Creating Jobs - Part I

Before I say anything else, let me state what I believe to be an absolute truth: The best way to bring someone out of poverty, is to provide them with a well paying job. Now, let's get on with the rest of this post...

I was recently listening to my favorite new Podcast, Planet Money, when I came across a very interesting story about how to fix aid to developing nations. They interviewed Glenn Hubbard. He's a professor in Economics at Columbia and has recently written a book called, "The Aid Trap: Hard Truths About Ending Poverty". It was absolutely fascinating and I highly recommend you listen to it.

Here's the gist: Developed nations have given about $1 trillion to developing nations over the past 50 years with almost no improvement in the lives of the citizens of those countries. The problem? We've been giving the money to the heads of state and asking them to figure out the best way to spend it on their nation. Kind of a Keynesian approach. Let the government build highways, dams, and other massive public works projects and that will employ their citizens who will then have money to buy things and that will spur the economy.

As I see it, there are two huge problems with this approach. First and foremost is corruption. Most third world countries are run by leaders who use this aid to reward friends and allies with big government contracts and the average citizen gets very little economic relief.

The second problem with this approach is it assumes the government, even if it isn't corrupt, knows best what the people need. As a free market person, I personally don't believe in this. For example, if only 10% of a society has vehicles and 90% of it's commerce takes place in local markets, what good does it really do to build an expensive highway system?

What a country needs is a thriving small and medium sized business community that can offer millions of jobs.

This, Professor Hubbard argues, can be done by distributing aid in much the same way the Marshal Plan did after World War II: Create regional offices within nations, give these offices a bunch of money, have those offices make loans to small and medium sized businesses, and have the loans repaid to the government of that nation.

This system of aid does several things. First, it gets much needed capital into the hands of local business people so they can grow their businesses. They will then be able to hire local people. Secondly, since the money is going to small, local businesses, it ensures that products and services needed in that region are being produced.

Lastly, since the loan repayments go directly to the government, it creates a major incentive for that government to create an atmosphere that will allow these businesses to succeed. This means removing hurdles to starting and growing a business, creating a better education environment so businesses can hire quality workers, and, perhaps most importantly, eliminating government corruption. If the governments don't do this, they don't get any of the money.

By helping small and medium sized businesses succeed, the Marshal Plan turned much of Western Europe and Japan into economic powerhouses. Yes, they have not been perfect - no human institution ever will be. But it lifted 100's of millions of people out of the desperate poverty and destruction wrought by WWII because there were millions and millions of jobs created by small businesses.