Poor people of the world, start a business

In the search for answers to grinding poverty, the world's rich nations have decided on a new tack. It's radical in its simplicity: For poor people to succeed, let them start a business.

The plan is one of those rare confluences of similar thinking. The Bush administration likes it. So do the French. It was endorsed at last week's summit of the Group of Eight in Sea Island, Ga. Development experts and even many poor nations endorse the idea.

There's just one bugaboo. Some say there's no proof that promoting small business actually reduces poverty. "It's an article of faith with a lot of people in the development community," says William Easterly, a former World Bank economist. "But there is no evidence whatsoever. It's a romantic view of small enterprise. It's another case where the prescription for international development is based on faith, not reality."

Rich nations have tried other solutions to poverty with only mixed success. Despite decades of foreign aid involving huge investments in everything from roads to dams and irrigation projects, along with the encouragement of population restraint, women's rights, education, and democracy, nearly half the world's population remains in severe poverty.

That's better than a decade ago in relative terms. The proportion of people in poverty has gradually declined as the overall population has grown. But the absolute number of poor remains about the same. Almost 3 billion people make $2 per day or less. And that $2 is measured in a way that takes account of lower living costs in poor countries.

Although the G-8 endorsement was overshadowed by concerns over Iraq and a Bush administration plan to push reform in the Middle East, it was cheered in other forums. At the United Nations, the World Bank, and other development bodies, the G-8 plan reflected their own newfound enthusiasm for harnessing private enterprise to tackle world poverty. World leaders breathed a sign of relief when even the Bush administration, skeptical of international action, endorsed the plan.

Mark Malloch Brown, head of the United Nations Development Program, was especially pleased that the G-8 endorsement backed a March 1 report of a UNDP commission.

That report has also got a positive reaction from developing countries, says Nissim Ezekiel, executive director of the UNDP's Commission on the Private Sector and Development. Further, it's being taken up this week at a session of the United Nations Conference on Trade and Development in Sao Paulo, Brazil, a meeting which gets far more attention in poor countries than in rich nations.

The basic thesis is that in developing countries the removal of red tape and other obstacles to private initiative and entrepreneurship has enormous potential to accelerate economic growth and thereby trim poverty. Supporters say it could prove particularly useful for small and medium enterprises and the "informal sector" - such as kids sent to street corners to peddle stuff and other "underground" business activities.

Unhappily, academic studies find no correlation between a high rate of formation of small enterprises in a developing country and economic success, says Mr. Easterly, now at New York University.

Though he cheers efforts to stimulate small business, he sees economic development as far more complex. It involves improving property rights, dealing with cultural barriers, improving the soundness of contracts and other business agreements, and helping big business, including multinationals, as well as small and medium-sized business.

In China and India, big business seems to be driving rapid progress as much as small business, he says.

And there are other factors that affect development, especially the heavy debts that many poor nations have accumulated. Jubilee USA Network, for example, has been pressing rich nations and multilateral institutions to forgive more of the foreign debt of the highly indebted poor countries, many in Africa, so they can spend more in areas such as education and health.

"We were quite disappointed with the outcome" of the G-8 summit, says Neil Watkins, the group's spokesman.

Free trade would also help, says William Cline, a senior fellow at both the Center for Global Development and the Institute for International Economics in Washington. His study calculates that global free enterprise would add $200 billion per year to developing countries' income - nearly twice the annual amount of foreign aid - and lift 540 million people out of poverty over 10 to 15 years.

The record suggests that single solutions don't solve a problem as stubborn as global poverty. Instead, a combination of measures - free enterprise, foreign aid, free trade, and debt forgiveness - looks more likely to turn, slowly, the tide.