Development aid

Do Poorer Countries Have Less Capacity for Redistribution?

Development aid and policy discussions often assume that poorer countries have less internal capacity for redistribution in favor of their poorest citizens. The paper, “Do Poorer Countries have Less Capacity for Redistribution” tests that assumption using data for 90 developing countries.

The capacity for redistribution is measured by the marginal tax rate on those who are not poor by rich-country standards that is needed to cover the poverty gap or to provide a poverty-level of basic income, judged by developing-country standards.

For example, the graph shows the marginal tax rates by country needed to cover a universal basic income set at the aggregate poverty gap, plotted against consumption per capita at PPP.Tax rates

For most (but not all) countries with annual consumption per capita under $2,000 (at 2005 purchasing power parity) the required tax burdens are found to be prohibitive—often calling for marginal tax rates of 100 percent or more. By contrast, the required tax rates are quite low (1% on average) among all countries with consumption per capita over $4,000, as well as some poorer countries.

Most countries fall into one of two groups: those with little or no realistic prospect of addressing extreme poverty through redistribution from the “rich” and those that would appear to have ample scope for such redistribution. Economic growth tends to move countries from the first group to the second.

Thus the appropriate balance between growth and redistribution strategies can be seen to depend on the level of economic development.

Debates on development aid

Aid effectiveness is still much debated. Angus Deaton’s The Great Escape poses a serious challenge to advocates of international aid. Deaton argues that aid props up bad governments and so hinders progress against poverty despite donors’ good intentions. If so then the bulk of today’s aid industry should be shut down.

But is Deaton right? In my review of the book for the Review of Income and Wealth I chose to focus almost solely on the chapter on development aid, as this is the most provocative and challenging chapter. The review tries to assess the veracity and relevance of Deaton’s claims and their implications for aid policy. While Deaton makes some good points, I argue that an objective assessment of the evidence and a consideration of the dynamics of institutional development suggest a more positive role for aid in the developing world’s ongoing efforts to escape poverty. 

Here is the review: 

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