The newest Nobel Laureate Angus Deaton on foreign aid, measuring poverty and the need for a data revolution

The most newly-minted Nobel laureate in economics - Professor Angus Deaton - wrote controversially against the utility of foreign aid just two years ago in the concluding chapter of his then just-released “The Great Escape: Health, Wealth, and the Origins of Inequality” (2013). Deaton controversially argued against ODA, blaming it for undermining local democratic governance, the development of stable institutions and for being deeply politicized. Deaton wrote then:

If poverty is not a result of lack of resources or opportunities, but of poor institutions, poor government, and toxic politics, giving money to poor countries — particularly giving money to the governments of poor countries — is likely to perpetuate and prolong poverty, not eliminate it. 

Now that Deaton has won the Nobel for his work on consumption and consumer pricing, poverty and welfare it's perhaps useful to recall this controversy, which also played itself out over the course of the last two years as the UN Member States debated the role of Official Development Assistance (ODA) in the now finalized Sustainable Development Goals and Financing for Development processes, which collectively will frame the UN 2030 Sustainable Development Agenda. Developing countries were keen to keep developed countries to their promises in the Monterrey Consensus on ODA, which has stagnated after hitting a high-water mark in 2013. 

A few things are highly relevant about Deaton's life work to the new sustainable development era.  As economist Dani Rodrik noted to the NY Times, “Suppose you wanted to understand the effect of a subsidy on rice on the well-being of farmers. He has produced an approach that you can actually use with household data to trace through the effect of something like this on the well-being of different farmers.”

Although Deaton's work focused on individual's consumption habits, the larger questions here are squarely relevant to the debates about aid and private capital in the 2030 agenda because they have to do with how individuals make choices. As companies look for new ways to produce for and market to potential consumers at the bottom of the pyramid, what is the right amount of public subsidy to make private market pricing for various kinds of so-called 'public goods' and services (at the global and national levels) affordable and therefore sustainable over the long-term?

The other aspect of Deaton' work that is extremely significant to the sustainable development agenda is his focus on the need for better data to track poverty, particularly in developing countries. As Deaton noted in a lecture in 2010 (years before the current 'data revolution' and before the process of the SDGs got underway in Rio+20 and afterward), there are good reasons for "skepticism about our ability to make precise comparisons of living standards between widely different countries such as poor countries in Africa and rich countries in the OECD." This leads to a further reflection by Deaton:

In spite of the attention that they receive, global poverty and inequality measures are arguably of limited interest. Within nations, the procedures for calculating poverty are routinely debated by the public, the press, legislators, academics, and expert committees, and this democratic discussion legitimizes the use of the counts in support of programs of transfers and redistribution. Between nations where there is no supranational authority, poverty counts have no direct redistributive role, and there is little democratic debate by citizens, with discussion largely left to international organizations such as the United Nations and the World Bank, and to non-governmental organizations that focus on international poverty. These organizations regularly use the global counts as arguments for foreign aid and for their own activities, and the data have often been effective in mobilizing giving for poverty alleviation. They may also influence the global strategy of the World Bank, emphasizing some regions or countries as the expense of others. It is less clear that the counts have any direct relevance for those included in them, given that national policymaking and the country operations of the World Bank depend on local, not global poverty measures.

And here we see Deaton's two major strains of significant contributions merge together as we will watch in coming months how the UN Inter-Agency Task Force on Statistics will try to come up with measures both of poverty and inequality within countries and globally and continue the march to "leave no one behind." As the private sector begins to engage with the SDGs, the next fifteen years will also see new experiments in how the private sector can ever more meaningfully engage with the problem of poverty, including through partnerships between large global companies and social entrepreneurs, among other partners. Both the statistics effort and the partnerships will depend on the role of public institutions to create enabling environments and will also rely on more precise measurement to continue to fine-tune approaches. 

Deaton's skepticism about these statistics and the contributions of aid give pause, but as others have recently noted, his criticism does not convincingly rule out all forms of aid in every circumstance; the best response, then, is probably to make aid better, not simply get rid of it. This will include using aid increasingly for 'blended finance' and also to enhance our ability to measure. Exciting things to come.

By Ariel Meyerstein
Vice President, Labor Affairs, Corporate Responsibility & Corporate Governance
United States Council for International Business (