Will ´Smart Aid` Ignore Half of the World´s Poor?

Inequality matters enormously for projected poverty outcomes, as has been demonstrated in a recent study by Edward and Sumner (2013)[1]. It would seem that inequality trends will not matter for ´Smart Aid`, though, if (and only if) OECD donors define aid as “smart aid” increasingly targeted towards the poorest countries (Lomøy, 2014)[2]: “If it’s to succeed, it must become ‘smart’ – increasingly targeted towards the poorest countries and those that face the greatest difficulties in raising alternative finance for development”. If the view expressed by the DCD director reflects DAC views, then the middle-income country classification in itself is a reason for reducing or even ending aid. This would exclude aid to the poorest who (currently) are overwhelmingly in countries ( such as India, China or Indonesia) classified as middle income countries (MICs). The UK Parliament has just released a similar recommendation: “We recommend that, in general, Middle Income Countries should graduate from aid, but in a controlled manner that takes account of needs and resources” (para 20)[3].

But as Edward and Sumner (2013) show this view will neglect the majority of the world´s poor, except under quite optimistic assumptions about both growth and inequality trends (Table 1). Under a scenario – quite realistic as we write (early 2014) – that countries achieve only half the IMF growth forecast (and that is still 3% in real terms) and that current inequality trends continue, 52% of the world´s extreme poor will still live in countries classified as MICs in 2030.

Distribution of $1.25 Poverty, % of World Poverty, 2030

Inequality trend	Current inequality trends		Static inequality		Lowest inequality
Growth	Pessimistic	Optimistic	Pessimistic	Optimistic	Pessimistic	Optimistic
Stable MICs	52.0	26.4	21.3	9.6	17.7	8.2
Fragile LICs	22.8	24.6	35.5	36.4	38.3	37.7
Fragile MICs	13.4	22.2	24.8	24.5	23.2	21.9

Source: Edward and Sumner (2013)

OECD donors could only ignore more than half of the world´s extreme poor, if they assumed that the MICs could mobilize enough own resources  to reduce the inequality within their respective countries.  The poor would come under new responsibility, from OECD donors to their own governments. Such an attitude would reflect excessive optimism around about poor countries´ capacity to mobilize their own resources rather than to depend on aid dollars, via redistribution from the “rich” to the “poor” within developing countries.

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[1] Peter Edward and Andy Sumner (2013), “The Future of Global Poverty in a Multi-Speed World: New Estimates of Scale and Location, 2010–2030”, CGD Working Paper #327, June.

[2] Jon Lomøy (2014), “Getting Smart with Aid”, OECD Insights, 27^th February.

[3] UK Parliament (2014), The Future of UK Development Cooperation: Phase 1:Development Finance, London: The Stationery Office Limited, 5^th February.