One is the Magic Number

For Britain’s politicians there seems to be a consensus, at least for now, that spending 0.7% of national income on government aid programmes would be the nation’s fair share of the global effort to eradicate poverty in the developing world. Indeed, aid charities and lobby groups have consistently pushed for all rich countries to hit the 0.7% target since it was endorsed by the United Nations back in 1970. Yet maybe the time has come to give up on this target. It is increasingly impractical and, more importantly, increasingly meaningless in a world where private donors as much as governments are in the vanguard of the fight against poverty.

First, the practical point. When you think about the depth of the fiscal black hole facing Britain’s new government, it seems odd, if laudable, that one of the few concrete commitments in the deal underpinning the historic new Conservative-Liberal Democrat coalition is a pledge to stick to the outgoing Labour government’s plan to increase spending on overseas aid to 0.7% of national income. Aid is, admittedly, a tiny part of public expenditure (a little more than a penny in every tax pound goes to fighting poverty overseas). Yet to crank up UK aid from the 0.52% of national income it represented in 2009 to 0.7% by 2013 means a cash increase of about £2.5 billion (from £7.4 billion to around £10 billion) – money which could be spent on things that voters really care about like hospitals and schools at home. Given the horrible fiscal realities and the fact that Britain is one of the few countries living up to its aid commitments, you have to wonder how long British voters will tolerate this munificence abroad.

There are also plenty of reasons to ask whether the 0.7% goal ever really meant anything at all. The whole process of setting this target was, as you’d expect, rather messy and the methodology for setting such a target has plenty of flaws – see the excellent paper by Michael Clemens and Todd Moss from the Center for Global Development for the full story. One of the most important facts that has been forgotten in this story is that the targeting began with a goal for total aid, public and private combined, of  1% of the national income of rich countries. The 0.7% target was simply chosen as a rough estimate of what government’s burden should be, assuming 0.3% would come from private donations. In a world where philanthrocapitalists are taking more of the strain in tackling global poverty and where governments are having to scale back their ambitions, maybe it is time to dust off and return to the 1% combined target for public and private giving.

But how do Britain and other rich countries perform against this broader measure of national generosity?

In its new Index of Global Philanthropy, published this week, the conservative American think tank the Hudson Institute shows that, far from being one of the stingiest countries, the United States is actually one of the most generous. According to their arithmetic, in 2008 the US government gave 0.19% of national income in aid (which is very low) whereas private philanthropy to developing countries added another 0.26%. At 0.45% in total, this still puts the US less than half way towards the goal of 1% but it is a big improvement to America’s position in the generosity standings, overtaking countries which rely largely on taxes to help the poor of the developing world, including France (0.42%) and Germany (0.41%), and towering over Japan, which is equally miserly with government monies and does little private giving, at 0.2%. The UK, which is privately as well as publicly generous, scores an impressive 0.67%.

The Index of Global Philanthropy also goes one step further and throws into its measures of international money flows remittances from migrants working in countries to their homelands, which takes total American generosity past the 1% target, all the way up to 1.12% of national income. Before Americans start hugging themselves and putting away their chequebooks, we think that adding in remittances is a step too far. While some of these monies undoubtedly should count as aid – such as paying for poor relatives to go to school – much of this cash is also used to, say, buy real estate in boomtowns like Mumbai, which clearly should not count as aid. Until we can figure out the proportion of remittances that are genuine aid, it is safer to leave them out of the calculations.

Data freaks could also object to the way that the Hudson Institute calculates private philanthropic donations: there is no agreed data standard and different countries measure charity differently. By contrast, government aid statistics are policed by the Organisation for Economic Co-operation and Development. A meaningful 1% target would need to have similar rigour applied.

While they are at it, the statisticians might also usefully take a look at how social investment should be counted in the aid figures. There is growing interest among the philanthrocapitalists in harnessing capital markets to fight poverty, much of which may involve trading off some financial return in exchange for benefits to the poor. If more assistance to the poor is delivered through mechanisms such as these, the subsidy element of these market-based tools should also count towards any real measure of national generosity.

This may just sound like statistical niceties, but getting accurate data on the total aid effort – public and private – has important policy implications. Take, for example, the idea put forward by model-cum-philanthropist Renu Mehta and Nobel prize winning economist James Mirrlees for government aid to be used to match fund and lever more philanthropy from the rich. When they floated the idea last year, it received some pretty withering criticism.

Now, better measurement of private aid flows would not tackle all the problems with this idea. But it would help answer the question whether public funds used in this way were effective in promoting more aid in total. Similarly, we have argued for government aid money to promote social investment targeted at fighting poverty – getting a measure of the contribution made by these flows would, again, help test this idea.

The current 0.7% target was the product of a different age when the fight against poverty was a matter almost exclusively for governments. With the rise of philanthrocapitalism, this is no longer the case. Out statistics should catch up and recognise that 1%, not 0.7%, is the magic number.