The final installment in our review of charitable giving and social impact.
An FKD Feature exclusive

In our ongoing discussion of aid and charitable giving, we have staunchly advocated that social entrepreneurship is the key to addressing common issues of underdeveloped regions.

While social entrepreneurship drives long-term economic growth, government institutions play a key role in determining whether the countries flourish or stay stagnant. In this section, we’ll discuss how governments can help foster the right economic environment for entrepreneurship to bloom.

Good government vs. bad government

Almost all poor countries struggle in raising tax revenue from individuals and businesses, which hinder the government’s ability to fund infrastructure projects, expand health care services and provide adequate education. Sometimes this is because of things like armed conflict, shitty resources, natural disasters, low human capital, etc. Other times though, this is a result of what is generally known as “bad government.” Excuse the highly technical jargon.

"This means fostering an inclusive system that welcomes diversity in all three realms, especially the economy."

Good governments are attributed with ensuring that political, social, and economic targets are based on the general agreement of the citizens. This means fostering an inclusive system that welcomes diversity in all three realms, especially the economy. By aiming toward a more inclusive system, they make certain that marginalized groups, often the poor, the disabled or those from minority communities have a say in the government’s allocation of resources.

Notably, good governments enforce the rule of law, meaning no one, no matter what status, is above the law. With a solid enforcement of the rule of law, governments have more transparency, accountability, and are generally more inclined to address human rights issues. This allows the people to trust their governments a little bit more, making them more willing to work with the government to get stuff done.

Bad governments, on the other hand, reflect an absence of some, if not all, of the good government attributes. They tend not to enforce the rule of law as decided upon by the citizenry, hence the often-rampant corruption, violent aggression, crime, and suppression of public expression or dissension.

Enter foreign aid

Since 1960, the Development Assistance Committee (DAC), which is made up of member countries within the Organization for Economic Cooperation and Development (OECD), has been distributing aid to developing countries.

This money gets directed toward development projects like improving access to healthcare, providing food security, education, and infrastructure. More importantly, though, some of the aid goes toward constantly playing Michael Jackson’s “Man in the Mirror” to government officials in hopes that they start embracing “good government” practices. 

 

Although we were totally kidding about introducing poor governments to MJ tunes, the aid is going to help influence positive reforms in the governments that need it.

A model for success

After the Korean War, South Korea was decimated. Nevertheless, it did clutch onto the principles of good governance which has turned into a clear model for success. The United States, along with some European countries, provided foreign aid to South Korea from 1960 to around the mid-1980s.

The Korean government was able to successfully utilize the funds to overcome domestic challenges through state-led development projects, and in just 50 years, South Korea has become an economic super power. The economy is well-diversified, Koreans trade with most of the world and the country has found its comparative advantage in exporting big-ticket items like telecommunication equipment and motor vehicles.

It went from being a foreign aid recipient to becoming a donor!

Ups and downs

An alternative example is that of Kenya, which has been a mixed bag of some successes and some failures. Throughout the ‘70s, Kenya demonstrated “good governance” and in light of that, it received a wave foreign aid. However, in the early ‘90s until today, Kenya has suffered from intermittent political turmoil, making countries reluctant to continue to give developmental aid.

Recently, the Kenyan government signed into law some much needed economic reforms that are meant to be more business friendly: the Companies Act, the Insolvency Act, the Special Economic Zones Act and the Business Registration Service Act. All of these will help diversify the economy and reduce the regulatory barriers for entrepreneurs to create sustainable economic growth.

Good governance with foreign assistance in infrastructure development may lead to another foreign aid success story.

Corruption and a failed state

While not all poor countries have “bad” governments, some countries are poor because their collection of natural resources have been squandered by severe poor governance. Nigeria is an example of plain ole bad governance.

Ranked among the most corrupt governments in the world, Nigeria is a blatant example of why bad governance can keep a nation poor, regardless of whatever big-ticket resources it may have. Nigeria is a crucial supplier of global oil (big-ticket item), yet Nigeria’s infrastructure, health services and education are all badly flagging behind other nations of similar stature.

 

Throughout the years, government and military officials have syphoned vast amounts of revenues from the oil industry. An official report recently showed that a state-owned oil company withheld over $25 billion from the public purse between 2011 and 2015. For a country struggling to provide basic services to its people and grappling with a terrorist insurrection, burning $25 billion is no laughing matter.

President Muhammadu Buhari is attempting to curb the unbridled corruption, but he is far from achieving this goal. When you combine a lack of transparency, accountability and genuine citizen participation with tons of special interest influence, you have a recipe for continued economic disaster. Because of this, foreign aid has gone mainly to address the humanitarian issues without any hope for sustainable economic development.

Beyond Nigeria, some of these countries are so far down the bad government hole that it doesn’t seem like they will ever be able to stand on their own, or at least in our lifetime.

Our take

Millennials continue to blur the lines between investments and philanthropy by making sure their money is killing two birds with the one stone — make money and help the world. By making sure that our investments and charitable contributions go toward local entrepreneurs so that they can overcome these regulatory costs and expand their businesses, we can really make an impact.

That being said, it is important to recognize that the money will not go far unless the political and economic institutions are reformed in ways that foster sustainable growth. Countries that are attempting to embrace good government practices do have such hope.

This along with reducing burdensome barriers that block entrepreneurial creation can help governments increase their tax base. Increasing the tax base helps raise revenues needed to combat poverty in their own countries and, like South Korea shows, the rest of the world.

 

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Header image: Getty

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Posted 08.05.2016 - 01:10 pm EDT