With its origins dating back to the 1960s, the economic foundation upon which the aid target is based has effectively been proven false, warns Simon Gordon.
Britain’s commitment to spend 0.7 per cent of GNI on overseas aid is often critiqued from the perspective of spending priorities. Less discussed is whether it makes sense on its own terms. It doesn’t.
Although it was only enshrined in British law two years ago, the 0.7 per cent target dates back almost half a century. On meeting the target in 2013, the Coalition government fulfilled a commitment first made by the newly elected Labour government in 1974.
But a lot had changed in the intervening decades. By the time Britain met the target, the economic basis for it had effectively been proven false.
The origins of the aid target lie in 1960s development economics. The wisdom at the time held that the reason the economies of poor countries weren’t growing was because they lacked productive capital.
The research suggested that if a minimum capital threshold were met, growth would take off. So aid, it was argued, should make up the ‘financing gap’ between actual domestic savings in developing countries and the capital threshold.
That ‘financing gap’ happened to equate to around one per cent of developed countries’ collective GNI at the time. Since the combined public and private capital flows from rich countries had already reached 0.6 per cent of their GNI in the late 60s, an aid target of 0.7 per cent was adopted at the UN in 1970 as a reasonable political compromise.
But, over the last forty years, that capital threshold has been met many times over. According to one study by economists at the Centre for Global Development (CGD), by the turn of the millennium the actual capital flows to low-income countries were 80 times greater than the ‘financing gap’ model would suggest they needed to be.
Nonetheless, many poor countries have stayed poor. Moreover, those that did take off, lifting millions out of poverty – China, India, and Indonesia, for example – received the least aid per capita, while those that got the most stagnated, or even declined.
In part, development aid is hindered by the way it is spent. Direct funding of corrupt regimes unsurprisingly doesn’t get much further than official pockets. The administrative costs of aid agencies can be remarkably high. Equally, many donor countries fail to perform thorough due diligence – or use aid more for promoting their interests than reducing poverty.
Aid certainly isn’t synonymous with productive capital.
Yet waste and corruption only tell part of the story. The deeper issue – as the Nobel economist Angus Deaton argues in The Great Escape – may be what aid does to the relationship between the government and the governed.
In Western liberal democracies, there is mutual dependency between the people and the government. The people depend on the government to maintain law and order and public services. The government depends on the people for tax revenue.
But in countries where a large proportion of national revenue is aid, that symbiotic relationship doesn’t exist. Not only are corrupt governments able to sustain themselves without recourse to the people. But people in receipt of foreign aid can survive without relying on a functional government.
Yet functional government is necessary for sustainable growth. In their acclaimed book Why Nations Fail, Daron Acemoglu & James Robinson argue that inclusive, rather than extractive, institutions are the key to long-term prosperity.
If institutions – rather than capital – are the missing ingredient for economic growth, then an aid target for developed countries is not merely unfounded. It may do more harm than good.
That’s not to say that aid is bad per se. Multilateral agencies have been remarkably successful, for example, in eradicating diseases – from smallpox to malaria to polio. Targeted projects that aim to help small groups of people are often very effective.
But it does mean that the idea of a spending target, and the way aid is spent, needs to be rethought. Which is why the latest research paper published by the UKIP Parliamentary Resource Unit proposes a different model for aid.
It advocates safeguarding spending on disease eradication and disaster relief, while reducing the overall aid budget. At the same time, it highlights the importance of abolishing trade barriers to the developing world – which leaving the EU’s customs union allows Britain to do.
We’re not the only ones to be thinking afresh about aid. Ministers are too – although they seem to be moving in a very different direction.
In an attempt to win public backing for the 0.7 per cent target, the Foreign Office is reportedly diverting some of the aid budget into a ‘soft power’ fund to battle Vladimir Putin.
That approach manages to combine the worst of both worlds. Not only does it retain unjustified rises in aid spending. It also promotes less transparency in how it is spent.
Behind this apparent policy shift is a tacit acknowledgement that the aid target is arbitrary, and losing public support. The solution is to scrap it.