This is the ninth in a series of posts discussing themes from The Aid Trap by Glenn Hubbard and William Duggan. In Chapter 4 the authors discuss their proposed new “Marshall Plan” in which money will be lent to businesses in poor countries to stimulate business activity. However, there is a weakness in this plan, which the authors acknowledge: most poor countries do not have existing businesses to which the loans could be made.
Small businesses in poor countries are increasingly being financed by microfinance, and very large businesses – typically foreign companies – are financed by international finance corporations. Hardly anyone finances the medium-to-large businesses because there are hardly any such businesses? How does a country get some? The authors’ best suggestion seems to be: by creating a more favourable regulatory environment.
Do medium-to-large businesses spring into existence in a poor country merely as a result of a favourable regulatory environment and the availability of finance? I am not sure that they do. The missing essential ingredient seems to be viable business opportunities. Agriculture is an obvious one to start with, but it is difficult for a poor country to compete against heavily subsidised rich-country farmers. Textiles is another obvious opportunity, but poor country textile businesses cannot compete with China which keeps its prices unbeatable through exchange rate manipulation.