Using Aid to Reduce Poverty is in the National Interest

Global Development

Further evidence that using aid to reduce poverty is in the national interest of donors has recently been published in the Quarterly Journal of Political Science. Rigorous analysis by University of Sydney, Dartmouth College and Australian National University academics, shows that aid targeted towards poverty reduction can improve the public perception of donors in recipient countries.

They illustrate that one of the United States Government’s flagship aid initiatives, the President’s Emergency Plan for AIDS Relief (PEPFAR), significantly raised public perception of the United States in aid recipient countries. For example, it is estimated that if PEPFAR had not been provided to Kenya, approval of United States leadership would have fallen from around 85% to 75%. The chart below shows the results for a number of African countries.

PEPFAR public opinions

To read more about this analysis check out the following:

-Development Policy Centre blog post summarizing these findings: http://devpolicy.org/doing-well-by-doing-good-foreign-aid-improves-opinions-of-the-u-s-20140423/

– Published Article can be accessed here: http://www.nowpublishers.com/articles/quarterly-journal-of-political-science/QJPS-13036

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Putting Australia’s Aid budget in Perspective

Australian Aid Policy

Key Points

Aid makes up only 1% of the Australian Government’s budget.

  • According to a Lowy Institute poll, the average Australian would like 12% of the Australian Government’s budget to be spent on aid. This is over 10 times as much as currently given in aid.
  • The Defence budget is around fives times larger than the Aid budget. The Australian Government’s recent purchase of fighter jets cost well over twice as much as the Aid budget.
  • Aid is such a small share of the Australian Government’s budget that it would take over 125 years worth of the Aid budget to pay off government debt.

Background

Next week the new Australian Government will hand down its first budget. As foreshadowed in the recently released Commission of Audit report there will be major cuts to public spending, which is highly likely to include the Aid program. At this time it is as important as ever to put the size of the Aid program in perspective.

Aid makes up only around 1% of the Australian Government’s expenditure. As the chart below shows this is quite small when compared to other expenses such as Defence. However one could be forgiven for thinking the Aid budget is larger than this, given that in the name of bringing the budget back into surplus various Australian Governments have cut the aid program a total of five times in the last two years. Over $10 billion dollars has been cut and almost another billion dollars redirected to pay for refugee costs.

Budget pie chart

The most recent cuts indicate that the new Australian Government has disproportionally targeted the aid program. Last year the Government announced they would cut $6 billion from the budget bottom line over the next 4 years, of which three-quarters would be taken from the aid program. All these cuts have been coming from such a tiny proportion of the Government’s overall budget.

Further cuts to the relatively small Aid budget is not in line with the wishes of the average Australian. According to a poll conducted by Australia’s leading foreign affairs think tank, the Lowy Institute, the average Australian would like 12% of the Australian Government’s budget spent of aid. This is over 10 times as much as currently given in aid.

Sources

Australian Government’s Mid Year Economic and Fiscal Outlook 2013 <http://budget.gov.au/2013-14/content/myefo/html/&gt;

Commission of Audit 2014 <http://www.ncoa.gov.au/&gt;

Liberal Party Media Release 2013 <http://www.liberal.org.au/latest-news/2013/09/05/final-update-federal-coalition-election-policy-commitments&gt;

Lowy Institute 2011 <http://www.lowyinstitute.org/publications/2011-lowy-institute-poll&gt;

Senate Enquiry into Australia’s Aid Program 2014 <http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Foreign_Affairs_Defence_and_Trade/Overseas_aid&gt;

Grading Bill Gates

Global Development

Could you imagine Grading Bill Gates? Well Columbia University Professor Chris Blattman did just that. What did he grade? A must read for those interested in aid and development. Find out more below.

A Must Read for those interested in Aid and Development

Each year Bill and Melinda Gates release a letter to the public and in 2014 they decided to Bust Three Myths about Aid and Development. These are that:

1) Poor countries are doomed to stay poor

2) Foreign aid is a big waste

3) Saving lives leads to overpopulation

The letter contains a large amount of evidence. If you have not read it already make sure you do, it is available here.

Also check out the following videos that summarise the evidence provided in the letter.

MYTH ONE: Poor Countries are doomed to Stay Poor

MYTH TWO: Foreign Aid is a Big Waste

MYTH THREE: Saving Lives leads to Overpopulation

Bill Gates Graded

Overall Bill and Melinda Gates received an A- from Columbia University Professor, Chris Blattman. The full report can be found here.

The main reason they do not score higher is because they claim aid leads to economic growth. Professor Blattman notes ‘The evidence that aid projects are associated with growth is amazingly absent’. This is problematic for the new Australian Government who have shifted the objective of the aid program away from poverty reduction and towards economic growth. Even though there is not any evidence that aid can actually cause economic growth.

There is however a great deal of evidence that aid can dramatically improve the lives of those in poverty. Professor Blattman comments ‘aid projects work and we know it’ and ‘Plenty of aid projects have huge impact’. 

Global Aid flows are going up, while Australian Aid is going down

Australian Aid Policy, Global Development

Key Points

  • Global aid flows reached the highest level ever in 2013, according to the latest OECD data released on Tuesday. In 2013, around US$135 billion was provided in aid, which is six percent increase from 2012.
  • The majority of developed countries increased their aid budgets, however Australia’s aid spending declined by almost five percent.
  • In 2013, Australia had the highest median income, the 4th highest income per person, the 8th largest economy but only the 10th largest aid budget in the OECD.

Background

Since 2012, the Australian Government has cut the aid budget five times. This is out of step with Australia’s international commitments and most other donors who are scaling up their aid programs. The latest data, released by the OECD on Tuesday, shows that while global aid flows are increasing, Australian aid is declining. In 2013, global aid flows reached the highest level ever. As the chart below shows, aid has increased above pre-Global Financial Crisis levels.

Total Aid

Australia is clearly against the trend by reducing its aid budget. The chart below shows that while most donors increased their aid budgets in 2013, Australia reduced its aid budget by almost 5%. Of the donors that did reduce their aid budget, most were still recovering from the European economic crisis, such as Portugal and Greece.

Change in Aid Budget 

It is clearly disappointing to see Australia fall in the international aid rankings. On any measure of economic prosperity Australia is one of the richest countries in the world. In 2013, Australia had the highest median income, the 4th highest income per person and the 8th largest economy in the OECD, but only the 10th largest aid budget. This is set to decline even further in coming years due to recent aid budget cuts announced by the Australian Government.

Sources:

Credit Suisse 2014 <https://www.credit-suisse.com/ch/en/news-and-expertise/research/credit-suisse-research-institute/publications.html>

IMF 2014 <http://www.imf.org/external/pubs/ft/weo/2013/01/>

OECD 2014 <http://www.oecd.org/newsroom/aid-to-developing-countries-rebounds-in-2013-to-reach-an-all-time-high.htm>

Who even benefits from Economic Growth?

Global Development

Key Points

  1. The Australian Government has recently changed the focus of the aid program away from poverty alleviation towards economic growth.
  2. However, historically economic growth has disproportionately benefited rich households in developing countries.
  3. Even when economic growth is more equal for rich and poor alike (i.e. equal across the income distribution), the income gap between rich and poor households still increases.
  4. The objective of Australia’s aid program should revert back to helping people overcome poverty.

Background

The Australian Government has changed the focus of the aid program away from poverty alleviation towards economic growth. However, the analysis below shows it is likely that this will largely benefit the wrong end of the income distribution in developing countries. This is because rich households gain the most from economic growth.

While economic growth is often argued to be the solution to poverty in developing countries, poor households have not benefited as much from economic growth as rich households over the last decade. This conclusion can be reached by analysing the World Bank survey data available at the online database Povcal.

Two country specific examples for the last decade of available data are provided below: one with rich households experiencing the greatest economic growth (Indonesia), and the other with more equal economic growth across the income distribution (Philippines).

Unequal economic growth in Indonesia over the last decade resulted in huge increases in income for the richest households. The first diagram below shows that the average income growth experienced by the poorest 20% of households was less than half the rate of growth of the richest 20% of households. The second diagram illustrates the even more unequal change in income that the economic growth brought about. Each year the total increase in income for the richest 20% of households was similar to the other 80% of households combined. In other words, half of the increase in income from economic growth went to the top 20% of the income distribution.

Indo1 Indo2

The Philippines experienced more equal economic growth across the income distribution over the last decade, however a similar pattern emerges. The first diagram below shows that the richest 10% of households experienced around half the rate of growth of the other 90% of households. However as the second diagram shows the richest 10% still experienced a greater increase in income than all the other households. In fact, the richest 10% of households had an increase in income of more than five times the increase in income of the poorest 10% of households. This is because a decade ago the richest households had an income around 30 times larger than the poorest households.

Phil1Phil2

Recent history has shown that a reduction in the income gap between the rich and poor has not occurred in a developing country during a period of prolonged economic growth. This evidence suggests that economic growth does provide some benefits to the poor, however the rich are the main beneficiaries. Even when economic growth is distributed more equally across the income distribution.

With promoting economic growth as the objective of the aid program, Australia’s aid will not focus on those who need it most. The Australian Government should revert back to the previous objective of the aid program – poverty alleviation. Otherwise rich households, as opposed to those in extreme poverty, will benefit the most from the aid program.

Sources

World Bank 2014A <http://iresearch.worldbank.org/povcalnet/index.htm>

World Bank 2014B <http://data.worldbank.org/data-catalog/world-development-indicators>