The UK government currently faces an unprecedented budget crisis. If it fails to curb government spending, the national debt will spiral upwards, imposing an unbearable burden on future taxpayers, stifling growth and perhaps leading to a mass migration of talent to more welcoming shores. In spite of this predicament, the government has committed itself to increasing spending on overseas development assistance (ODA).
As the table above shows, Britain’s coalition government recently committed itself to spending 0.7% of Gross National Income (GNI) on ODA by 2013. Its justification for this input target is that 0.7% is a UN General Assembly resolution from 1970 (which committed ‘each economically advanced country’ to meet the 0.7% commitment by the mid-1970s).
The notion that rich countries should spend 0.7% of their GNI on aid to developing countries is predicated on the investment gap theory. The 0.7% figure was a back of the envelope calculation based on a presumption of the scale of the ‘gap’. A recent analysis using the same methodology ‘yields an aid goal of just 0.01% of rich-country GDP for the poorest countries and negative aid flows to the developing world as a whole.’ In other words, the 0.7% solution has no empirical basis and should be scrapped.
Moreover, the investment gap theory has itself been discredited by the finding that what actually matters for economic development is the institutional environment. If a country is politically stable, has sound money and well defined, readily enforceable and transferable property rights, a government that is not overbearing and does not interfere in an arbitrary, capricious or corrupt manner and is subject to the rule of law, then entrepreneurs will both create capital and attract capital inflows that will drive innovation and development.
If the British government wants to ensure that aid does more good than harm, the first thing it should do is reverse its decision to increase aid spending. Enshrining into law the commitment to spend 0.7% of UK GNI would be counterproductive: it would harm both people in Britain and people in poor countries.