The Paradox of Redistribution in International Aid

My colleague Thilo Bodenstein and I wrote an article (fc. in World Development, free of access for 6 weeks here) on the paradox of redistribution in international aid. In the literature on rich welfare states there is a well-known, even if somewhat controversial, paradox of redistribution. The idea is that, paradoxically, the more you target social policy toward the poor in a society, the less you spend on social policy in total. Famous examples are the tough workfare policies in the ‘stingiest’ states of the U.S.A. Also in a cross-country comparison it is remarkable that the U.S. spends much less money on social policy purposes, but targets these means much more to the poor than a country like Sweden which is famous for its large but universal welfare state. It is less straightforward why this stylized fact holds (some have even questioned that it holds). One reason may be that even the middle class needs to benefit from social policies to vote for them.

We apply this logic to the realm of bilateral official development assistance. We want to know whether the recent renaissance of poverty-focus in development aid has also led to an overall drop in the amount of aid, consistent with a paradox of redistribution on the international level. For this reason we compute the amount of aid a OECD country gives to the poorest developing countries. It is not easy to do this across time and countries, so we use as an indicator of poverty the incidence of child mortality. We think this indicator to be preferable to the GDP per capita measure usually employed since the GDP measure does not take into consideration poverty and inequality directly.

The following graph shows the results for some donor countries. We see that the poverty focus is on the rise in all major donors. Countries like India get ‘de-listed’ and donors, for better or worse, follow Paul Collier’s advice to target the bottom-billion countries. Note that the actual numbers differ in some instances quite a bit from those for a GDP measure (for details see paper).

Next, we use this numbers to investigate whether there is indeed a tradeoff between the size and the poverty focus of aid. Using a battery of multiple regressions (with some statistical tweaking to account for problems like endogeneity) we do find evidence for such a tradeoff for the whole sample of donor countries. On average, rises in poverty focus are accompanied with considerable drops in the overall amount of aid (and vice versa). We think a similar logic is at work in the field of external aid than in the field of domestic social policy: the more focused aid becomes, the more certain types of actors loose interest in aid. In contrast, more universal, larger aid donations come from countries where a broader coalition with diverse interest in aid decides about spending. We illustrate this with two case studies from the UK and Germany. We also see that this tradeoff is not immutable, i.e. some countries at certain points in time have managed to overcome the tradeoff better than others.

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