Global Poverty

Much remains to be done--but some programs have made remarkable gains

Seventeen years ago, Rhoda Kabogaza and her family fled in terror from their home in Uganda's Luwero Triangle, hiding out in the bush 10 miles away. The region was engulfed in a long, bloody civil war. Kabogaza's 20-year-old son was executed as a suspected rebel. Her six other children had no access to education or health care. Today, Kabogaza owns a bustling business, has put her two eldest children through high school, and supports two children whose mother died from AIDS.

In the wake of devastating floods, strife-torn Bangladesh drew world attention in the 1970s as millions faced starvation. Like most of their illiterate neighbors in the village of Bharariya, which had no school or health clinic, Noor Jahan Begum and her family were landless. They barely fed themselves toiling on the farms of a wealthy landowner. Today, Bharariya has all the basic services and 80 small private businesses. Noor grows two tons of rice every year on her farm and hopes to save enough money to send her daughter to college and build a house.

To be sure, these are just two uplifting stories plucked out of an ocean of desperate poverty. But they illustrate a powerful trend. Each year, millions of people are climbing out of destitution, helped in part by smart aid projects aimed at stimulating development at the grassroots level. Both Rhoda Kabogaza and Noor Jahan Begum, for example, turned their lives around with the help of microcredit agencies, a rapidly growing movement that has enabled some 2 million poor families in dozens of nations to start and expand small businesses.

What's more, this transition is occurring in many nations that not long ago were viewed as hopeless cases--just as Afghanistan or Sierra Leone are today. Uganda, for instance, remains extremely poor, with a per capita income of $300 a year. And the government depends on foreign aid for 52% of its budget. But it puts the money to good use: Since 1993, the percentage of people living with HIV has plunged from a third of the population to 6%; primary-school enrollment has risen from 60% to more than three-quarters of school-age children; and the proportion of the population living on less than $1 a day has dropped from 58% to just over a third. "We are very much on the right track," says Kenneth Mugambe, a Finance Ministry official. Bangladesh is now self-sufficient in food, averaged 5% economic growth through the past decade, and has slashed its poverty rate. El Salvador, which used to lavish funds on its military as it neglected the poor, now spends most of its budget on things like education and has emerged as one of Latin America's economic bright spots. Dramatic gains also are being seen in such war-ravaged lands as Vietnam, El Salvador, Mozambique, and Nicaragua.

Granted, it's way too early to declare economic miracles in any of these countries given the financial and political setbacks that have rocked emerging markets since the mid-1990s. Indeed, this year's famine shows how severe conditions remain in Africa. And as activists were quick to point out at the late September meeting of the International Monetary Fund and World Bank in Washington, the industrialized nations still fall far short of what they could do to help the world's poorest.

But as debate rages over what can be done about global poverty, there's also a quiet revolution under way in some countries. What's emerging is a new approach that combines greater use of market-based strategies with a smarter deployment of foreign aid that sets tougher standards and demands results. It's tragic "that hundreds of hundreds of billions in aid and assistance have done so little to improve living standards" in poor nations, says U.S. Treasury Secretary Paul O'Neill. "It doesn't have to be that way."

A new breed of philanthropist is also playing a key role in the most recent assaults on poverty. Both Microsoft Corp. (MSFT ) Chairman William H. Gates III and financier George Soros are bringing a more businesslike approach to the projects they fund. The key elements they stress are savvy use of financial incentives, combined with aggressive monitoring, to get both developing-nation governments and myriad donor agencies to coordinate their activities and achieve results. "It's simply wrong to let millions suffer and die needlessly when we have the knowledge and tools to reduce disease and save lives," says Gates, whose foundation backs various disease-prevention programs.

For this report, BusinessWeek visited some of the most promising projects in the developing world. The Bangladesh Rural Advancement Committee (BRAC) has educated and provided business loans to 4 million poor women who have long been disenfranchised in that predominantly Muslim society. In China, an ambitious effort to award long-term land tenure to 210 million families is giving the rural poor a chance to build wealth and diversify into cash crops. In Mexico, a microcredit bank is on its way to becoming a profitable institution while still serving the poor. In India, digital technologies are helping transform impoverished villages. And in Mozambique, an innovative program to immunize children against diseases could serve as a model for mobilizing aid to conquer a wide range of health problems.

The challenge is to replicate successful strategies on a bigger scale and, where possible, to make these programs self-sustaining. What is needed? More resources, to be sure. Columbia University economist Jeffrey D. Sachs, for one, estimates that $25 billion in additional aid would save the lives of 8 million who die annually because they can't afford vaccines for preventable diseases. But aid also must get a much bigger bang for the buck. Donors should channel the bulk of new money to 20 or 30 nations that, most experts agree, are desperate for outside funds to meet essential needs but also are committed to spending the money efficiently on useful projects. That would include countries like Uganda and Mozambique. But regimes like those that do little to promote growth would be limited to humanitarian relief during crises.

The biggest drops in global poverty will likely come in the nations that don't need big infusions of aid because they already have the resources needed to propel growth. These include China, India, most of Latin America, the Middle East, and Eastern Europe. What these regions require is technical help, and more investment in their own people so the gains of economic growth spread more widely. That's what East Asia did during its takeoff from the '70s through the '90s, when the region's poverty rate plunged from 58% to 8%. These developing nations still need to better mobilize the domestic savings, export earnings, and sheer entrepreneurial energy they already possess. Making it easier for the poor to obtain title to land so they can build wealth is a first step. "Developing countries have many more resources than meet the eye," contends influential Peruvian economist Hernando DeSoto. "By documenting land rights, you provide people with a tangible asset."

Just as important, a truly effective war on global poverty requires an overhaul of the management of aid. Far too much of the $10 billion the U.S. calls "foreign aid" goes to nations such as Egypt and Pakistan for political reasons, rather than to seriously promote economic development. Some 30% of U.S. aid is wasted because contracts must go to American companies whenever possible, estimates Washington's Center for Global Development. Too many aid organizations duplicate one another's efforts and create bureaucratic nightmares for understaffed Third World ministries. And the IMF and the World Bank, whose prescriptions often work better in theory than in real life, still wield too much power.

That's why many aid skeptics are dubious of new calls by the U.N. and World Bank for rich nations to boost foreign aid by about $50 billion annually to meet the Millennium Development Goals, which include halving world poverty and providing universal primary education by 2015. "There hasn't been this level of interest by rich countries since the 1960s," says William Easterly, a former World Bank economist. "What angers me is, so much is dissipated in bureaucracy and rhetoric."

The naysayers raise legitimate points. Ever since colonialism ended after World War II, Western donors have pushed one flawed panacea after another. They've showered developing nations with funds to build infrastructure. They've sent droves of earnest volunteers and countless tons of food. The World Bank and IMF have used jumbo loans to entice--and then compel--governments to adopt sound policies. Then loans are written off when the policies go bad anyway. Poor nations are told to throw open their doors to trade and foreign capital, sometimes causing devastating dislocation.

Despite good intentions and billions of dollars, some 1.2 billion people still must survive on less than $1 a day. If $2 a day is set as the absolute poverty line, nearly half the world's population is destitute. AIDS now infects 65 million in sub-Saharan Africa, including nearly half of the young males in some countries. "There is no sense talking about market reforms in Africa if you have an AIDS pandemic raging," says Sachs, a U.N. adviser on poverty. "If you can't control disease, you can't have economic development."

The good news is that never in the past three decades has there been a better opportunity to reduce global poverty dramatically--if rich nations and poor can seize the moment. Out of self-interest alone, business should join the effort. Because if the bottom half of the global population becomes the biggest consumers and producers, the payoff for business will be immense. Investing in basic health care, says Gates, "will pay substantial dividends 20 years from now in the form of healthier, more economically independent societies."

One cause for hope is that September 11 has generated so much energy, money, and political will to fight the poverty that many believe breeds fanaticism. In the U.S. Congress, there is bipartisan support for antipoverty programs after two decades of slashing foreign aid. At a March summit of 50 heads of state in Monterrey, Mexico, the U.S. and Europe promised to hike aid by $12 billion a year by 2006. Companies like Hewlett-Packard Co. and GlaxoSmithKline PLC are pledging to bring the Internet to the rural poor and find new cures for tropical diseases. Aid groups offering microcredit and business training have seen a surge in volunteers.

Another encouraging development is that charitable foundations, companies, the U.N., government aid agencies, and Third World government ministries are increasingly pooling their efforts. "This is a new way of looking at things," says Andrew S. Natsios, administrator at USAID, which manages $3 billion annually in development help. "If we can harness all of those funds and link what we do, then the scale of what we can achieve increases dramatically."

This new approach to aid is most visible in health care. Poor donor coordination is one reason that millions still die of diseases for which cheap vaccines are available. "Each donor has its own program, and they don't always talk to see whether they are duplicating each other's work," says Lomamy K. Shodu, a health official for 15 years in two African nations. Honduras currently hosts 57 separate health projects, according to the World Bank, and until recently, officials in Tanzania were asked to produce 2,400 reports every three months for various agencies. Shodu says African governments sometimes have submitted the same reports to two or three donors, who unwittingly give money for the same project.

These days, Shodu works for a group that aims to remedy that--the Vaccine Fund, backed by the Bill & Melinda Gates Foundation. The fund buys vaccines for diseases such as measles and hepatitis and helps governments and aid agencies administer them efficiently. Similar collaborations between philanthropies and health groups aim to attack tuberculosis, malaria, and AIDS.

Innovative programs also are increasingly found in education. One closely watched model is Brazil's Bolsa Escola scheme, which pays poor families to keep their children in school. Each month, the government hands out blue debit cards to 5 million mothers whose families earn $4 a day or less. They can use the cards to collect about $40 in cash or groceries--as long as their children stay in school. The $500 million annual program also provides free meals to 36 million children and has set up a distance-learning system that broadcasts three hours of lessons daily to 60,000 schools. Such programs have helped boost primary-school attendance among poor Brazilian families from 75% to 93%. The school-completion rate also is up sharply. "We will see the impact of this on our economy 10 years from now," predicts Education Minister Paulo Renato Souza.

Another breakthrough is being achieved in microfinance, where loans of as little as $20 to a few hundred dollars are dispensed to people who lack collateral. The Grameen Bank of Bangladesh helped pioneer "village banking" in the 1970s. Now, there are as many as 9,000 microlenders across the developing world, but few reach more than a few thousand people because they still depend on charities for much of their budgets. Even so, some microlenders are now making it to the next level. They are big and profitable enough to evolve into banks and tap private capital with the help of agencies such as International Finance Corp., the World Bank's private lending arm. Microlenders are making this transition in Mexico, Bolivia, Kyrgyzstan, and Uganda.

If families are to climb securely out of poverty, it helps if they own assets. In most developing nations, the majority of people own no land. They may have lived in homes for generations but have no legal title to them. Businesses often are undocumented as well. Peru's DeSoto estimates that an astounding 78% of Mexico's population is in the so-called underground economy. In Egypt, he says, the portion may be closer to 90%.

How much would these assets be worth if there were legal titles? Just in Mexico City, according to a study by DeSoto's Lima-based Institute for Liberty & Democracy, there are undocumented buildings, equipment, and enterprises worth $315 billion--29 times the value of foreign direct investment and seven times Mexico's oil reserves. In Egypt, DeSoto concluded, there are $241 billion in unofficial assets--90 times more than all the foreign loans the nation has received in the past three decades. "The question is how to convert their assets into liquid capital," says DeSoto. That's one reason these nations, as well as Peru, India, and Mexico, are making a push to modernize record-keeping and establish laws that will make it easier for citizens to own, buy, and sell property legally.

The magic of the marketplace alone won't solve poverty everywhere in the world, though. There's no way around the fact that some nations need huge infusions of outside money. They are simply too poor, or regarded as too much of a risk, to draw enough investment to stimulate the growth needed to erase poverty. Consider Rwanda. With a per capita income of $192 and a population growing 3% annually, Finance Minister Donald Kaberuka estimates that his country must grow by 8% annually to significantly boost living standards. "How do we do that in a continent with very low investment?" says Kaberuka. "We have to be realistic." The U.N. Development Program says there are 39 such nations, dubbed the "least-developed countries."

How poor are the LDCs? More than half of their populations make less than $1 a day. A child has a 10% chance of dying before age five. Dozens of these countries pay more servicing their foreign debts each year than they do on education or health care. Most depend for exports on commodities such as coffee and copper, whose world prices have crashed. Their governments spend just 15 cents a day per person on all social services, infrastructure, administration, and police.

Although rich nations are canceling billions in debts for nations that use the proceeds to fight poverty, big increases in aid are urgently needed. To reduce by half the estimated 132 million children who will still be malnourished by 2020 would require an annual investment of $25 billion, according to one estimate. Achieving universal primary education would cost $13 billion more, according to the World Bank.

Aid commitments fall far short of that. While Treasury's O'Neill says that fighting AIDS must be a high priority, for example, the White House thus far has pledged just $200 million in new funds to a global AIDS fund. "There is a big disconnect between public promises and the allocating of money," says Columbia's Sachs.

It is time for rich nations to step up and support the programs that do work. Like past waves of world sympathy, the current attention being paid to global poverty is likely to be fleeting, especially as the West becomes ever more absorbed in its own economic woes. If new programs bog down or are grossly underfinanced, billions of dollars will again be wasted. Disillusionment will return. And 15 years from now, the recent grand pledges to conquer global poverty will sound laughable (again). But if rich nations and poor can seize this moment, they could well set the stage for dynamic global growth that could raise the quality of everyone's lives.

By Pete Engardio in New York, with Declan Walsh in Kampala, Uganda, and Manjeet Kripalani in Dhamri, Bangladesh

    Before it's here, it's on the Bloomberg Terminal.