Posted on

South Africa: Why Investing in Emerging Market Companies Makes More of an Impact Than Foreign Aid

For decades, many have viewed foreign aid as the best way for rich, developed countries to help poor, developing countries. In fact, the value of international development aid reached a new peak of $152.8bn in 2019, a slight increase over 2018, according to the Organisation for Economic Co-operation and Development.

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…