Poverty, Geography and the Double Dilemma

Andy Sumner speculates on the future role of aid agencies.

Imagine a world without extreme poverty. The Economist did and in doing so joined others who have argued that extreme poverty - those who live on $1.25 a day or less - could be ended by 2030. Furthermore, as extreme poverty moves towards zero, the proportion of the world’s poorest in fragile states will rise from one-third today to two-thirds in 2030 and the remainder will be living largely in stable, middle-income countries. In short, almost none of the poor will be in ‘traditional’ poor countries, ie those which are low income and stable. Actually this is not a future possibility. It is already the case that only 6% of those on $1.25 a day live in such countries.

All of which leads us to what The Economist called the ‘double dilemma’ for donors: What if global poverty is increasingly focused either in countries which do not really need aid or in countries who cannot absorb aid easily and quickly? These are not trifling matters. The annual aid budget is currently $125 billion per year.

To answer that question, begin with a quick recap on the maths on ending poverty.

The developing world is booming. Eighty developing countries are on a convergence path with OECD average incomes and 130 developing countries get less than 2% of their gross national income from aid, a tiny amount. In fact, the aid dependent group consists of only about 30 countries and 10 islands.

Even among the world’s poorest countries a third are also ‘convergers’ with OECD incomes (but of course have a long way to go). By 2030 there could be as few as just 16 low income countries.

And so extreme poverty could be ended – well, kind of. Extreme poverty by the $1.25/day measure could be reduced to about 300m or so - not quite ended, but close.

But it may not work out that way. If one considers a range of scenarios for economic growth and changes in inequality, one can see huge differences in possible future poverty. For example, if countries achieve only half of their IMF growth forecasts and current inequality trends continue for each country, there could be 1.3 billion people in extreme poverty in 2030. In contrast, if countries’ economic growth meets IMF forecasts and inequality falls in each country, extreme poverty could fall to 300m. In sum, the difference between strong economic growth and current inequality trends versus weak economic growth and falling inequality is one billion people (see figure 1).

Figure 1. How many poor people? Scenarios for $1.25 poverty in 2030, millions of people

Source: Edward and Sumner (2013)

What about the geography of poverty? Surely, the poor will increasingly live in fragile states as the world moves towards 2030? Maybe. Maybe not. The good news is most of the world’s extreme poor live in the emerging economies. Half of the world’s poor are in India and China alone. By 2030, some of those emerging economies could be high-income countries (see figure below).

Brazil, China and Indonesia could all be high-income countries by 2025 if growth meets IMF forecasts. Indonesia may cross the threshold into the “upper middle-income country” classification in the next couple of years and could attain-high-income country status around 2025. India and Nigeria are some way behind but may be upper-middle-income countries by 2025. Further, if Nigeria’s GDP revision later in 2013 drastically increases its GDP per capita as expected, Nigeria could be pushed towards the same kind of path as Indonesia and on a trajectory to high-income country status. Given all this, surely the poor will increasingly live in fragile states? One would be forgiven for thinking so but that is certainly not a given.

Here’s the rub: A significant amount of world poverty could easily remain in stable middle-income countries (figure 3).

Figure 3. Where will the poor live? Estimates of distribution of $1.25 poverty in 2030, % of world poverty

Source: Edward and Sumner (2013).

Further, poverty in fragile states is increasingly, not in low-income fragile states but middle-income fragile ones, such as Pakistan and Nigeria. That suggests the cause of poverty in such countries is not solely a lack of resources; it also suggests fragility is not necessarily a barrier to raising average incomes. There are important definitional issues here: Nothing magically happens when a country crosses an arbitrary line into a new classification based on income per capita but many foreign-aid donors do treat countries differently when this happens and consider that middle-income country classification in itself is a reason for reducing or even ending aid.

So what does this all mean for that donor’s double dilemma, that if many countries either don’t really need aid or can’t absorb it effectively, then how can they spend $125bn effectively?

The role of foreign donors is already under discussion. This is partly because the additional resources produced by economic growth make aid from donors less important and partly because even poor countries can get access to private capital markets. ‘Traditional aid’ is becoming less important over time as domestic-resource allocation and foreign loans become ever more significant variables.

Donors could focus all their efforts on fragile states, of course, regardless of whether poverty is focused there. But that would imply that each fragile state would end up absorbing $3 billion a year, which is not very sensible. Helping very poor fragile states like the Democratic Republic of the Congo is a long run business. Elsewhere, donors might reasonably ask if the real problem for better-off ‘fragile states’ is different. It is likely to be more a question of poor governance and it is not clear what donors can do about that.

Indeed, in time, donors may face a world where, in all but 15-20 countries, the main demand will be for concessional lending and for different policies in trade and migration and so forth, rather than for relatively small amounts of traditional development assistance.

This may also be a world where supporting more inclusive economic growth – spatially and for all social groups - could be increasingly important. But donors will be walking a political tightrope because talk of inequality may be perceived as neo-colonial in some developing countries. This will push donors towards helping construct (via co-financing with middle-income countries) global and regional public goods such as infrastructure and public health.

All of this may well imply big changes for donor agencies. The kind of administrative unit fit for engaging with the developing countries of the future is unlikely to be a large aid ministry with its own portfolio of projects, programmes and spending. Rather, one might imagine smaller, cross-governmental administrative units with mandates to pursue ‘policy coherence’ on trade and other matters and with the technical capacity needed to build, say, tax systems in developing countries. Such new units would need to be staffed by people with ‘soft skills’, meaning with strong political sensitivity, rather than, as in the old days, people whose skill lay in evaluating and managing big projects.

Such units may be better suited to helping the shift from spending money on projects to cultivating collaborative relationships. Such a shift would require careful negotiation of objectives, co-financing arrangements, policy-coherence agreements between parties and working sub-nationally in the remaining pockets of poverty. ‘Soft skills’ and a premium on political sensitivity and negotiation would be the core skills rather than ‘old school’ project and programme planning and management. These are likely to only matter in an ever decreasing number of aid-dependent countries in the decades ahead.

This post first appeared on The Economist. Andy Sumner is Co-Director, King’s International Development Institute, King’s College London, and the author, with Peter Edward, of "The Future of Global Poverty in a Multi-speed World" and published by the Centre for Global Development.