As the New Horizons satellite was beaming pictures of Pluto back to Earth last week, giving humans their first up-close look at a planet 3 billion miles away, world leaders were gathering in Addis Ababa to discuss raising money to fight poverty—using financing mechanisms that were put in place years before the first monkey was sent into orbit.
The anti-poverty tools created in the 20th century have done an amazing job of helping people improve their lives. But it’s time to update them for the changing development landscape. Global heads of state and finance ministers took an important step in that direction last week, announcing a number of initiatives and commitments to finance the new sustainable development roadmap that the United Nations will approve in Sep. 2015.
One important issue that didn’t draw much attention at the global finance meeting is how we treat countries that have built strong enough economies to lift themselves out of extreme poverty, but which still have a lot of people who are barely getting by.
The system of development finance currently used by many donor governments and international financial institutions allocates funding to countries based in significant part on their average income per person. As economic growth moves countries like India and Nigeria into the “middle-income tier,” they become ineligible for many of the grants and low-interest loans used to fund basic infrastructure and essential services.
The problem with this is that huge pockets of poverty still exist in many of the countries facing a cutoff of funds. In fact, more than 70% of the world’s poorest people live in countries defined as “middle income” by the World Bank.
Clearly, a nation’s access to the most favorable financing for development should taper off as the level of personal income grows. But if we make countries with high levels of inequality and poverty ineligible for aid too soon, it will become increasingly difficult for them to continue on a path of economic growth.
Based on current trends, our foundation estimates that countries such as India, Ghana, Nigeria, and Vietnam could lose between 18% and 40% of their funding from donor countries and multilateral aid programs. Cuts of this magnitude would have a severe impact on basic health and social programs that rely on donor funding to operate.
If we are intent on helping the world’s poorest lift themselves out of poverty, we need to ensure that development assistance reaches people in need, regardless of where they live. The classification of countries based mainly on average income should be updated to incorporate other measures centered on improving the human condition such as better access to health services and education. And we need to think about the right incentives and approach for a thoughtful and smooth transition for each country to reach self-sufficiency.
To their credit, multilateral development banks such as the World Bank and African Development Bank are increasingly aware of the need to tailor concessional finance to the circumstances of each country, but we need to do more. Advances in technology and in data-gathering have the potential to allow these global institutions to assess each country’s needs and allocate and deliver aid with greater specificity and individualization than ever before. These are the kinds of adjustments needed to equip the world to do a better job of assisting the poorest, no matter where they live.
This “transition” problem is not the only change in the kinds of financing mechanisms needed to fight global poverty. Development assistance from wealthy countries will continue to play an important role. But developing countries will need to rely even more on their own resources to pay for basic services and infrastructure. By prioritizing domestic spending, modernizing tax systems, and wisely stewarding natural resources, they can accelerate the kind of broad economic growth needed to build sustainable economies. And, as we’ve seen in recent years, the private sector and newer development partners such as Brazil, China, Turkey, and the United Arab Emirates, can play a valuable role with innovative approaches and experience in financing and development.
We’ve proven that we know how to create a better world. Between 1990 and 2015, child mortality—a key indicator of progress—has fallen by half. This advancement required effort and coordination among rich and poor countries, development institutions, and the private and non-profit sectors.
The Addis Ababa financing for development conference and the UN’s action two months from now on the SDGs are important steps in moving us closer to a world free of extreme poverty, hunger, and disease. By keeping our focus on what has worked well, and on continuing to improve the mechanisms of development finance, I’m optimistic that we can improve the lives of people in poor countries faster in the next 15 years than at any other time in history.