A Nobel Laureate\'s dilemma: How best to combat poverty
Hasnat Abdul Hye | Tuesday, 28 June 2016
The brief article must have drawn the attention of many because of the name of the writer who is not a usual habitue of newspaper columns but has become a celebrity in the academia. It is a syndicated column that appeared in the Financial Express a few days back under the caption "Rethinking Robin Hood Money" and authored by Prof. Angus Deaton, the recipient of 2015 Nobel Prize in Economics for his work on poverty.
The catchy caption defines foreign aid giving reference to a folk hero of Britain, Robin Hood, observing that international development aid is based on the principle of taking from the rich and giving to the poor. According to the author's estimate, international aid agencies, non-governmental organisations (NGOs) and multilateral institutions currently transfer $135 billion a year from rich to poor countries with this principle in mind. He then uses a more formal term substitution of the Robin Hood Principle, and calls it 'Cosmopolitan Prioritisation', an ethical rule that says everyone in the world should be thought of in the same way, no matter where they live and channel help where it helps the most. He believes this ethical principle has guided the disbursement of aid for economic development, health and humanitarian needs. Under the Cosmopolitan Prioritisation criteria those who have less have priority over those who have more because their needs are more pressing and money spent on them has greater value. The Prioritarisation Principle is distinguished by two considerations: (a) more pressing needs of the poor in developing countries and (b) greater value of money spent. On the basis of these considerations the Prioritisation Principle appeared to Prof. Deaton as broadly right as he tried to analyse global poverty.
He startles the readers not a little when he says that secepticism has overwhelmed him regarding this principle and he finds himself increasingly unsure about its merit and rationale. He wants to rethink both the ethical (more pressing need) and economic considerations (facts) behind the Cosmopolitan Prioritisation Principle because facts and ethics now pose problems for him. Among the facts prodding him to revise his views on giving aid to the poor in developing countres is the 'huge stride' made in reducing global poverty more through growth and globalisation than through aid. The readers notice that this conclusion is not based on any comparison between the contributions made by aid on the one hand, and by growth and globalisation, on the other. Following the conclusion, which appears assertive in nature, Prof. Deaton gives the estimate that the number of poor people has fallen in the past 40 years from more than two billion to just under one billion. He considers this a remarkable fact given the increase in global population and the slowing down of economic growth, especially since 2008. The 'facts' of growth and globalisation contributing more to reducing of global poverty poses a problem for Prof. Deaton in continuing to believe that a strong case prevails for giving aid based on Cosmopolitan Principle at present. The slowing of economic growth (mentioned by him in the article) does not appear to him as a justification to continue with aid to sustain poverty reduction. More seriously, he does not take into account the many handicaps from which people (including the poor) in developing countries suffer preventing them from reaping the benefits of globalisation.
Joseph Stiglitz, another Nobel Laureate in Economics, has brought these handicaps in sharp relief in his critique of the 'mangement' of globalisation by the rich countries, particularly America. In the chapter on 'Globalisation : Early Forays' in his book 'The Roaring Nineties', Stiglitz writes: In the mid-Nineties, we put forward a vision of the world in which trade liberalisation would bring unprecedented prosperity to all, in both the developed and less developed countries. By the end of Nineties the treaties that we had hailed so proudly were seen as unbalanced, trade liberalisation became a new way in which the rich and powerful could exploit the weak and the poor. In the book he has further highlighted the negative impact of globalisation on poor countries saying, 'The United States pushed other countries to open up their markets to areas of our strength, such as financial services, but resisted, successfully so, efforts to reciprocate'. Thus areas of advantage of many developing countries were kept outside the purview of trade agreements depriving these countries of benefit of trade liberalisation (one aspect of globalisation). Financial services liberalisation proved harmful to developing countries as large international banks squelched local competitors and channelled funds they mobilised to international firms, not to medium and small-sized local firms. Agriculture was another example of the double standard inherent in trade liberalisation agenda pushed by rich countries, including America. Although it was insisted by them that other countries reduce their barriers and eliminate subsidies, they kept barriers from products of developing countries and continued with massive subsidies on agricultural products. The farmers of poor countries, far from becoming beneficiaries of globalisation became losers. Finally, intellectual property rights, including patents and copy rights, brought within the ambit of World Trade Organisation at the insistence of rich countries have made developing countries worse off.
From the above review of some of the measures under the rubric 'globalisation' it is apparent that the developing countries have not benefited much so far and as such globalisation could not have contributed significantly either to economic growth of developing countries or to the reduction of their poverty. In the face of this fact how does Prof. Deaton arrive at the conclusion that growth and globalisation have contributed more to poverty reduction than aid? Aid may not have been the single-most important factor in reducing poverty in developing countries nor can globalisation be given the exclusive credit for this. To be realistic, poverty reduction can be ascribed to home-grown growth, poverty reduction-oriented programmes and aid utilisation in developing countries. To the extent export-led growth has been given leeway globalisation can claim some credit, though the extent has been meagre and the pace incremental.
Having tried to make aid appear unnecessary for poverty reduction in developing countries (because globalisation purportedly played a greater role in this) Prof. Deaton proceeds to explain why giving aid to poor countries now seem 'ethically uncomfortable' to him. In the article under discussion he has written: 'while impressive and wholly welcome, poverty reduction has not come without a cost. The globalisation that has rescued so many in poor countries has harmed some people in rich countries as factories and jobs migrated to where labour is cheaper ............ globalisation is less splendid for those who not only do not reap its benefits, but suffer from its impacts ........... several million Americans - black, white and Hispanics - now live in households with per capita income of less than $2-a-day, essentially the same standard that the World Bank uses to define destitutional poverty in India and Africa........ $2-a-day poverty is almost certainly much worse in the US than $2-a-day poverty in India and Africa '. While $ 2-a-day has been estimated the daily income of the poor in India and Africa, it has not been explained whether $ 2-a-day is the income earned or dole received by the poor households in America for which the basis for comparison between American poor and poor in the developing countries is missing. Reference to this, therefore, appears irrelevant, even meaningless. However, Prof. Deaton uses this $2-a-day standard to arrive at the monumental conclusion: 'Perhaps it is not so clear that the greatest need is on the other side of the world'. In other words, the poor in the developing countries do not deserve as much assistance as the $ 2-a-day poor in America.
The main focus of Prof. Deaton's article is on foreign aid and secondarily on globalisation. He wants to upend the principle of Robin Hood Money or its formal version Cosmopolitan Prioritisation because of his latest conviction that millions of Americans have suffered joblessness and are mired in $2-a-day poverty resulting from the impact of globalisation. He believes these millions of Americans who have paid for globalisation with a high price are now in a greater need for help. Curtailing or stopping aid to the poor 'on the other side of the world' whose $2-a-day poverty is less painful than Americans in $2-a-day poverty, the money should be spent for the Americans to alleviate their poverty as they claim a greater priority. Thus he upends Cosmopolitan Prioritisation and replaces it with the implicit principle of domestic prioritisation. Thus on both counts, aid and globalisation, Prof. Deaton is more inclined to think of 'America first', very much like a populist politician in America. In the article he observes, 'The Cosmopolitan part of ethical guidelines (behind foreign aid) ignores any special obligations we (Americans) have toward our fellow citizens (Americans). Implicit in this argument is the suggestion that America should restrict liberalisation of trade and investment under globalisation to cut the 'cost' to Americans.
The observations of Prof. Deaton about the people of poor countries benefiting more from globalisation that enabled them to reduce poverty dramatically are vastly exaggerated. The analysis of Joseph Stiglitz has shown that the people of poor countries far from gaining significantly has suffered more loss from globalisation because of the biased management of the process by rich countries, including America.
If globalisation has not benefited the people in developing countries it could not have harmed millions of Americans in a zero-sum game. Rather, it has benefited enormously the multinationals, mostly owned by the Americans, the rich investors, the financial institutions including banks and exporters of rich countries.
If a section of the Americans has become poor it is because the rich in that country have not shared this windfall gain with their fellow citizens. Growing inequality in America and the western world has been at the root of incipient poverty in America and Prof. Deaton has himself bemoaned this fact. Poverty in America is largely home-grown and as such it should be addressed with domestic economic policy that aims at reducing inequality through higher taxation of the rich, greater expenditure on infrastructure and employment by the government and a humane welfare programme. Prof. Deaton's argument does not proceed along this line at all. His doubt about Cosmopolitan Prioritisation (foreign aid) makes him an isolationist and he becomes aware of the 'rights and responsibilities' of citizenship (his and other Americans) towards fellow citizens.
Realising that he is contradicting his earlier stance on reducing global poverty and making an about-turn, Prof. Deaton hastens to add, 'These responsibilities (to fellow citizens) do not invalidate or override our responsibilities to those who are suffering elsewhere in the world'. He does not, however, explain how these responsibilities to the poor in other countries can be met when the ethical principle of Cosmopolitan Prioritarianism is pushed to the background in favour of Domestic Prioritarianism. He is clearly on the horns of a dilemma.