How foreign aid should be focused

Monterrey

A new study on abject poverty is challenging how the developed world delivers foreign aid.

 

It says that trying to reduce poverty simply by increasing trade is, with a very few exceptions, slow and inefficient — exactly what free traders say they abhor. Seen against the backdrop of this study, the recent speeches of world leaders applauding trade as the solution to global poverty become little more than self-serving justifications for increasing globalization without change.

 

The speeches include that of Prime Minister Jean Chretien at last month’s United Nations Conference in Monterrey, Mexico, where he announced a piddling increase in Canada’s foreign aid budget.

 

It also includes speeches by business leaders at the 2002 World Economic Forum in New York in February, and an endless succession of speeches by the heads of the World Trade Organization and the World Bank.

 

The study was prepared for the University of London (England) School of Oriental and African Studies (“Redistribution Matters: Growth for Poverty Reduction,” SOAS Dept. of Economics Working Papers, No. 99, Jan. 2002, by Hulya Dagdeviren [University of Hertfordshire], Rolph van der Hoeven [International Labour Organization], and John Weeks [SOAS]).

 

It says that for almost all impoverished nations, redistribution of income will reduce abject poverty roughly three times faster and more effectively than waiting for the trickle down of benefits from increased trade.

 

The exception is the very few countries where more than half the citizens are below the poverty line. In their cases, things are so bad that any increase in trade will immediately benefit everyone.

 

For the great majority of poor countries, however, the fact that them-as-has-gets seriously delays the delivery of trade benefits to the poor. They have to wait as the well-to-do cream off their excessive shares before they get to see significant improvements.

 

With redistribution, the poor see benefits immediately, and although the study doesn’t say so explicitly, speed is important if the world is going to meet its target of cutting in half by 2015 the 1.3 billion people now living in abject poverty.

 

The U.N. defines abject poverty as existing on less than $1 a day (U.S.), or about $1.58 (Can.).

 

The most direct way to redistribute income, the study says, is to change tax rates to impose higher taxes on the rich, lower taxes on those with modest incomes, and to use surplus funds to provide services to the poor.

 

The study acknowledges, however, that changing existing incomes by shifting tax rates would be politically difficult in many countries. One alternative, it suggests, is to distribute the benefits of increased trade (growth in per capita income) evenly across all income sectors. In other words, ensure that those in abject poverty share the increase on an equal basis with everyone else.

 

What I found most compelling in the study was the observation that redistribution of income does not necessarily mean that money needs to be transferred directly to the poor. Building schools, hiring teachers, providing textbooks and computers, improving health services — all these initiatives would be the equivalent of shifting money to the poor. And, by far, the greatest needs of the poor are for education and health services if they are going to improve their lot.

 

This observation solves what, for me, would have been a difficult dilemma. I think it would smack too much of meddling for the Canadian government to say to poor countries, we will only give you foreign aid if you redistribute income.

 

But it would be quite a different matter to focus foreign aid on education and health. It would also be easier for Ottawa to monitor, ensuring that what it wanted to deliver, got delivered.

 

And since the study says focusing aid this way will help pull people out of poverty three times faster than providing money for such things as roads and commercial endeavours, adopting this approach would make eminent sense — especially since reducing poverty helps not only the poor: it helps to resolve just about every other global problem we’ve got.

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