- In 2015-16, Australia’s Aid Program will be around A$4 billion, which is less than half the size of what it would have been if the bipartisan promise to reach 0.5% of GNI in 2015 was kept.
- The cuts to the aid program over the last three years have disproportionally affected the world’s poorest countries, with aid to Sub-Saharan Africa to fall to less than 10% of the level it was promised to be.
- Only the Pacific and countries that Australia has a refugee processing deal with have been spared the bulk of the cuts, as aid to the Pacific is still set to be almost 60% of the level originally promised.
Three years ago the Australian Government released a blueprint for the bilateral aid program in 2015-16 disaggregated by region. The plan was for a geographically diverse aid program that had a presence in the world’s poorest countries, while still clearly prioritising Australia’s immediate neighbourhood. However these spending promises have failed to be fulfilled. Instead, Australia’s aid program almost exclusively focuses on the Pacific and some nearby countries in East Asia. The chart below shows that Africa and the Middle East as well as Latin America and the Caribbean have disproportionally suffered from the aid cuts since 2012.
Potentially one of the most concerning aspects of the retreat of Australia’s Aid Program from its trajectory three years ago is the shift away from the world’s poorest countries. As discussed in this blog, Australia’s aid program was already dramatically disproportionally skewed away from the world’s poor. The latest round of aid cuts is set to exaggerate this imbalance even further.
DFAT 2015 <http://dfat.gov.au/aid/Pages/australias-aid-program.aspx>
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
- Recently, this year’s Commitment to Development Index was released, which ranks rich countries based upon a number of factors, such as Aid, Trade and Environmental policies.
- Northern European Countries, such as Denmark, Sweden and Norway continue to be on the top of the list. While South Korea, Japan and Switzerland are at the bottom.
- Interestingly, New Zealand substantially outperforms Australia, while the United States and Germany are on par with Greece and Spain respectively.
- The index shows that all rich countries could be doing much more to contribute to international development.
Each year the Centre for Global Development, an international development think tank, ranks rich countries based upon how their policies enable or inhibit development in poor countries. The seven factors included in the index relate to Aid, Trade, Finance, Migration, Environment, Security and Technology. The latest rankings released in early January are shown in the Figure below.
The index measures rich countries commitment to international development beyond comparing aid levels alone, which dramatically alters the rankings of some countries. Luxembourg falls from 1st place based upon aid as a share of GNI to 18th place based upon the more comprehensive index. While Portugal moves much higher up the list to 6th place compared to 12th place when comparing just aid.
Importantly, this index shows that rich countries could be doing much more to contribute to international development. Every country performed poorly in at least one of the seven factors included in the index.
Centre for Global Development 2015 <http://www.cgdev.org/publication/commitment-development-index-2014>
- 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>
- 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>
- 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>