Target inequality

Aid is a poor answer to poverty
November 14, 2012
Most of the world's poor now live in middle-income countries like India (photo: Meanest Indian)

Should Britain give aid to India? For a hefty majority of people in this country, the answer is clear: it is absurd to keep handing our money to one of the world’s biggest economies. India is a fast-growing, middle-income nation rich enough to lavish money ($1.3bn by next year) on a space programme and to have its own aid agency with a budget worth $11.3bn over the next five years.

So India has become the prime battleground in the dispute over whether Britain should spend rising amounts on aid while enduring austerity at home. This booming nation remains the biggest recipient of bilateral development assistance. The row, which erupted yet again in October during a House of Lords debate, was fuelled by Pranab Mukherjee, now India’s president, who has dismissed foreign assistance as “peanuts.”

What India demonstrates so clearly is how the aid debate has been mugged by economic reality, wrong-footing both sides. Critics are wrong to argue there is no point giving money to wealthier nations; it is no longer the case that the world’s poor are found in the poorest nations. But supporters are wrong to focus on foreign intervention to end poverty; the issue is now domestic inequality.

The coalition, responding to the hammering it received following Mukherjee’s comments, has indicated that the current tranche of aid to India—£1.6bn over eight years, ending in 2015—will be the last. As the government reacts to voters’ concern and seeks to boost the effectiveness of aid, it is also scaling back handouts to other thriving middle-income countries such as Indonesia and Vietnam.

This might seem to make sense. Poor people live in poor places, right? But studies by Andy Sumner, an increasingly influential economist at King’s College, London, show the flaw in this approach. He reveals that, while two decades ago 93 per cent of the world’s poorest people lived in the poorest nations, three-quarters now live in middle-income countries.

Partly, this reflects astonishing growth in the developing world. Almost 30 countries have gained middle-income status this century, with Zambia and Ghana among the latest success stories. Yet for all the stellar growth enjoyed by a country such as India, according to Sumner’s findings it remains home to more than one-third of the world’s most impoverished citizens. Another study found more poor people living in eight of its 28 states than in the 26 poorest African countries combined.

As the number of poor countries dwindles, the ideas behind western aid policies look increasingly outdated. A more pertinent indicator than India’s space programme is that, while it was home to just one dollar-billionaire in the mid-1990s, it now has 46, many relying on government connections to amass their fortunes. Their combined net worth is equal to roughly 10 per cent of the country’s GDP—the same share of national wealth as the 424 billionaires in the US.

The richest of these is the energy tycoon Mukesh Ambani, whose 27-storey, billion-dollar home in Mumbai stands as a towering symbol of inequality in India. Contrast this brash modernist palace dominating that wondrous city’s skyline with the thousands of people living on the pavements below, unable to afford even a shanty home. One in five of the 13m Mumbaikars live below the poverty line.

It is a similar story in other middle-income countries. After the United States, China has the world’s highest number of ultra-rich people—those with assets of more than $50m—with 4700 living there. Yet for all China’s success in lifting millions out of poverty, it remains home to about one in seven of the world’s poor.

As Sumner pointed out in two important papers this year, if most of the world’s poor live in countries with the capacity and wealth to tackle extreme poverty, eradication becomes largely a domestic issue rather than an international one. It is a question of internal inequality rather than external aid, relying on political settlements rather than foreign salvation. This is especially true of countries such as India where the richest people are taking a bigger share of national wealth while the poor end up with even less. Foreign aid simply fuels corruption, funds repression and allows inequality to continue.

If this is the case, why do western governments continue to insist on providing it? Aid is driven, in part, by western salvation fantasies and by the desire of politicians to appear compassionate. But an out-of-control aid industry is beginning to cause more harm than good, preventing other countries from working out their own solutions. Foreign aid demeans the recipient nation when that nation has the financial capabilities to solve its own problems.

Inequality is moving up the political agenda across the world. In the west, there is justified concern over bonus-chasing bankers and plutocrats who plunder profits while cutting wages for workers. In the developing world, the issues are even more stark. But we need to recognise the pace of change on the planet. If we really want to help the world’s poor, we could liberalise immigration controls and tackle issues such as tax evasion and corruption with far tougher action against money-laundering and all those in our own countries who assist the corruption. We can do the most good by abandoning an antiquated way of talking about aid.