Why investing in emerging market companies makes more of an impact than foreign aid

Covid-19 and its associated lockdowns have, however, underscored the limitations of foreign aid. In Uganda, for example, aid cuts have forced hundreds of thousands of people to the brink of starvation. Even outside such an extreme example, many believe that foreign aid only serves the interests of donor countries and that it either creates dependency or has too many destitution “traps” to be effective. There are also some who argue that most foreign aid is spent on Western consultants instead of the people it’s supposed to help. 

But if foreign aid is ineffective and we accept that wealthier countries should “do their bit” to help, how should they go about doing so? 

A much better solution may be to invest in companies in these countries which have long-term commercial viability and which provide local solutions to local problems. 

Foreign aid and missing incentives 

One of the problems with foreign aid is that it doesn’t provide the right incentives for donors or recipients. 

For many public and private sector donors, the responsibility is over once whatever project they were funding is complete. Whether it’s the construction of a well, a new school, or handing out mosquito nets, there’s little reason for funders to stay invested in the long run. Certainly, some NGOs might play on their ability to demonstrate impact, but the best they can offer funders is a sense that their money’s being well spent.

Similarly, the recipients of aid funding don’t have any incentive to sustain a project if they don’t have ownership of it. We’ve witnessed this first-hand, having been involved in funding a Zimbabwean dairy training centre. 

Once the site was handed over to management, herd size began to shrink and feedstock was no longer managed properly. By June 2020, the herd had dropped to 21 head of cattle, down from 35 in August 2018. As of October 2020, there were 13 cattle, comprising 2 cows, one bull and 10 heifers. Many of the cattle were malnourished and we received reports that several had died while giving birth. 

While such a vocational facility clearly has benefits for the people it serves, the incentives simply weren’t strong enough for it to run sustainably. 

Investment and ESG 

Contrast that with the relationship between a business and an investor. When it’s looking for an investment, a business will do everything it can to prove that it’s viable. And once it’s made an investment, a good investor will do everything it can to ensure that the business succeeds. 

This is especially true of private equity investors who typically restructure companies to give them the best chance of success. 

And if the concern — as is the case with most foreign aid — is making a sustainable difference in emerging markets, then there are plenty of opportunities to invest in companies with a good environmental, sustainability and governance (ESG) record. There are also private equity funds who’ll guide investors through the process. 

Imagine what these funds could do with the $60-billion spent on aid to Africa every year. Imagine what impact a growth explosion in tax-paying businesses could have on the continent’s poverty, employment and development levels. And, all of that can happen while still providing investors with real returns. 

A growing imperative

With traditional big Western donors set to target aid budgets as their own economies falter, the imperative for investment only becomes bigger. Handouts may alleviate some of the pain caused by 2020’s economic ructions, but only temporarily. 

Beyond simple recovery, what’s needed is sustainable growth which benefits people on the ground. This is especially true of already fragile emerging market economies which have been decimated by the pandemic. Properly managed, foreign investment can achieve much more and much quicker than aid will ever be able to. DM/BM