More people have moved out of poverty than ever before. That’s the verdict of the latest United Nation’s progress report on the Millennium Development Goals (MDGs) – a series of poverty, education, health, and development targets, which the international community committed to in 2000 to set us on the course to eradicate poverty, hunger, gender inequity, illiteracy and disease.
Economic growth and development spurred by innovation plus apt use of investments, including foreign aid, helped us achieve the poverty MDG – to slash in half those living below a dollar a day – seven years ahead of schedule.
This was an incredible feat.
Yet, we still have more than one billion people in poverty. And, we have yet to achieve most of the other MDGs before 2015 – the deadline set to meet the goals. The impact of the global economic slow-down has compounded the challenge, since fewer resources are available to finance development. Bill Gates had several recommendations in his G20 report last year, ‘Innovation with Impact: Financing 21stCentury Development,’ to overcome this challenge.
Upper middle-income countries could mobilize enough domestic resources to independently meet the poverty, education, and health goals. In contrast, aid will remain a primary source of finance for many of the poorest countries.
The OECD’s Development Centre –a global think tank – recently published a study that complements Mr. Gates’ report by showing what needs to be done to achieve the MDGs: we need another $120 billion annually on top of existing development financing. This is a significant resource gap. If we are to fill it, we need to rethink the way we think about development, and development finance.
We need better targeting of resources. We must differentiate between dynamic emerging economies and stagnant poorest countries, many of which are conflict prone. The former can take charge of their own economic progress: it is their policy environment, entrepreneurs, and domestic resources that will help them meet the MDGs. The key driver for development here is better domestic policies that mobilize more funds through taxes and also innovative financial instruments, such as diaspora bonds. Foreign aid can play a catalytic role, but is not significant in terms of volume for emerging economies. This is an important change from the traditional model, where aid finances most of development.
For the poorest countries, the traditional aid financing development model holds. While domestic policies are important, in the near term there is a significant role for aid. As the study shows, these countries will largely rely on aid as long as they will not be able to generate enough taxes to finance their own development.
As illustrated by the figure below, emerging economies (also classified as upper middle-income countries) could mobilize enough domestic resources to independently meet the poverty, education, and health goals. In contrast, aid will remain a primary source of finance for many of the poorest countries (also classified as low income countries).
The authors estimate that Columbia could generate as much as $5 billion annually in additional tax revenues but Uruguay only as much as $700 million, the Central African Republic (CAF), as little as $100 million. Estimates about tax potential vary but there is little doubt that countries like Columbia could fund their MDGs while countries like the CAF cannot, for the time being.
Potential for enhanced tax collection in developing countries
Source: Stijns, J., et al. (2012)
Of course, financing alone will not help us achieve the MDGs. In all developing countries, whether they are emerging economies or poor fragile states, effective service delivery is fundamental to attaining the development goals – whether it be in terms of delivering HIV drugs, bed-nets or quality education. The role of appropriate policies, state, civil society and private sector capacity with appropriate accountability mechanisms is vital.
Ultimately, new partnerships will need to be forged in this new world where developing countries do not form a homogenous group, where emerging market economies are no longer recipients of aid but have large revenue streams of their own, and where new actors like private philanthropies are investing in much needed public goods – like basic health and agricultural research. The New Partnership for Development is a step in the right direction and needs to be encouraged.
To sum-up, if we want to achieve the MDGs, we need better policies as much as more resources. Citizens of the developed economies of North America, Europe, and Japan need to advocate for continued foreign aid funding, since we cannot lose the momentum of progress against poverty in the poorest countries.
We must also recognize that emerging economies can finance their own development through better policies and partnerships – civil society in these places needs to advocate for inclusive development and donors need to support their efforts. In all developing countries, we need to promote more effective service delivery.
All this needs to be done in partnership among various stakeholders, where old distinctions like donor and developing, private and public do not hold quite as clear. Fortunately our end-game is crystal clear: a world where poverty is history.