For a goal which has proved so persistent, it is astonishing that the intellectual basis for the 0.7% of GDP target for foreign aid is so weak.
The target was endorsed by the UN General Assembly in 1970 in response to a recommendation from the Pearson Commission on International Development. It was originally based on the ‘investment gap theory’ which holds that developing countries can increase growth if rich countries fill the gap in investment. The idea is that because growth is proportional to investment and because poor countries are unable to save enough to invest, aid spending can be used instead to increase capital investment and boost output. The 0.7% figure comes from the 42 year old estimation of the size of this gap.
Even if we accept the validity of this theory, comprehensive research using the same models discussed in the Pearson Commission shows that the aid goal should in fact be a mere 0.01% of GDP, and even then only if it is directed to the poorest countries. Further analysis using a different model still only gives an optimal figure of 0.54%.
Even if we accept this, we are already spending more than this on taxpayer funded aid. Furthermore, as the graph below from a report by the Hudson Institute shows, total UK aid to developing countries (including philanthropic and remittance giving) is 1.34% of GDP.
However, the investment gap theory itself is utterly discredited as a guide for policy. The idea that large transfers of money will magically improve underlying growth is as wasteful as it is naïve. What really matters is the institutional environment of developing countries (see anything by Daron Acemoglu).
Reformers in aid-recipient countries often despair about how aid spending entrenches corruption through encouraging patronage, makes local politicians less accountable to the public and bloats already large bureaucracies. It is also estimated that government aid has been the source of financing for 40% of arms in Africa. Indeed, research shows that countries which have aid as a larger proportion of GDP are much less democratic - and that more aid is usually followed by less efficient governance. The investment gap theory upon which the 0.7% target is based takes absolutely no account of this.
Nevertheless, the Coalition is ramping up the aid budget by another £2.7 billion in the coming year in order to reach the 0.7% target and intends to maintain this elevated level for the rest of the Parliament. Of course, there are some things that as developed countries we could, and should, be doing to help. But recent reports of fat cats feeding on this splurge of aid spending are particularly galling. Myriad consultants enjoying sun-kissed beaches in the Bahamas rightly infuriate families in the UK facing higher taxes as a result.
The 0.7% target is based on a defunct theory using data from nearly half a century ago. It is creating significant waste and is completely arbitrary. The Coalition should scrap the target immediately and allow the recently appointed Justine Greening to thoroughly review the whole of the aid budget. Meanwhile, it should push for the things we know do improve outcomes in developing countries: improving political accountability and stability, reducing global protectionism, safeguarding property rights and enforcing contracts.