Horizon 2025: the future of aid (and a potentially epic nerdwar on poverty numbers)

July 13, 2012 4 By admin

I’ve been starting to feel like an unpaid publicist for the Overseas Development Institute recently. It’s not my fault – ODI keeps publishing horizon 2025 coverreally interesting stuff (and anyway, I’m not always nice about it). You’re likely to hear a lot about their latest paper, Horizon 2025: Creative Destruction in the Aid Industry, by Homi Kharas (Brookings Institution) and Andrew Rogerson (ODI), so I urge you to read it, rather than just winging it based on this blog (not that you would dream of it, of course).

The paper first takes the ‘MICs v LICs’ discussion on where poor people actually live, which Andy Sumner has been leading for the last couple of years, and projects it forward to 2025. Futures work usually offers several scenarios because the future is so difficult to predict, but Horizon 2025 opts for a single ‘base level 2025 scenario’, extrapolating recent trends as follows:

• High per capita income growth and falling population growth in large, dynamic, middle income countries (MICs) shrink the global poverty pool drastically.
• Income stagnation and high fertility rates in selected low-income and fragile countries re-establish them as the main locations of global poverty.
• Growth in emerging economies dominates global growth and they account for most new trade and foreign capital flows to poor countries, along with sizable increases in aid-like flows, competing for influence with traditional aid donors.
• Availability of public and private resources for development, coupled with the fall in global poverty, imply that dramatically more funding is potentially available for each poor person.

globalpov fragile v stableThis is all good stuff but is arguably skating on fairly thin ice as the ‘baseline’ is at the optimistic end of possible scenarios. It uses IMF growth projections and average expenditure per person from GDP data (known as the national accounts), rather than the now burgeoning amount of household poverty survey data, and assumes that inequality remains constant as countries grow (when it often rises). That means that the 2025 baseline effectively maximises per capita income and minimises poverty, compared to other estimates such as that by Karver, Kenny and Sumner for CGD (here) and Andy for IDS (here).

Andy’s now ubiquitous killer fact is that three quarters of the world’s poor – well, 79% or 2 billion poor people (by $2 poverty) – now live in MICs. You hear this quoted everywhere, with the implication that internal politics and distributive struggles (rather than aid) hold the key to future development. Kharas and Rogerson argue that the MIC thing is actually a blip (OK, a twenty year blip, but still). By 2025, growth in most MICs will have lifted almost all their poor citizens above the $2 a day poverty line (I said they were optimists). Instead, the vast majority of the world’s remaining poor will live in FRACAS – fragile and conflict affected states (see chart 1): the long-term dividing line will between between fragile v stable states, rather than LICs v MICs, which chimes nicely with my own work on effective states. They will also largely live in Africa, which should please Paul Collier, as it endorses his Africanist ‘Bottom Billion’ thesis.

Using a different source of data – household poverty surveys and multiple scenarios – Andy Sumner finds a quite different pattern. Across a range of scenarios, there is a 50/50 LIC/MIC split in poverty in 2020 and 2030. Given that some of today’s LICs will be MICs by then, it’s possible that just one-third of the world’s poor will be in the remaining LICs. Meanwhile, estimates for total global $2-a-day poverty by Andy’s method in his paper with Charles Kenny and Jonathan Karver at CGD (see here) run from as low as 600m to as high as 1.6bn (there’s also multiple scenario data for other poverty measures such as malnutrition there too).

All in all, I’d say that Horizon 2025 is not the last word: there’s plenty of room for doubt and arcane methodological debate over the numbers, with significant consequences for the way we think about the future of development. I see a nerd war approaching – wonderful!
But whatever the final outcome of that war, it seems to me that Horizon 2025 is really onto something. In terms of reducing poverty, the focus in most MICs will be domestic policy, not aid. Donors and INGOs may play a minor supporting role in those domestic struggles, but the core aid business is likely to retreat to fragile states, (where, incidentally, we will witness a titanic clash between the chaotic, unpredictable nature of fragile states and the increasing demands for measurable, attributable impact).

Where Andy and Kharas and Rogerson do agree is on the affordability of ending poverty. Andy provides a set of estimates that suggests Horizon 2025 chart 2the costs of ending poverty might well be affordable (as a percentage of GDP) for most MICs by 2020 and certainly by 2030, leaving just 16-28 LICs in 2030 needing foreign aid to end poverty.

Kharas and Rogerson calculate the costs of eradicating poverty in a similar rump of fragile states, assuming a certain amount comes from domestic sources and the rest from aid. Their argument is that by 2025, mobile phone-based banking will be ubiquitous so it really will be possible to deliver cash direct to the poor, however dysfunctional the state. As poverty falls and GDP grows, a tech-based $2-a-day safety net becomes increasingly affordable, accounting for just a fraction of 1% of global GDP (see chart 2).

Next, the authors think through a further set of issues on the future role of aid. They look at three intriguing and believable ‘disruptors’ to the traditional aid system:

1. New channels for aid via philanthropy or ‘disintermediated’ direct giving
2. The rise in South-South cooperation, and with it, the blurring of distinctions between aid and cooperation based on mutual interest
3. Climate change and the rise of climate finance (both for mitigation and adaptation) either in parallel to, or as a competitor to, poverty-focused aid

Going into any detail would be too much for an already overl-long blogpost (you really should read the paper), but they run a stress test against existing aid agencies to see who is best/worst prepared for this 2025 world. On the resulting ‘traffic light’ bar chart (below), red is the worst prepared. Bad news for Spain, but Canada (for once) is deemed to have got it right, and they’ll be dancing in the corridors of GAVI and the Global Fund.

I suspect this may not be the last post on this.

Horizon 2025 chart 3