Are Developing Countries too dependent on Aid?

Global Development

Key Points

  • Aid as a share of Gross National Income (GNI) in developing countries has remained below 1% for the last 20 years. In 2012, it reached the lowest level ever recorded.
  • Least Developed Countries receive more than ten times as much aid as a share of GNI as Middle Income Countries.
  • The Pacific receives the highest level of aid as a share of GNI for any region in the world.

Background

A great deal of attention is given to the level of aid as a share of GNI that developed countries provide, however less attention is given to aid as a share of GNI that developing countries receive. This measure is important to examine because it provides insight into how dependent developing countries are on aid. While there is a considerable variation between countries, the chart below shows that on average aid to developing countries has remained below 1% of GNI for the last 20 years.

Aid as a share of Developing World GNI

Least Developed Countries (LDCs) receive significantly more aid as a share of GNI than Middle Income Countries. However on average aid as a share of GNI is still below 5% in LDCs. As the chart below shows as countries’ incomes increase they tend to become considerably less dependent on aid.

Aid as a share of GNI (Income level)

There is tremendous variation in the level of aid as a share of GNI across regions. The chart below shows that the Pacific region receives almost 10% of GNI in aid. The low level of aid as a share of GNI for East Asia is partly due to high economic growth in the region in recent decades that has reduced dependence on aid.

Aid as share of GNI (Regional)

On average, there is little reason to believe that developing countries are too dependent on aid. However for some countries this concern may be more valid. For example, the Solomon Islands have received around 40% of GNI in aid for the last decade.

Source

OECD 2014 <http://www.oecd.org/dac/stats/idsonline.htm>

Advertisements

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’. 

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>