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Today, almost 80% of those living on less than 2 US dollars a day reside in middle-income countries. Despite impressive economic growth in recent years and substantial improvements in health and educational outcomes, growth has been a necessary but not sufficient condition for poverty reduction – growth needs to be more inclusive.
Inequality is also related to sustainability, the second pillar of the post-2015 agenda. As mentioned in Chapters 1 and 2, OECD research suggests that increasing inequalities erode social cohesion, stifle upward social mobility, threaten equality of opportunities and generate political instability (OECD 2011d). Given its prime importance for the future of poverty reduction and sustainability, tackling inequality in its many dimensions (income, political, gender etc.) is crucial for achieving global goals.
Aid can help foster Inclusive Growth, but important challenges need to be addressed. Aid helps to support government capacities, address infrastructure deficiencies, and improve education, health care and social protection systems for the poor. These areas are especially important in the poorest, most fragile and conflict-affected states. For such countries, official development assistance (ODA) accounted for over 60% of external financing over the 2005-2010 period (by contrast, for middle income countries, ODA represented a mere 4%, (Adugna et al., 2011)). Because of the wide variations in aid per inhabitant, the different goals at which aid is aimed, and the comparatively small amounts involved (USD 31.5 per capita per year according to Tarp (2006), it is not easy to quantify the impact of ODA on growth. However, Arndt et al. (2010) finds that ODA equivalent to 1% of GDP raised GDP growth by 0.1% on average over the 1970-2000 period, a small but helpful impact. Clemens et al. (2012) found that increases in aid are usually followed by increases in investment and growth, although the magnitude of this relationship is modest, and it varies greatly across recipients and diminishes at high levels of aid. Similarly, studies on the role of ODA in assisting Inclusive Growth by reducing poverty and promoting health and education have been positive, but with room for improvement (Collier and Dollar, 2002; Bourgignon and Sundberg, 2007;
Virtanen and Ehrenpreis, 2007; Alvi and Senbeta, 2012). Also, Huang and Quibria (2013) find that foreign aid has a positive impact on Inclusive Growth in their sample of countries, especially when aid is directed at the areas of health and education.
There are several areas where aid could make a significant difference in making growth more
inclusive. In particular:
Expand access of the poor to vital and proven technologies, such as high-yield seeds, immunisations, modern contraception or Internet connectivity (Sachs, 2005). Easterly (2006) notes that such interventions “give the poorest people the health, nutrition, education, and other inputs that raise the payoffs to their own efforts to better their lives”.
Identify barriers to growth and take steps to increase the inclusiveness of the growth process, for example by increasing processing of raw materials and not just their extraction (where this makes economic sense) and by providing infrastructure that helps the poor to access markets (OECD, 2007).
Improve the business environment, provide market information and infrastructure while cutting red tape. The significant risks to doing business in developing countries, especially the fragile and conflict-affected states, can be mitigated via loan guarantees and other debt and equity instruments.
In the short term, there remains a need for aid-supported social protection. Micro-insurance schemes have their uses, although they might not be the most appropriate social protection mechanism for the poor. There have been many positive experiences with Conditional Cash Transfer Programmes (CCTs) on school enrolment rates, reduced school drop-out and improved health and clinic attendance. CCTs are “as close as you can come to magic bullet in development by creating an incentive for families to invest in their own children’s futures”.57 Effective democratic governance is a pre-requisite for Inclusive Growth. Aid that improves government accountability and citizen-state relations can help reduce poverty and support rights, equity and justice, in particular for marginalised populations. Donors can help through technical assistance focusing on electoral processes, the strengthening of legislatures and judiciaries as checks on executive power, and the protection of civil society organizations, including a free press (Knack, 2004).
Aid should foster complementary and coherent policies for inclusive and sustainable growth. Aid can promote renewable energy, low-carbon transportation networks, clean water, waste disposal and sewage treatment, sustainable agriculture and drought-resistant crops; thereby improving economic opportunity, energy access, and public health and sanitation for the poor.
Furthermore, aid for capacity building in the areas of eco-system services schemes, environmental fiscal reform and fuel subsidy reform helps meet environmental goals. If savings and revenues are invested in health, education and poverty programmes, environmental and social objectives can be achieved simultaneously.
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