Deconstructing Domestic Spending & International Assistance to End Poverty

1.2 billion people in the world today live beneath the international poverty line on less than US$1.25 a day. Out of the 507 million people living in this extreme poverty in South Asia, 400 million are Indians.

Development Initiatives is think tank that believes that we can end this extreme poverty by 2030. To do that we have to:

·Target aid at the poorest,

·Mobilise all available resources and

·Get the maximum value out of every dollar.

Their report entitled Investments to End Poverty maps all resources coming in and going out of developing economies. If we can better understand what resources, domestic and international are available to us, then we can better decide when and how to deploy them in order for it to have the greatest impact.

Judith Randel, Executive Director Development Initiatives says, “If we are serious about ending poverty we have to move from a vision to a time-tabled reality.” On the domestic front, economic growth will play a critical role in reducing poverty but, according to Randel, the data shows that even current patterns of growth will not be enough.

Despite recent slowdowns, since 1991 the Indian economy has grown exponentially. The World Bank even moved India to a “lower middle income” country from a “low income” one in 2007.  But, no matter where the poverty line is placed, this continues to be a country of rampant poverty and vast inequities. And this dichotomy is in accordance with global trends in poverty.

A 2010 study by economist Andy Sumner at the Institute of Development Studies titled “The New Bottom Billion” found that where two decades ago, 93 percent of the world’s poorest lived in low-income countries, today nearly 75% of them (1 billion people), live in middle-income economies.

It would therefore be imprudent to depend on economic growth alone and we need to have a deeper understanding of all the resources at our disposal if we are to make the most effective use of them.

Domestic government spending per poor person is the most important indicator as to whether enough is being done to lift people out of extreme poverty. Most poor people live in countries with very low government spending per capita that is nowhere near enough to end poverty.

Government spending in India per capita, at purchasing power parity was US$864.1 in 2011. On the other hand, China spent nearly US$2000 and Brazil spent over US$2500 during that same year.

 

India still spends only 0.9 percent of gross domestic product on health care, among the lowest in the world, and only 3 percent on education.

Not only does this imply that not enough domestic resources are being spent on lifting people out of poverty in India, it also dictates the kind of international aid India has access to. It is only where government expenditure is higher, that international aid flows are also larger and more diverse.

The report deconstructs the kinds of financial aid being provided so that a country can see what funds are available to it, for what purposes and who controls how they will be used. This is crucial for 2 reasons: First, each donor offers a different package. For e.g., 2/3rds of Italy’s aid stays in Italy while most of Denmark’s aid, goes to the recipient country. Secondly, the bundle that each country receives is also different. Togo and Afghanistan for example appear equally aid dependent but while most of what Togo receives is in the form of debt relief that stays in the donor country, the bulk of Afghanistan’s aid actually reaches Afghanistan as cash, projects and technical help.

Governments that spend more see a greater diversity of funds flow into the country—not just aid, but also lending, remittances and foreign direct investment, because better-run countries are able to spend more and have the capacity to attract other sources of funds.

More mature economies like Brazil and China, where resource use is more effective and efficient, rely on direct investment and lending. Africa, where government spending per person is less than $500, per year depends most on aid which accounts for nearly 70% of the financial resources from abroad.

According to the report, remittances remain the largest resource flow into India; followed at some distance by long terms loan and then FDI.

59% of Overseas Donor Aid (ODA) to India goes to just 3 sectors – infrastructure, health and education. Three –quarters of all aid is in the form of loans and equity investments which is much higher percentage than that of the average recipient. Health is the only sector where other types of aid, cash in grants, in particular prevail. Funding to these sectors is also highly concentrated. International Donor Aid, Japan, the UK and Germany account for most of it.

Though ODA volumes to India have increased over 2000-2011 from US$3.6 billion to US$5.4 billion making India the 3^rd largest recipient of aid in 2011, ODA per poor person has actually decreased.

A slew of recent pro poor legislation have been passed by the Government of India but unless they translate into increased per poor person spending in the country we will be unable to see a sharp decline in poverty. A simultaneous challenge is how to attract greater diversity and flexibility in the kind of aid packages being offered to us.

By Gayatri Verma