video report on micro-lending-- an anti-poverty strategy in which organizations distribute very small investments (as small as $25) from comparatively rich Westerners to very poor citizens of developing countries who wish to start their own businesses. This idea, when it works, manages to reach those citizens (many of them women) who are ignored by banks and marginalized by their own societies. When it really works, it manages to teach men to fish instead of giving them fish, which is good for those men, the customers they serve, and the economies of these countries.
Kristof became the business partner of a baker in Kabul, Afghanistan--Abdul Satar-- who has recently opened the second in his chain of establishments. In the video report, he goes to visit the baker and
"He now benefits from economies of scale when he buys flour and also firewood for his oven," Kristof notes.
"If you come back in 10 years, maybe I'll have six more bakeries," Satar tells Kristof.
Want to give it a try? You can browse at Kiva.org for borrowers whose stories interest you. Accion, the Grameen Bank in Bangladesh, and SHARE, which targets rural women in India, are other groups involved in this kind of lending.
The Boston Globe points out that micro-lending is not a cure-all. It, as other forms of aid, faces some of the same accountability issues. Companies doing lending must make sure that money actually goes to start small businesses, and checking up can be relatively hard in remote, rural areas of developing countries. But, with micro-lending, the market naturally provides an accountability where government welfare-style aid does not.
Accion explains its lending process:
Because of the poverty of our clients, we send loan officers to meet potential borrowers in their places of work, where we also weigh intangibles like references from customers and neighbors, and the loan officer’s own “gut feeling” about the microentrepreneur's drive to succeed. This character-based lending allows us to go "beyond the numbers" and develop a more complete picture of a potential borrower than a traditional credit score.
Borrowers either apply for loans individually, or, if they lack physical collateral or a co-signer, they team up with a few other borrowers. Known as solidarity group lending, this method allows members to cross-guarantee one another’s loans in lieu of collateral. ACCION spearheaded this approach in the 1970s to help bring microlending to the poorest of the economically active population.
First loans start small – as low as $100 in Latin America and $500 in the United States. Borrowers who repay their loans on time are eligible for increasingly larger loans. This process, called stepped lending, keeps initial risk at a minimum while allowing microentrepreneurs to carefully grow their businesses and increase their incomes.
And, instead of taking a hand-out and eating for a month, a man like Abdul Satar can take a loan, employ a few people, and feed thousands for years. That's a beautiful way to beat poverty.