4 Mar 2015 09:20am

Are there better ways to solve global poverty than aid?

Wealthy nations are giving record sums to the poor. But are there better ways to end poverty? Fernando Florez investigates

Money is tight for governments around the world and pressure is intense to cut spending. But one area that that has escaped the fiscal axe is foreign aid. Development assistance budgets in rich nations rose to a record $135bn (£88bn) in 2013, a surge of 6%. Five countries now meet the iconic 0.7% of GDP aid target set by the United Nations in the 1970s. The UK government has even planned to enshrine that aid pledge in law, protecting it from future austerity.

But are nations putting too much stress on the quantity of aid? Has the much-vaunted 0.7% target outlived its usefulness? Critics point out that not all foreign aid is what it seems. Even the UK, widely respected for spending aid funds wisely, is far from perfect. Its aid budget in 2012 included almost £12m on projects such as global citizenship lessons for Scottish schools, military training for African officials and study visits to the UK for North Korean officials. Meanwhile the largest recipients of American largesse are strategic allies like Afghanistan, Jordan and Pakistan.

Perhaps more importantly, many nations neglect other policies that have a far larger effect on the fortunes of poor nations. “The 0.7% has become a talisman,” says George Ingram, a senior fellow at the Brookings Institution and a former US government aid official. “Aid is important. But the bigger impact comes from a nation’s stance on trade, finance and immigration.”

For example, economic migrants from poor nations to countries like the US send home a flow of funds to their families. These “remittances” were almost four times larger than official development aid in 2013, according to a World Bank report. As wealthy nations tighten immigration rules, that stream of cash is at risk.

Barriers to trade can be even more harmful to the economic well-being of developing countries. For example, Norway is on paper the world’s most generous large nation, giving over 1% of GDP in aid. Yet it undermines part of the good it does by imposing high tariffs on agricultural imports, making it less profitable for poor nations to sell it staple goods. “You can have a crazy situation where a donor country pays for technical aid to help promote textile production,” says Owen Barder, director of the Center for Global Development in Europe and a former Downing Street aide. “Then they slap a 10% tariff on shirt imports.”

Then there is finance. Switzerland, which gives a respectable 0.5% of GDP in aid, is often criticised for banking secrecy. These rules have historically made it easier for corrupt officials in poor nations to siphon stolen money out of the country.

Experts say rich nations need to consider a number of factors in combating poverty – the quantity of aid, the quality of aid, and the composition of a range of government policies.

The fact that aid spending has held up despite fiscal strains in most rich countries points to a broad political consensus in favour of well-funded development agencies. “Helping the poor is something that commands support from all sides of the political spectrum these days,” says Barder. “There is even some evidence that people become more generous when times are tough.”

A report by the Chronicle of Philanthropy in the US showed that the poorest Americans – those taking home $25,000 (£16,400) or less – boosted their charitable giving by nearly 17% in the often tough years between 2006 and 2012.

Change is best directed by people closest to the problem and who have the greatest stake in the solution

That tendency also seems to be reflected in patterns of nations’ spending. Some of those hardest hit by financial turbulence have been among the most generous. Despite a stagnant economy and a rising debt burden, Italy boosted aid by 13% in 2013. Japan, which has been dipping in and out of recession and faced a huge rebuilding bill after the 2011 tsunami, increased aid by 36%.

But the UK was the star among the top donors, boosting spending by 28%. So great was its boost to aid in absolute terms, says Barder, that it accounted for a large share of the 6% global increase. At $18bn (£12bn), the nation was now the world’s second largest donor – despite being the world’s sixth largest economy. The UK gave about 60% more than France, the world’s fifth largest economy, according to the International Monetary Fund and OECD.

Underpinning generosity in hard times was a sentiment expressed by UK prime minister David Cameron. “We accept the moral case for keeping our promises to the world’s poorest even when we face challenges at home,” he said in a 2012 speech in New York. “When people are dying, we don’t believe in finding excuses. We believe in trying to do something about it.”

But do governments overall get enough bang for their development bucks? Many distinguished academics have pointed out that the record of foreign aid is patchy. New York University Professor William Easterly has pointed out that the West has spent over $2.3trn (£1.5trn) on foreign aid over the last five decades. Yet donors have still not managed to get 12 cent medicines that would avoid half of all malaria deaths to children, or to get $4 bed nets to poor families. Easterly contrasts this with the ability of the British and US economies to deliver nine million copies of the sixth Harry Potter book on just one day in 2005.

The pattern of poverty reduction in recent years suggests that foreign aid can claim little credit. For example, between 1981 and 2010 the number of poor people in the world fell by about 700 million. But China, which has received only minimal foreign aid relative to its size, accounted for 90% of that fall, with a reduction of 627 million. By contrast, Liberia, where aid of $765m (£501m) accounted for 73% of GDP in 2011, still has almost two thirds of its four million citizens living on less than $2 a day.

“Too much aid is not being spent efficiently,” says Leni Wild, lead author of a research document published by the UK’s Overseas Development Institute (ODI). “The most successful efforts tend to be entrepreneurial in spirit. That means testing a variety of approaches to see what works rather than having a rigid plan from the start. It is essential to allow for cycles of doing, failing, adapting, learning and eventually getting better results.”

Finally, Wild believes that aid needs to be led by the local communities. “Change is best directed by the people who are closest to the problem and who have the greatest stake in the solution.”

In addition, aid is not always directed at the nations that need it most. In fact, in terms of the amount of aid given per person living in extreme poverty, the poorest countries get substantially less aid than the richer ones. According to Marcus Manuel, another researcher at ODI, the most impoverished nations – those with GDP per capita of less than $500 (£327) – get an average aid amount of $70 (£46) per person living in extreme poverty. As the income level of the country goes up, the amount of aid rises. Countries with a GDP per capita of $2,000 (£1,310) receive $300 (£196)per person living in extreme poverty – over four times more than their poorer peers.

Finally, development efforts are not always directed towards schemes that deliver the largest return for the smallest financial input. Danish economist Bjørn Lomborg, aided by researchers around the world, recently offered a ranking of different aid initiatives by value for money.
To give just a few examples, he found that a dollar spent on reducing tuberculosis delivered around $43 of economic benefit, while increasing nursery school enrolment gave a smaller benefit of $33. Increasing access to contraception gave a whopping economic gain of $120 per dollar spent.

But perhaps the most crucial finding was the huge poverty-fighting value of policies that had nothing to do with conventional aid.
Notably, $1 spent on trade liberalisation delivered a gain of $2,011, according to Lomborg – making it by far the most effective way of contributing to development. Other alternatives to traditional aid also score relatively well. Increasing the availability of work visas by 20% would deliver benefits of $15 per dollar.

This broader approach has been embraced for years by the Center for Global Development, a US think tank. It produces an annual ranking of how the policies of the major rich nations affect the poor in its Commitment to Development Index. This measures not just the quality and quantity of aid, but also policies on trade, finance, migration, the environment, security and technology.

Sadly, Barder, who helps run the research, says there has been only limited improvement globally over the 11 years that the index has been in existence. “Trade is the obvious one where we need improvement,” he says. Among the countries that still have the least progressive policies are the likes of Japan and South Korea, which have high tariffs on rice. Norway and Switzerland also score poorly on this scale.
In terms of financial policies there is also considerable room for improvement in many nations, Barder believes. Aside from its banking secrecy, Switzerland scores badly since it is only one of three nations in the rich world without an agency that offers political risk insurance to companies wishing to deal with developing nations. Such agencies can be extremely effective at boosting commerce and investment in poor nations. Ireland and New Zealand also lack such agencies. Along the same lines, Ireland and Greece have policies that restrict their pension funds from investing in less developed nations.

Environmental damage and global warming are harder to cope with in poor nations, Barder says. As a result, countries with harmful environmental policies can undo much of the good work of aid agencies. Again many nations score poorly. Australia, Canada and the US are marked down for their high fossil fuel emissions.

Countries can also get credit for contributing to the security of poor nations. Norway and Denmark get high marks for providing significant contributions to internationally-sanctioned peacekeeping. By contrast France, the US and the UK are penalised for allowing large exports of arms to undemocratic countries.

The lesson from this holistic approach to development is that aid agencies should be at the table when a broad range of government policies are being discussed, says Ingram. The UK is an example in this regard.

“The UK’s Department for International Development has been given enough heft that it can influence other government policies,” says Ingram. “Over the long term that will make Britain an even more progressive force in the world.” That helps explain why the UK already ranks an impressive fourth out of the 27 nations graded in the Commitment to Development Indicator, only just behind Finland, Sweden and world-beating Denmark.

Overall, the index suggests that rich nations have a long way to go before they can really claim to be doing their best to banish global poverty. Hitting the 0.7% target might make nations feel virtuous. But it seems clear that generosity alone won’t get the job done.

Fernando Florez


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