How Capacity Building Can Break the Debt Cycle and Help Poor Countries Grow

Triggered by two recent publications—the OECD’s Handbook on Due Diligence for Enabling Living Incomes and Wages in Agriculture, Garment, and Footwear Supply Chains, and the World Bank’s report: Poorest Economies Face Toughest Conditions in Two Decades—I began to question why so many of the world’s poorest countries remain stuck in a cycle of poverty. As a sociologist, not an economist, I may have overlooked other solutions, but one thing seems clear: traditional aid isn’t working. It’s like giving a person a fish; they eat for a day, but remain hungry thereafter. Instead, by teaching nations to fish, we empower them to feed themselves for a lifetime. Capacity building offers this sustainable path forward, enabling countries to grow their economies and break the debt cycle.

Despite billions of dollars in aid, many of the world’s poorest countries are still stuck in debt. The World Bank reports that government debt in low-income countries (LICs) has reached 72% of their economic output (GDP), the highest in 18 years. Nearly half of these countries are close to debt distress, meaning they can’t pay back what they owe and risk defaulting (World Bank, 2024). So, is traditional aid helping or making things worse?

Maybe it’s time to stop just sending fish and start teaching them to fish—giving countries the tools they need to grow on their own through capacity building.

To break the debt cycle and facilitate sustainable development, we must shift from traditional aid to capacity building that empowers low-income countries to transform their economies and increase their earning power.

The Vicious Cycle of Debt and Aid

For decades, the international community has responded to poverty in LICs with financial aid, often in the form of loans or grants. While these efforts are well-intentioned, they frequently lead to short-term relief rather than lasting change.

The World Bank’s report highlights a sobering reality: net official development assistance to LICs has declined to a 21-year low, forcing these countries to seek financing under harsh conditions, typically with high interest rates and strict repayment schedules (World Bank, 2024). This increases the amount of debt they owe, making it harder to pay off and prevents them from investing in key areas like health, education, and infrastructure.

Moreover, traditional aid can make people dependent on outside support and stop them from learning how to take care of themselves. Projects may succeed while external support is present, but once the funding dries up, they regularly fail. This keeps people dependent on outside help instead of being able to sustain progress on their own.

Success Stories: Transforming Economies Through Capacity Building

To illustrate the transformative power of capacity building, let’s examine success stories from countries that have effectively leveraged these strategies to break the debt cycle and achieve sustainable development. Vietnam and Bangladesh serve as compelling examples of how investing in human capital and institutional strength can lead to significant economic and social progress.

Vietnam’s Economic Transformation

Vietnam transitioned from one of the world’s poorest nations to a lower-middle-income country within a few decades. Through capacity building, market reforms, and investment in education, Vietnam achieved significant economic growth and poverty reduction (World Bank, 2016). The country’s focus on developing human capital and embracing global trade has been instrumental in its success.

Bangladesh’s Development Journey

Bangladesh has made remarkable progress in health, education, and economic growth by investing in human capital and empowering women. Capacity-building programs have played a crucial role in these achievements (Asadullah, 2013). The country has seen improvements in literacy rates, life expectancy, and economic stability.

Photo by Peter Horsten

A Personal Encounter in Ethiopia

During a visit to Ethiopia, I had the opportunity to engage with local coffee farmers. When asked what they needed to improve their livelihoods, their immediate response was money. You might say that this is an understandable request, given their circumstances. But it didn’t satisfy me.

Therefore, I probed further: “What if money wasn’t an option? What else would help you?” After a thoughtful pause, they expressed their true needs:

• Training in sustainable farming practices: They were keen to learn how to manage their land and plants better to increase their crop yields.
• Access to proper tools: Basic cutting knives would enable them to maintain their plants more effectively.
• Market access: Assistance in reaching buyers who would pay fair prices for their higher-quality coffee, preferably premium prices for their Fairtrade certified coffee.

They were excited about the idea of learning new skills and improving their productivity. It was clear they wanted more than just financial help—they wanted a chance to create a better future for themselves. It’s important to ignite and stimulate their sense of entrepreneurship. People need to understand that they are the ones responsible for their future development; it is not someone else’s duty.

This experience was eye-opening. It highlighted the limitations of traditional aid and underscored the transformative potential of capacity building. By empowering individuals with knowledge and resources, we can enable them to drive their development.

The Limitations of Traditional Aid

Traditional aid models often fail to address the main issues that keep poor countries struggling. Here are some key problems:

1. Dependency and Reduced Incentives for Self-Reliance

Continuous financial aid without capacity building can create a dependency trap. Recipients may become reliant on external support, diminishing their motivation to develop sustainable solutions internally (Whiteside, 2009)

2. Corruption and Misallocation of Funds

Aid money can be misused, with resources taken away from those who need them most. Many poor countries face corruption and bad governance, which makes aid less effective. According to Transparency International’s Corruption Perceptions Index, many LICs struggle with governance issues that undermine the effectiveness of aid (Transparency International, 2021).

3. Lack of Sustainability

Projects funded by aid may not last eventually. Without local ownership and skills, projects frequently fail once the external support ends (Easterly, 2006).

4. Misalignment with Local Needs

Aid programs sometimes don’t match the real needs of the communities they are supposed to help, which can make them ineffective or even harmful (Easterly, 2007). We need to be careful not to impose our ideas of what is needed based on a Western perspective. Their needs can be entirely different, and we must listen to understand them properly to prevent these failures.

Capacity Building: A Sustainable Alternative

Capacity building focuses on enhancing the abilities of individuals, organisations, and societies to perform functions, solve problems, and achieve objectives. It’s about equipping people with the skills, knowledge, and tools they need to take charge of their development.

By increasing their capacity, we aim to improve their earning power, which is crucial for repaying debts that are often in foreign currencies. To pay off these debts, countries need to earn foreign currency, which usually requires increasing exports.

This can be done through higher yields, better quality, expanding the amount of land used for crops, or adding value to products (which is frequently overlooked).

The OECD’s recent report on due diligence for enabling living incomes and wages in supply chains highlights the importance of a structured approach to tackling income and wage gaps (OECD, 2024). This involves integrating living income and living wage considerations into corporate policies and engaging in a six-step risk-based due diligence framework.

Such an approach aligns well with capacity-building efforts, as it ensures that people not only earn enough to meet basic needs but are also empowered to sustain these improvements.

The report also identifies agriculture and garment sectors as particularly high-risk areas for income and wage gaps (OECD, 2024). Poor working conditions, seasonality, and informal work arrangements in these sectors often keep incomes low.

By focusing capacity-building initiatives on these vulnerable sectors, we can help communities become more resilient and better equipped to handle economic challenges. Moreover, collaboration with stakeholders—including governments, private companies, and civil society organisations—can enhance market access, provide practical training, and help address the systemic issues that contribute to income inequality.

The report further underscores the role of the private sector, driven by investor interest and regulatory requirements, in addressing income and wage gaps (OECD, 2024).

Successful collaborations, such as the EU’s Corporate Sustainability Due Diligence Directive, show that systemic change is possible through collective action.

These examples demonstrate why engaging the private sector is essential for capacity building, as ethical investments and fair trade practices can support local economies and promote responsible business conduct.

To make these ideas more actionable, here are four areas where capacity building can make a meaningful difference:

1. Education and Skills Training

Investing in education empowers individuals to innovate and contribute meaningfully to their economies. The United Nations Development Programme emphasises that capacity development is essential for achieving sustainable human development (UNDP, 2015). For example, Rwanda’s investment in education and technology has transformed it into one of Africa’s fastest-growing economies (World Bank, 2020). By prioritising universal primary education and fostering a knowledge-based economy, Rwanda has reduced poverty and stimulated growth.

2. Agricultural Development

In many LICs, agriculture is the backbone of the economy. Providing farmers with training in modern farming techniques, access to quality seeds and fertilisers, and tools can dramatically increase yields and food security. In Malawi, capacity-building initiatives in agriculture led to surplus maize production, turning the country from a food aid recipient into a food exporter (Chinsinga, 2011). By empowering farmers, we can enhance food security and stimulate economic activity.

3. Entrepreneurship and Private Sector Growth

Supporting small and medium-sized enterprises (SMEs) stimulates job creation and economic diversification. In countries like Kenya and Nigeria, programs that offer training, mentorship, and access to finance have empowered entrepreneurs and spurred economic growth (IFC, 2017). A vibrant private sector reduces reliance on external financing and fosters innovation.

4. Good Governance and Institutional Strengthening

Building the capacity of governmental institutions improves public financial management, reduces corruption, and enhances service delivery. The International Monetary Fund notes that capacity building in public financial management leads to better budget execution and increased revenue collection (IMF, 2023). Strengthened institutions are fundamental to maintaining economic stability and attracting investment.

Addressing Potential Concerns

While shifting from traditional aid to capacity building is promising, there are a few common concerns:

1. Capacity Building Takes Too Long to Help

Concern:
Capacity building is a long-term solution which doesn’t address urgent crises like hunger or disease.

Response:
Immediate aid and capacity building can go hand-in-hand. For example, training farmers in improved techniques can boost yields in a single season, and healthcare worker training can quickly enhance patient care (Davis, 2010; WHO, 2013). Capacity building offers both immediate and long-term benefits.

2. Cultural or Governance Challenges

Concern:
Local governance issues, cultural differences, and political instability may slow down capacity building efforts.

Response:
By involving local communities and focusing on strengthening institutions, we can overcome these barriers. International partnerships provide technical support and share best practices (Grindle, 2007). These efforts ensure success, even in challenging environments.

3. Risk of Corruption

Concern:
Capacity-building funds might be misused in countries with weak governance, limiting their impact.

Response:
This risk can be minimised with transparency, strong monitoring systems, and community involvement (Transparency International, 2018). Strengthening local governance through capacity building helps reduce corruption over time (Whiteside, 2009).

4. High Costs and Donor Fatigue

Concern:
Capacity building requires long-term investments, and donors may lose interest over time.

Response:
While the upfront investment is significant, it reduces dependency on aid, making it cost-effective over time (OECD, 2006). Collaborative funding and partnerships help distribute costs, ensuring continued support.

5. One-Size-Fits-All Solutions

Concern:
Standardised programs may not work in countries with unique challenges.

Response:
Capacity building should always be tailored to local contexts through collaboration with local experts and adaptability based on feedback (Morgan, 2006). This ensures that solutions meet specific needs and circumstances.

Breaking Free from Dependency

To effectively break the debt cycle, we need to rethink our approach to aid:

1. Long-Term Commitment

Capacity building is not a quick fix. It requires sustained investment and patience. Development partners must commit to long-term support that prioritises skill development and institutional strengthening over short-term financial aid.

2. Local Ownership and Participation

Empowering local communities to take charge of their development ensures that initiatives are relevant and sustainable. When people are involved in decision-making, they are more committed to the success of projects.

3. Collaboration with the Private Sector

Engaging businesses can enhance market access and provide practical training opportunities. Ethical investments and fair trade practices can support local economies and promote responsible business conduct.

4. Monitoring and Evaluation

Establishing clear metrics to assess the impact of capacity-building initiatives ensures accountability. Continuous evaluation allows for adjustments and improvements, maximising effectiveness.

A Call to Action

Breaking the debt cycle is a collective responsibility. Governments, international organisations, the private sector, and civil society must collaborate to implement capacity-building strategies. By investing in people rather than just projects, we can empower nations to become self-sufficient and resilient.

What can you do?

• Support organisations that focus on capacity building and sustainable development.
• Advocate for policy changes that prioritise education, healthcare, and institutional strengthening in aid programs.
• Encourage ethical business practices, such as fair trade and investment in local enterprises.

As the World Bank’s Chief Economist, Indermit Gill, stated, “If they are to rise out of a state of chronic emergency and meet key development goals, low-income economies will need to accelerate investment to a pace without precedent” (World Bank, 2024). This acceleration is possible when we focus on capacity building that enables LICs to harness their potential.

From Aid to Empowerment: The Path to Breaking the Debt Cycle

Imagine a future where countries that once relied on aid are now strong and independent. This can happen if we shift from just giving aid to helping them build their own skills and resources. By focusing on things like education, entrepreneurship, and better institutions, we can help poor countries grow and pay off their debts on their own.

It’s time to rethink how we support these economies. Aid is useful in emergencies, but long-term growth comes from helping people stand on their feet.

Together, we can help break the debt cycle and create lasting change.

Featured image: Photo by Doug Linstedt on Unsplash

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