Experts have warned that the donor community will have to double current aid levels if the Millennium Development Goal (MDG) poverty target is to be met. This figure is based on meeting the target on a country-by-country basis. But other ways of allocating aid could be more effective.

Research from the Overseas Development Institute, UK, examines how much additional aid is required to meet the MDG poverty target and how that aid should be allocated across countries. The study covers most aid-receiving poor countries.

The MDG poverty target calls for reducing the share of people living in extreme poverty (daily income of less than US$1) by 2015 to half what it was in 1990. It was intended as a measure of progress towards poverty reduction at the global level, but has been widely interpreted on a country-by-country basis.

The researchers calculate how much additional poverty reduction could be achieved by 2015 at the global level, if additional aid were allocated on a poverty-efficient basis rather than being allocated so as to halve poverty in each individual poor country. A poverty-efficient approach would mean targeting aid on poor countries where it could have the greatest impact on poverty reduction.

In a poverty-efficient approach, poverty reduction can be seen simply in terms of reductions in the numbers of people living below US$1-a-day or US$2-a-day. However, it can also be seen in terms of reductions in the poverty gap or in the squared poverty gap. The poverty gap shows how far off households or individuals are from the poverty line, providing a measure of the depth of poverty. The squared poverty gap also takes into account inequality among poor people, and shows the severity of poverty.

Key findings of the research include:

• Evidence is mixed on whether a large increase in existing aid levels allocated on a country-by-country basis would be able to halve poverty in each individual poor country (because some poor countries would be unable to absorb the extra aid required).
• If aid were allocated on a poverty-efficient basis (rather than a country-by-country basis) up to 69 million more people could be lifted out of poverty.
• But this approach would result in slower poverty reduction in sub-Saharan Africa and in the poorest countries more generally.
• Allocating aid according on a poverty-efficient basis but using the poverty gap or squared poverty gap measure of poverty would overcome this problem and channel a larger share of aid to sub-Saharan Africa and the poorest individual countries.

The donor community is concerned with seeing the most poverty reduction achieved from its aid. This research suggests that donors should therefore consider allocating aid on a poverty-efficient basis detailed above.

The implications of the research include:

• The country-by-country poverty target approach should not be used when allocating aid across countries.
• The poverty-efficient approach, using either the poverty gap or the squared poverty gap measure of poverty, would achieve a similar reduction in poverty in the poorest countries as the country-by-country approach, but a much larger reduction at the global level.
• These approaches would also achieve a larger reduction in the depth (poverty gap) or severity (squared poverty gap) of poverty at the global level.
• Improving the quality and expanding the coverage of household surveys from which poverty estimates are derived is also important.

Source(s):
‘Aid and the Millennium Development Goal Poverty Target: How Much is Required and How Should it be Allocated?’, Oxford Development Studies 35.1, pages 1-31, by Edward Anderson and Hugh Waddington, 2007

Funded by: UK Department for International Development

id21 Research Highlight: 15 August 2007

Further Information:
Edward Anderson
Overseas Development Institute
111 Westminster Bridge Road
London SE1 7JD
UK

Tel: +44 (0)20 79220386
Fax: +44 (0)20 79220399
Contact the contributor: e.anderson@odi.org.uk

Overseas Development Institute, UK

Hugh Waddington
Development Planning Unit
Ministry of Finance and Economic Planning
Government of Rwanda

Contact the contributor: hugh.waddington@minecofin.gov.rw