Glenn Hubbard has a bold idea: it’s called the new Marshall Plan.

Question: What are the disparate arguments for how we should tackle the aid crisis?

Glenn Hubbard: The real issue is the dire poverty in much of the world and what we can do about it. And the current aid debate has two poles. One pole says, well the real answer in the last, is we need to spend some certain fraction of GEP. The current target is maybe .7% on aid. To me as an economist, that pole has always seemed odd. We typically measure success or failure, not how much you spend. On the other end, there are well-meaning people who say, “You know what? For the past 40 years of aid have been a failure,” and they’re largely correct insofar as they’re talking about economic aid, “So, let’s stop doing that.” I don’t think that’s the right moral answer and I certainly don’t think it’s the right economic answer. We can do this.

Question: What is your idea for how to fix it?

Glenn Hubbard: The idea is really in two steps. The first is to step back and say, well what works. And if you look economies that have become prosperous, whether it’s historically or in the modern period, it’s about invigorating the local business center. That’s how the United States got rich, that’s how the west got rich, that’s how modern growth miracles in Asia and even in parts of Africa have happened.

One of the things we could do there is to focus much more economic aid on local business. And there in the book, The Aid Trap, I argue that we should go to the software of the Marshall Plan. People think of the Marshall Plan for Europe in 1947 to 1952 has being a grand aid scheme; it wasn’t that at all. The Marshall Plan loaned money to local businesses. It was only when that money got paid back that it went to governments and the entire plan was run by business people. Now Europe then is not the same as Africa now, but that same software could work.

Question: What are the nuts and bolts of it working?

Glenn Hubbard: Well, I think we first start with the big picture of institutional reform. President Bush implemented what was called the Millennium Challenge Account, which was a very good idea. It tried to condition the U.S.A. on institutional reforms that are pro-business, we need to keep that. But then we need to get the money directed to local businesses. And the way they do that would be to establish regional offices throughout Sub-Saharan Africa so some country specific, some region specific. Offices would compete for allocations of money based on reforms. Money would be given directly to local businesses, through local business people, through private equity, through U.S. business aid. And when that money is repaid, it could either be given to governments, if that’s the goal, or given directly in some recycling to other businesses. The Marshall Plan offers us a way to do that.

There are countries in Sub-Saharan Africa that are already making good progress along these lines. Rwanda comes to mind as a great example. The World Bank actually tries to measure the ease of doing business in a country, the so-called Doing Business Indicators. Rwanda has actually done very well at this in the past couple of years moving up 60 notches. So, there are come countries already doing this.

Question: Does this new Marshall Plan protect from corruption inherent in the aid process?

Glenn Hubbard: I think so. A lot of the corruption that arises in the present aid system is because so much of aid flows go directly through government organizations highly concentrated payments that are prone to corruption, direct lending to individual businesses; yes, there will be some corruption, yes, there will be some linkages. Nothing is perfect. But I think it will be a lot less than we see in the current system. And you’re building a constituency of small and medium sized business people who then are powerful advocates against corruption.

Question: How does the new Marshall Plan that you’re proposing differ from the Millennium Challenge Account?

Glenn Hubbard: Well the Millennium Challenge Account started from a simple premise from economic research in the past 10 or 20 years that, there are some institutional changes that lead to growth. For example, having an independent judiciary enforcement of simple debt contracts and the rule of law institutional doesn’t make it easier for a business person to operate over somebody to lend you money and get paid back. So, the idea of the Millennium Challenge Account was, let’s take a pot of money and go to countries receiving aid and say, “If you’d like additional money, you need to make these institutional changes.” And that’s a very good idea. Except, I think, that too much of the money was going directly to governments so missing the point about how to directly get money in the hands of the small business, medium sized business sector. So, what I proposed in The Aid Trap is to take essentially the idea of the Millennium Challenge Account a step further, why don’t we go directly to the local businesses, having established the institutional reforms.

Question: What are your thoughts on China’s role in Africa right now when it comes to aid?

Glenn Hubbard: I’m fascinated by China’s goals in Africa. It’s essentially in our modern time a version of what was the Big Game a century or so ago of intrigue, of domination. And I think what China has done is made a bargain that is almost colonial. We will give you large amounts of aid, a $10 Billion promise from China, but in exchange, we are interested principally in locking up resources that help us, the Chinese, in our growth, very little effort to promote African business.

Now I think for the U.S., there’s a double win here possible. One is to say, “Look, in terms of the economics. If you want growth in Sub-Saharan Africa, it’s not going to be with special deals with China, it will be what invigorates local business.” And second, what better foil for the U.S. to be the aid giver that says, “No, we’re about local African business. We’re not about taking resources.” I think that’s a real win for us.

Question: Do you think this is something that could come to fruition under a Democratic Congress?

Glenn Hubbard: Obviously the Congress has many priorities at the moment and this probably isn’t the top one, two, or three, but I do think there is interest in both the Congress and the Administration for the simple reason that I think President Obama would like to take bold action here. I think he believes it is an imperative and I share that view, but he is shackled a bit by the fact that the U.S. really can’t spend the amount of money that many aid advocates are talking about. This is an alternative view for him. If he didn’t do this, I’m not sure what he would do.

Question: What’s an example of a country that grew because of small and medium-sized businesses?

Glenn Hubbard: Sure, well outside of Africa, the two growth miracles of the very recent couple of decades have been India and China. Both of those miracles have involved opening and the very significant growth of domestic business. Much like growth miracles we’ve seen for centuries. In Africa today, in Sub-Saharan Africa, two countries in recent years have done extraordinarily well in moving up in the Doing Business Indicators, one is Rwanda, and the other is Mauritius. In both cases, it’s been leaders that have been very focused on the business sector, both importing multi-national investment, but also importantly encouraging local business. So, this has been done. I think it would be a good idea, for example, for the World Bank to take small groups of African countries, maybe starting in Eastern and Southern Africa and bring together the best practices and try to encourage this pro-business attitude.

Recorded on December 17, 2009