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Scott Gilmore, executive director of Peace Dividend Trust

The Globe and Mail

This is the last in a four-part series on innovative ways to deliver aid in our conflicted world.

Aid is ineffective. By some estimates, more than $2-trillion has been spent fighting poverty since the 1950s, with little direct impact. The stories of failure are illustrated with hydro dams that never worked, crops that never grew and roads that went nowhere.

Entrepreneurs, however, are changing the world. Since 2005, an estimated half-billion people or more have been raised out of poverty, mainly by small business, trade liberalization and gains in productivity. In China, Pakistan, Indonesia and Nigeria, booming local economies, oblivious to the latest schemes of aid programs, are creating millions of jobs.

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The Brookings Institution recently predicted even more dramatic gains ahead: "Between 2005 and 2015, India, Bangladesh, Vietnam and Ethiopia are each expected to grow by at least 6.3 per cent per year, and in the process, each is likely to see a quarter of its population lifted out of poverty." Entrepreneurs, not aid spending, are driving this growth.

The innovation that led to this dramatic advance in the fight against global poverty was the grudging realization by donors that aid planners do not create jobs – small business does.

I personally saw this when I worked for the United Nations in East Timor. I was charged with creating an "economic security" policy and I failed, spectacularly. Although our aid budget was larger than the entire Timorese economy, unemployment was over 50 per cent and poverty levels were the worst in Asia.

But I found hope in the front yard of my rented house. There, day by day, my Timorese landlord, Senhor Antoni, patiently rebuilt a burned-out bus. He used my rent cheques to buy parts and hire local boys as mechanics and drivers.

Senhor Antoni soon became the biggest employer in the neighbourhood, and had a small fleet providing transport services across the entire country. Meanwhile, our massive aid program continued to wallow ineffectively.

That experience taught me that the most powerful force for poverty reduction is not development assistance – it's local entrepreneurs. When they are given an opportunity to compete, they can transform even the poorest country.

Donors have slowly arrived at a similar conclusion. While once the private sector was seen as a necessary evil, now it is recognized as the main means of sustainable economic growth. Increasingly, aid agencies are funding mechanisms to make markets more efficient, to connect local exporters to global buyers, and to provide finance to small and medium-sized businesses.

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An important factor that supported this innovation was the rejection of "tied aid." Traditionally, government donors required that money for overseas assistance had to be spent on domestic firms. For example, when Canada gave food to Ethiopia, it bought it from Canadian farmers. It was an ineffective means of subsidizing domestic farmers, it flooded Africa with underpriced grain and it inhibited the development of an African agricultural market.

Canada has led international donors on changing this, for which CIDA and the Conservative government rarely get credit. Canada announced that it would untie food aid in 2008 and is set to untie all aid by 2013. This allows Canada to procure its development assistance from local entrepreneurs and to spend its development dollar twice. For example, if CIDA spends $1-million building a school in Afghanistan by using a local construction firm instead of one from Montreal, it leaves behind not only a school, but also $1-million in wages and taxes.

Sooner than we realize, the future of aid will be no aid. Other than urgent humanitarian assistance, donors will no longer be needed or wanted, as entrepreneurs in such countries as Liberia and Haiti create what donors cannot: prosperity.

Scott Gilmore is founder and CEO of Peace Dividend Trust. To see a video conversation with the author, visit the Canadian International Council's website at www.opencanada.org/newhumanitarians.

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