Some thoughts on the health and wealth of nations, and what needs to be done to help those left behind.
- By Angus Deaton<p> Angus Deaton is the Dwight D. Eisenhower Professor of International Affairs and Professor of Economics and International Affairs at the Woodrow Wilson School and the Economics Department at Princeton. This article is an excerpt from his forthcoming book The Great Escape: Health, Wealth, and the Origins of Inequality. Copyright © 2013 by Princeton University Press. Reprinted by permission. </p>
The Great Escape is a movie about men escaping from a prisoner-of-war camp in World War II. The Great Escape that I describe in my book is the story of mankind’s escape from deprivation and early death, of how people have managed to make their lives better, and led the way for others to follow.
For thousands of years, those who were lucky enough to escape death in childhood faced years of grinding poverty. Building on the Enlightenment, the Industrial Revolution, and the germ theory of disease, living standards have increased by many times, life spans have more than doubled, and people live fuller and better lives than ever before. The process is still going on; in some of the world, it has hardly begun.
My father lived twice as long as either of my grandfathers; his real income as a civil engineer was many times the income of his father, who was a coal miner; and my education and income as a professor greatly exceed his education and his income. Mortality rates of children and of adults continue to fall throughout the world. But the escape is far from complete. A billion people suffer living standards, schooling, and life spans that are little better than those of their (or our) forebears.
The graph above shows GDP per capita and life expectancy for the years 1960 (in lighter shading) and 2010 (in darker shading) with the area of the circles proportional to population. As you’ll notice, almost all of the darker circles are above and to the right of the lighter circles; since 1960, nearly all countries have become richer and their residents longer lived. This is perhaps the most important fact about wellbeing in the world since World War II: that things are getting better, that both health and income parts of wellbeing have improved over time.
A world of economic growth and narrowing differences between countries is a world to which we have become accustomed, at least if we live in the rich world and if we were born after 1945. High living standards are normal and further growth is confidently expected. Income and health differences between countries have shrunk; travel has become faster, cheaper, and easier; and information is everywhere and instantly available.
Since the end of World War II, which left much of Europe in economic and social disarray, the richer countries of the world have grown rapidly — first repairing the damage and then surging ahead to new levels of prosperity. The rich countries have also grown closer together, and the differences between them are much smaller than the differences between the rich group and the much poorer rest of the world. Figure 2 shows what has happened to (price-level-adjusted) national incomes for 24 rich countries. While measurement is always less than perfect, the data are good and the currency conversions generally reliable for this group of rich countries.
The tops and bottoms of the shaded boxes show the positions of the top and bottom quarters of the countries, so that half the countries are in the shaded areas, with the line in the middle indicating the median. The “whiskers” give an idea of the dispersion of the data, and the dots indicate extreme cases.
The figure shows that other rich countries have shared the slowdown in growth that has taken place in the United States. The decade of the 1960s was the postwar golden age, with an average growth rate of more than 4 percent a year, a rate that is high enough to increase incomes by a half in 10 years. The average growth rate for this group of rich countries fell to 2.5 percent a year in the 1970s, to 2.2 percent in the 1980s and 1990s, and to less than 1 percent in the decade up to 2010. The extent of the broad decline is exaggerated by, at one end, the catch-up growth after the war — which we would not expect to continue once repairs had been made — and at the other, by the financial crisis. Fixing devastation and destruction, though hard enough, is easier than striving for levels of income that have not previously been achieved; people remember how things used to be done, and the technology needs to be recreated rather than created from scratch. Once the rebuilding is done, new growth relies on inventing new ways of doing things and putting them into practice, and this turning over of virgin soil is harder than replowing an old furrow. Of course, in an interconnected world, innovation can often spread from one country to another — especially to similar countries — so that the burden of invention is spread among many. This interconnectedness, by itself, will tend to speed up growth.
But the rest of the world doesn’t look anything like this. Figure 3 is the same as Figure 2 but includes all the countries of the world, both rich and poor.
Naturally enough, when we include the poor countries, the range of average incomes is much larger; the boxes are taller, and the whiskers and dots extend farther out. The data are not as reliable, and errors of measurement likely make the spread of incomes appear wider than it really is. More interesting, and less obvious, is that when we look across all countries the spread of average incomes — international country-by-country income inequality — is not falling over time. The boxes for 1950 should be ignored for the moment; there are many countries for which there are no data, and many of the omitted countries were very poor, so that the box is too high and too short. After 1950, the difference between the country a quarter of the way up from the bottom and the country a quarter of the way down from the top — the distance between the top and bottom of each box — has remained more or less the same, and if we look at the bottom whiskers we see that the dispersion has actually increased, especially among the poorest countries of the world.
That country average incomes are neither more nor less spread out as they used to be does not tell us what is happening to the spread of incomes over all of the people of the world. If big countries — or even one or two big countries, like India and China — grow very rapidly they will take a lot more people with them than do smaller, less successful countries — such as several countries in Africa. This “big country” growth will bring more Indians and Chinese into the global middle-classes, and help reduce income inequality over all of the citizens in the world. At the same time, expanding inequality within these and other countries — the United States, much of Europe, as well as India and China — works in the opposite direction. My guess is that, at least for now, global income inequality for people is falling, but the uncertainty of measurement — particularly in converting living standards across countries — makes it hard to know for sure.
Since World War II, rich countries have tried to help close the gaps between rich and poor using foreign aid. Foreign aid is the flow of resources from rich countries to poor countries that is aimed at improving the lives of poor people. In earlier times, resources flowed in the opposite direction, from poor countries to rich countries — the spoils of military conquest and colonial exploitation. In later periods, rich-country investors sent funds to poor countries to seek profits, not to seek better lives for the locals. Trade brought raw materials to the rich countries in exchange for manufactured goods, but few poor countries have succeeded in becoming rich by exporting raw materials. Many have been left with a legacy of foreign ownership and internal inequality. Against this history, foreign aid, which is explicitly designed to benefit the recipients, is something completely different.
One of the stunning facts about global poverty is how little it would take to fix, at least if we could magically transfer money into the bank accounts of the world’s poor. In 2008, there were about 800 million people in the world living on less than $1.00 a day. On average, each of these people is “short” about $0.28 a day; their average daily expenditure is $0.72 instead of the $1.00 it would take to lift them out of dollar-a-day poverty. We could make up the shortfall with less than a quarter of a billion dollars a day; $0.28 times 800 million is $0.22 billion. If the United States were to try to do this on its own, each American man, woman, and child would have to pay $0.75 each day, or $1.00 a day each if children were exempted. We could cut this to $0.50 a person per day if the adults of Britain, France, Germany, and Japan joined in. Even this is about three times more than we would need given that prices are so much lower in poor countries
It is hard to believe that global poverty can exist simply because of the failure to give such tiny sums. However, in spite of much popular belief to the contrary, such monetary calculations are almost entirely irrelevant to the problem of eliminating global poverty. The idea that global poverty could be eliminated if only rich people or rich countries were to give more money to poor people or to poor countries, however appealing, is wrong. Its undying popular appeal seems to be based on the commonsense notion that, if I am poor, and you give me money, I am less poor. But foreign aid doesn’t work that way; the belief that it does is what I call the “aid illusion,” itself a barrier to better policies. A closely related illusion is that fixing global poverty, or meeting development goals, is a technical or engineering problem, best handled by development “experts” one road, one school, one clinic, or one dam at a time; all that is lacking is money. These simplistic beliefs are based on a misdiagnosis of what it is that is keeping people poor. As the economist Peter Bauer noted many years ago, if the conditions for development are present except for money, money will soon be available but if the conditions for development are not present, aid will be unproductive and ineffective.
One reason why today’s aid does not eliminate global poverty is that it rarely tries to do so. While the World Bank flies under the flag of eliminating poverty, most aid flows come not through multilateral organizations like the Bank but as “bilateral” aid, from one country to another, and different countries use aid for different purposes. In recent years, some donor countries have emphasized aid for poverty relief, with Britain’s Department for International Development (DFID) as one of the leaders. But in most cases, aid is guided less by the needs of the recipients than by the donor country’s domestic and international interests. This is hardly surprising given that donor governments are democratic and are spending taxpayers’ money.
Although there is a strong domestic constituency for global poverty reduction in many countries — Britain being a good example — donors must balance a number of other considerations, including political alliances and maintaining good relationships with ex-colonies where donors often have important interests. Domestic donor interests include not only citizens with humanitarian concerns but also commercial interests that see both opportunities (sales of their goods) and threats (competition from developing countries) from foreign aid.
Aid is spread over many countries, with some donors providing funds to more than 150 different recipient countries. Donors seem to want to give aid to countries, rather than to people, and would prefer to give to as many countries as possible, paying little attention to where poor people live. As a result, small countries receive more aid than large countries, whether measured per person or as a proportion of their incomes. Yet most of the world’s poor live in large countries that get very small amounts of aid relative to their size. “Aid fragmentation” by donors is another reason why aid is not effectively targeted to the poor of the world. One might have thought that the upside of aid fragmentation is that the small countries, which get a lot of aid relative to their size, would do relatively well. Yet small countries have not grown more rapidly than large countries; if anything, the reverse is true, one more piece of evidence that large aid flows do not help countries grow more rapidly.
In direct contradiction to any supposed poverty mandate, much official direct assistance does not even go to low-income countries, let alone to those countries where the poor live. The distribution of aid reflects the different policies of different donor countries. Aid from France is heavily focused on French ex-colonies. U.S. aid has always reflected American foreign policy, supporting allies against communism during the Cold War, supporting Egypt and Israel after the Camp David accords, or focusing on funds for reconstruction in Iraq and Afghanistan. Some countries “tie” their aid, requiring that the funds be spent on donor goods (including food aid) or that donor goods be transported in donor-owned ships. By some estimates, 70 percent of aid from the United States never reaches the recipient countries, at least not in cash.
Many people — laypeople and development professionals alike — argue that we should not assess aid by looking for its effects on economic growth. For them, aid is about projects: the funding of a school or of a clinic or giving aid to an organization that provides insecticide-treated bed nets, that offers information about how to avoid HIV/AIDS, or that sets up microfinance groups. It is about the road that changed life in a village or the dam that created livelihoods for thousands.
They will admit to failures, but they count them as the cost of doing business — a business that overall is a great success. How can we reconcile this knowledge with the ambiguous or even negative assessments from the statistical evidence?
One possible explanation is the lack of serious project evaluation. If the World Bank had subjected all of its projects to rigorous evaluation, so the argument goes, we would by now know what works and what does not work, and global poverty would have vanished long ago. Those who favor randomized controlled trials — the randomistas — tend to be very skeptical of typical self-evaluations by NGOs, and they have worked with cooperative NGOs to help strengthen their evaluation procedures. They have also persuaded the World Bank to use randomized controlled trials in some of its work.
Finding out whether a given project was or was not successful is important in itself but is unlikely to reveal anything very useful about what works or does not work in general. Often, the experimental and control groups are very small (experiments can be expensive), which makes the results unreliable. More seriously, there is no reason to suppose that what works in one place will work somewhere else, that a project run as a prototype will work as well in routine practice, or that scaling up will not cause side-effects that undermine its immediate success. Even if an aid-financed project is the cause of people doing well — and even if we were to be absolutely sure of that fact — causes usually do not operate alone; they need various other factors that help them to work.
The key to understanding why aid does not work lies in the relationship between aid and politics. Political and legal institutions play a central role in creating the environment needed to nurture prosperity and economic growth. Foreign aid, especially when there is a lot of it, affects how institutions function and how they change. Politics has often choked off economic growth, and even in the world before aid, there were good and bad political systems. But large inflows of foreign aid change local politics for the worse and undercut the institutions needed to foster long-run growth. Governments that receive most of their revenues from abroad are relieved of the need to raise taxes at home, and so do not need to justify their activities to their own populations. Aid thus undermines democracy and civic participation, a direct loss over and above the losses that come from undermining economic development. These harms of aid need to be balanced against the good that aid does, whether that’s educating children who would not otherwise have gone to school or saving the lives of those who would otherwise have died. But we cannot look only at the direct benefits, and we need to understand that, in the long run, schools and clinics cannot be run from outside the country. Good government requires a contract between the state and the people, and aid undermines such contracts.
From its beginnings after World War II, development economics saw growth and poverty reduction as technical problems. Economists would provide the knowledge that would tell the newly independent rulers how to bring prosperity to their people. If development economists thought about politics at all, they saw politicians as the guardians of their people, motivated by the promotion of social welfare. Politics as an end in itself, as a means of civic participation, or as a way of managing conflict was not part of their operations manual. Nor would development experts much concern themselves with the fact that, in many cases, the governments through which they were working had interests of their own that made them improbable partners in a broad-based development effort.
It is the local people, not the donors, who have direct experience of the projects on which aid is spent and who are in a position to form a judgment. Such judgments will not always be well informed, and there will always be domestic debate on cause and effect and on the value of specific government activities; but the political process can mediate these normal divergences of views. For foreign donors or their constituents — who do not live in the recipient countries — there is no such feedback. They have no direct information on outcomes; they must rely on the reports of the agencies disbursing the aid, and so tend to focus on the volume of aid, not its effectiveness.
The aid endeavor is inspired by the question of what we should do, or by its imperative version that we must do something. Yet this may be precisely the wrong question, and asking it may be part of the problem, not the beginnings of a solution. Why is it we who must do something? Who put us in charge? We often have such a poor understanding of what they need or want, or of how their societies work, that our clumsy attempts to help on our terms do more harm than good.
What surely ought to happen is what happened in the now-rich world, where countries developed in their own way, in their own time, under their own political and economic structures. No one gave them aid or tried to bribe them to adopt policies for their own good. What we need to do now is to make sure that we are not standing in the way of the now-poor countries doing what we have already done.
In fact, foreign aid is one of the least important of the ways in which rich countries affect poor countries. Rich countries provide capital in the form of private investment, often more readily and with less bureaucratic fuss than do aid agencies. Private remittances from rich to poor countries, for example from immigrants to their families at home, are twice as large as official development assistance. Basic science — discoveries of new classes of drugs, of vaccines, or of the mechanisms underlying disease — has almost always come from rich countries but has also brought benefits to poor countries. So have inventions like cell phones or the Internet. At the same time, trade restrictions or patent enforcement can restrict poor countries’ access to wealthy markets or to important treatments. These non-aid links are often much more important — for good or ill — than is foreign aid. For those of us who acknowledge the moral commitment to reducing the outrageous inequalities in the world today, our task should be to persuade our own governments, not to give more aid-indeed it would be better if they gave less-but to reform their domestic and international policies in ways that do not hamper poor countries’ abilities to improve their health and levels of living.