When money is not enough to help the poorest

The share of the world’s population living below the global extreme poverty line has dropped from 42% in 1981 to 11% in 2013. This dramatic change has encouraged the UN to set the goal of ending it by 2030. Can it happen? In a recent article published in the Journal of Economic Perspectives, Page and Pande (2018) ¹ review the literature of poverty reduction to address the question. Their main conclusion is that the two historical ways to reduce poverty, economic growth and redistribution of resources to the poor, are not enough and that their implementation must be revisited. Here is a summary, often in their own words, of the article.

In 1987, 90% of the world poorest lived in low-income countries. By contrast, in 2013, over 60% lived in middle-income countries. The extreme poverty is split between two country groupings: low-income, fragile states like Afghanistan, Liberia and the Democratic Republic of Congo, and a set of fast-growing but increasingly unequal high-poverty middle-income countries. The strategies to reduce poverty further must adapt to the group.

In low-income countries, growth will probably be the most important tool. However, many of the countries in this group show patterns of erratic economic performance. In the absence of sustained growth, direct provision of cash and services is a critical, immediate way to alleviate poverty, and foreign aid will likely play a role in this.

Ending poverty by 2030 in the second group of countries will require not just growth of the economy, but redistribution of new domestic resources, and the effort should come from the countries themselves. As these countries become richer they will be less likely considered aid-receivers. How can a rich nation in Europe justify donations to India when this country has resources to maintain its own space program? Still, in these countries, growth is unequal, leaving many people in poverty, and very often discriminating among social groups (Alvaredo et al., 2018 ²), with the consequence that the poor are increasingly drawn from socially disadvantaged groups (Mitra and Ray, 2014 ³).

The next question, about the nature of the aid and the way to reach the poor, need some change in perspective. Direct aid to the states proved wasteful in the past. Corrupt governments and officials meant that little of the aid reached those in need. Thus, in the past decades, donors tried to bypass the states. But escaping poverty requires more than cash, and a variety of studies have shown that extreme poverty can be reduced by providing poor households with health, education, financial services and regulations to ensure they are not exploited. These resources need the state to guarantee property rights, the monopoly of violence and the absence of gaps in service provision. Also, in middle-income countries, the size of the state dwarfs that of foreign aid. In low-income countries, the state will be needed, because they will increasingly bear responsibility for providing this “invisible infrastructure” as they grow. Even in the short run, bypassing the state inhibits the use of local information about what works best and about the preferences of the citizens. Therefore, the effective use of resources to alleviate extreme poverty requires building capable and accountable domestic states.

A role for the domestic private sector

Consider the case of financial services. In the 1960s and 1970s, governments of many developing countries created large-scale social banking programs to provide credit and bank accounts to poor citizens. They did help reducing poverty, but the repayment rates were very low, and governments discontinued many of the programs. In the 1980s some non-government organizations developed more viable financial products, like the microcredits. Despite their success in reaching 26.7 million by 2010 and in avoiding corruption and inefficiency, the initiative presented some problems. Critics warned that a for-profit drive was incentivizing frontline agents to overload the poor with loans (CGAP 2010, ⁴). In India, alleged coercive loans collection polices that caused a series of suicides, caused the government to impose a restrictive regulation on microfinance institutions that brought this industry to a sudden halt (Breza and Kinnan, 2018 ⁵).

In another example, poor regulation in Liberia caused some private initiative to provide education to selectively push undesired students and teachers to the public schools, thus subverting the goals of policymakers (Romero et al., 2017 ⁶).

These are just two examples on how private players can provide invisible infrastructure, but still need the state as an active regulator to ensure that those services reach the poor.

A role for foreign aid

Some successful aid-funded health campaigns like the one against smallpox are often designed as “vertical” programs, a type of campaign that targets a particular need and is funded and overseen by external donors. Vertical initiatives may get rapid results by working outside of weak public systems. However, vertical public health programs may not contribute to the strengthening of domestic “horizontal” primary healthcare systems (Oliveira-Cruz et al., 2003 ⁷). When it comes to more diffuse projects that require working across systems, success or failure can depend on whether aid complements, or substitutes for, the state.

Building invisible infrastructure that delivers for the poor

One key aspect for aid to work is that citizens in developing countries demand well-functioning invisible infrastructure. Democratic institutions are a critical step. International aid aimed at promoting these institutions has increased twentyfold since 1990 with some success (Finkel et al., 2007 ⁸, and Dietrich and Wright, 2015 ⁹).

Page and Pande (2018) [1] argue that the accountability is the aspect that needs to be stressed to deliver the aid to the poor. They propose to think the problem as a chain of principal-agent relations in which every level of governance is accountable to the level above, and the level on the top answers to the citizens. The goal is then to align incentives. To better explain their view, the authors show the case study of the Workfare Program Reforms in India (we talked about this program here).

The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) is a very large program that seeks to guarantee employment to the rural poor. First, it is crucial to ensure that information on reform reaches those with the will and ability to implement reforms. Banerjee et al. (2016) ¹⁰ found that a new digital accounting system that cuts out administrative tiers lowered corruption and reduced spending by 24%. However, mid-tier administrations found their links to the chain cut-out, and lobbied against the reform with some success at the state level. Eventually, the federal government intervened to overrode the state.

Second, workers did not directly benefit from the reduced corruption, as the amount earned by an individual remained unaffected, so they had no knowledge of the better opportunities of the reform, and could not lobby on its favor. A different reform that translated into higher wages could have encounter higher support.

Third, Gulzar and Pasquale (2017) ¹¹ compare MGNREGS performance in districts where bureaucrats are supervised by a single political principal with those supervised by multiple politicians and find that program performance is substantially better where bureaucrats answer to a single politician. They conclude that politicians face strong electoral incentives to motivate bureaucrats as long as they internalize the benefits from doing so.