The latest update from the OECD shows that donors are continuing to slash aid to least developed countries, falling by 16% in 2014 alone. If this trend continues, how will this impact the achievement of the Sustainable Development Goals (SDGs)? What will happen if world leaders fail to redirect this pattern at the Financing for Development Summit in July?
An ODI report released this week tackles these questions head on. The costs of achieving three central elements of the SDGs, ending extreme poverty, ensuring every child receives a basic education and providing universal health care are compared to the financial resources available in low income countries. The best available estimates of the costs involved in reaching these SDGs, from sources such as UNESCO, show that the annual amount required for low income countries is $148 billion. This is significantly higher than the finance available in these countries that is estimated to be $75 billion a year. This figure is a combination of half of these countries revenue capacity and existing aid flows. Revenue capacity is estimated by using World Bank and IMF estimates of the optimal level of revenue that could be collected given a country’s stage of development. Only 50% of revenue capacity and aid flows are used because countries face many costs outside the social sectors, such as infrastructure, and on average OECD governments only spend around half of their revenue on social protection, education and health.
Low income countries collectively face a financing gap of $73 billion to be able to meet these SDGs. However some countries are much closer to the amount required than others. The graph below shows the size of the finance gap on a country by country basis for low income countries, ordered in terms of GNI per capita. The richest low income countries, like Kenya, are over three-quarters of the way towards covering the costs. While the poorest countries, like Burundi, are not even able to cover a quarter of the costs of the SDGs.
The global financing summit planned in July provides an opportunity to tackle these huge financing gaps required for the achievement of the poverty, health and education SDGs. This analysis identifies that relying on more taxes in low income countries will not be enough to ensure a global minimum standard of living for all. In addition to current levels, more aid will be required to pay for the shortfall.
But is it affordable? There are at least three reasons to believe that it is entirely affordable for the world to provide the additional finance required for low income countries to reach the SDGs:
- Within existing commitments – The extra finance required to meet these goals are well within the bounds of existing international aid commitments. Furthermore if current levels of international support was better targeted towards low income countries than most of the additional finance needed could be found.
- Small relative to other expenditure – The additional finance required to close the gap in low income countries only amounts to 4% of what the UK government spent on the 2008 financial crisis bank bail-out or less than 1% of global healthcare spending.
- It has never been as affordable as it is now. Take ending extreme poverty for example, less than 15% of the world’s population live in extreme poverty today compared to around half three decades ago and if current trends continue it is expected to reduce to around 5% by 2030. As the number of people in extreme poverty has reduced so has the cost, as only a fraction of one percent of world GDP would be required to bring everyone above the extreme poverty line.
To find out more check out the report available at: http://www.odi.org/financing-future
- A number of world leaders, including the Australian Prime Minister, have claimed that millions of people have been lifted out of extreme poverty and are now living in the “middle class”.
- However, there is no universally accepted definition of “middle class” and the use of this term is often very misleading. The “middle class” in developed countries, such as Australia, have substantially higher living standards than the vast majority of people in developing countries.
- While there have been large reductions in extreme poverty over the last twenty years, 93% of people in the developing world still live below the United States’ national poverty line of less than US$13 a day.
Earlier this year, the Australian Prime Minister claimed that hundreds of millions of people have been lifted from extreme poverty to “middle class” and there are now almost two billion people in the global “middle class”. Statements such as this do not represent how the notion of “middle class” is typically understood in the developed world.
The lowest possible standard of middle class in a developed country is living above the United States’ national poverty line (defined as $13 a day (2005 US PPP)). According to the latest World Bank data, 93% of the developing world’s population live below this line. As the chart below shows the huge decline in people living in extreme poverty has not been matched by a decline in the share of people living below the United States’ national poverty line.
The incredible reduction in the population living below the extreme poverty line (shown in the chart above) should be celebrated. However this should not be misrepresented to suggest most of these people live in “middle class” by any developed country standard.
World Bank 2014 <http://iresearch.worldbank.org/povcalnet/index.htm>
Australian Government 2014 <https://www.pm.gov.au/media/2014-01-23/address-world-economic-forum-davos-switzerland-0>
- In 1820, almost everyone in the world lived in extreme poverty. Since this time, incomes in the developed world have increased more than 12 fold, eradicating extreme poverty in these countries. In the UK, income per person was equivalent to Africa today in 1820 and to Latin America today in 1950. While in China income per person was equivalent to Africa today twenty-five years ago and is now similar to Latin America.
- Income per person only tells part of the story of how living standards have changed over time. For example, due to improvements in medicine, child mortality in Africa is around one quarter of the rate of the UK in the early 1800s, even though they had similar income per person.
- The eradication of extreme poverty in less than two centuries in some countries provides hope that extreme poverty can be eliminated from all countries.
For most of human history, extreme poverty was the norm. This only began to change in the last couple of centuries as some countries (largely in Western Europe and North America) experienced prolonged periods of economic growth.
The chart below shows the steady increase in income per person over the last two hundred years in the UK. In 1820, income per person was equivalent to Africa today, while by 1950 incomes were similar to Latin America today.
Rapid economic growth in China led to the same increase in income per person, which took the UK 130 years, in just 25 years. This has led to hundreds of millions of people escaping from extreme poverty.
To get a more holistic understanding of how living standards have changed over time, it is important to go beyond the income per person measure. Advances in medicine have allowed for higher levels of development for a given income level than what today’s developed countries experienced in the 1800s. For example, in the UK in the early 1800s, every second child died before the age of five. While around one in seven children die before five in Africa today.
Next month, World Leaders will discuss the next Millennium Development Goals and whether to include a timeframe to end extreme poverty by 2030. This is a truly historic moment in human history as it was really only a couple of centuries ago that extreme poverty began to be permanently reduced.
World Economics 2014 <http://www.worldeconomics.com/Data/MadisonHistoricalGDP/Madison%20Historical%20GDP%20Data.efp>
Copenhagan Consesus Center 2011 <http://www.copenhagenconsensus.com/sites/default/files/health.pdf>
As the 2014 Commonwealth Games come to end have you ever wondered how fair the playing field is?
Most members of the Commonwealth are developing countries and many are small islands. Only a few countries, like the United Kingdom, Australia and Canada, are rich enough and have sufficiently large populations to have well nourished populations that have time to hone their skills in competitive sports. This significantly reduces the competition at the top of the medal tally. For example, to illustrate the inequality between Commonwealth countries compare the richest and poorest countries. The richest country, Australia, has over 125 times more income per person than the poorest country, Uganda.
Countries rankings would change dramatically if the medal tally were revised to adjust for differences in income per person and population size, as has been done for the table below. This removes disparities in wealth and population and allows for a fairer comparison of how countries have performed.
||Revised Medal Tally
||Change in Ranks
||Trinidad and Tobago
||Isle of Man
||Papua New Guinea
Small islands countries and some African countries perform substantially better when the medal tally is revised to take into account income per person and population size. Nauru, Samoa and Kiribati take the top three places because they are middle-income countries with tiny populations and still managed to get five medals between them (including a gold and three silver). While Australia, the United Kingdom and Canada fall to the bottom third of the rankings.
Commonwealth Games 2014 <http://results.glasgow2014.com/medals.html>
World Bank 2014 <http://data.worldbank.org/data-catalog/world-development-indicators>
- Almost 90% of Australia’s country program aid goes to middle-income countries.
- Middle-income countries have higher average living standards than low-income countries and are typically less reliant on aid. For example, aid accounts for less than 2% of Vietnam’s economy.
- Almost all low-income countries in the world are in Sub-Saharan Africa. This is the region where Australia provides the lowest level of aid in per person terms.
The World Bank defines a middle-income country as having over US$1045 income per person (2013 GNI Atlas Method). These countries are considered to be rich enough to be able to begin to access forms of finance other than grant aid, such as private sector loans.
Australia provides almost 90% of country program aid to middle-income countries. This is significantly higher than most other aid donors. The chart below shows that almost all of Australia’s top aid recipients are middle-income countries.
Aid is typically only a small share of the economy in middle-income countries. The chart below shows how most of Australia’s top aid recipient countries are not very reliant on aid. In the case of Indonesia and Philippines, aid is actually a negative share of GNI because more money is spent paying off aid loans than they receive in new disbursements of aid.
High economic growth rates in Asia in recent decades have meant that there are only a few low-income countries in the region. Sub-Saharan Africa is home to almost all low-income countries in the world and the region is the most reliant on aid. However Sub-Saharan Africa receives the lowest level of Australian aid in per person terms.
Should the region with the poorest countries in the world, which rely the most on aid and have the highest proportion of people in extreme poverty, receive the lowest levels of Australian Aid?
OECD 2014 <http://www.oecd.org/dac/stats/idsonline.htm>
World Bank 2014 <http://data.worldbank.org/data-catalog/world-development-indicators>
- The Australian Government has a new commitment to redirect aid spending from traditional aid programs, such as health and education, towards ‘Aid for Trade’. Aid for Trade initiatives are meant to lower transaction costs, making it cheaper and faster for developing countries to buy and sell products overseas. This also benefits Australia because it makes it cheaper and faster to buy from and sell products to aid recipient countries.
- Many of Australia’s aid recipient countries also rely on Australia as a major trading partner. For example, over one third of PNG’s exports and imports are with Australia.
- While it is expected that Australia will benefit under this new approach, it is unclear whether the benefits to aid recipient countries from Aid for Trade will be similar, better or worse than those from traditional aid programs.
According the Australian Government, Aid for Trade is about opening up new markets to help boost trade in developing countries. Examples of Aid for Trade initiatives currently funded by the Australian aid program include: paying for DFAT employees to negotiate a Free Trade Agreement with Pacific nations to remove trade barriers; and infrastructure projects such as roads or bridges to allow easier movement of products in and out of developing countries.
Aid for Trade is becoming the flagship of the Australian Aid program under the Government’s new aid paradigm. By 2020, one fifth of all aid will be spent on Aid for Trade. Australia will benefit significantly from an increased focus on Aid for Trade as this will lower transaction costs when trading with Australian aid recipient countries.
Australia is a major trading partner for Australia’s main aid recipient countries, especially in the Pacific. The chart below shows the share of Australian exports of the total exports to these countries. Australia is a top 20 trade partner for all of these countries and a top 5 trade partner for the Pacific countries.
To fund Aid for Trade, aid will be shifted away from traditional aid programs, including health and education. While it is likely Australia will benefit from more efficient trade, it is unclear what the impacts of this shift will be for aid recipient countries. Little analysis has been made available by the Australian Department of Foreign Affairs and Trade that discusses what the implications are, positive or negative, for developing countries when aid funding is shifted away from traditional programs to Aid for Trade initiatives.
Given that aid has been redirected away from traditional aid programs towards Aid for Trade, Australia is set to be a beneficiary of this and the benefits for developing countries have yet to be made clear, the question emerges, should Aid for Trade be the flagship of the Australian Aid program?
DFAT 2014 <http://www.dfat.gov.au/>
Have you ever wondered how large the gap in living standards is between countries? Or how this has changed over time?
An excellent resource to allow you to look at the evidence in a visually engaging and user friendly way is http://www.gapminder.org/
For example, to explore how the Wealth and Health of Nations has changed over time click on the picture below to open Gapminder’s interactive display.
Gapminder also has a series of brief and informative YouTube clips, such as the following video that shows how 200 countries have developed over the last 200 years in just 4 minutes.
- 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.
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.
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.
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.
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.
OECD 2014 <http://www.oecd.org/dac/stats/idsonline.htm>
The end of extreme poverty has never been so affordable.
- The additional income required for everyone to be lifted out of extreme poverty is the equivalent of only 0.05% of World Gross Domestic Product (GDP).
- This is the smallest increase in income (as a fraction of global income) required to end extreme poverty in human history.
The additional income needed for people in extreme poverty to reach the poverty line is defined as the ‘poverty gap’. The chart below shows that over the last 20 years, the global extreme poverty gap has shrunk from over 25 cents to below 10 cents as the average income of those in extreme poverty has increased.
The share of global income required to fill the extreme poverty gap has never been so small. As shown in the chart below, over the last 20 years the share of World GDP required to fill the extreme poverty gap has fallen from 0.35% to 0.05%.
The actual cost of raising people out of extreme poverty is likely to be significantly larger than the poverty gap. This is because there are costs associated with getting resources to those in extreme poverty, whether through direct cash transfers, income generation activities or other mechanisms.
This analysis provides even further reason to believe that extreme poverty can be eliminated within a generation. Furthermore, it discredits cynics who argue that the world can’t afford to eliminate extreme poverty.
World Bank 2014A <http://iresearch.worldbank.org/povcalnet/index.htm>
World Bank 2014B <http://data.worldbank.org/data-catalog/world-development-indicators>