The link between foreign aid and domestic social spending

In Angus Deaton’s January 24 New York Times op-ed, The U.S. Can No Longer Hide From Its Deep Poverty Problem, the Nobel Prize winning economist rightly pointed to the scourge of absolute poverty in many parts of the United States. He also cited new evidence that absolute poverty standards should be adjusted according to need, as well as to take into account price differences across countries. Many have already responded to technical issues as to whether being poor in the U.S. is fundamentally different from being poor in developing countries, and the difficulty with comparing income and consumption data.

The controversial part of Deaton’s article is his conjecture that “for years…the needs of poor Americans (or poor Europeans) have received little priority relative to the needs of poor Africans or Asians.” The implication, drawn from his own personal experience with giving, is that funds should be reallocated from international aid (known as official development assistance or ODA) toward meeting urgent domestic needs.

Fundamentally, Deaton’s conjecture merits empirical analysis. Do countries that spend more on their own domestic social priorities spend less on ODA? We find the opposite. The chart below maps ODA as a percent of GDP against social expenditure as a percent of GDP for OECD countries (including the U.S.) from 2000 to 2016. There is a clear positive slope to Figure 1. Countries that spend more domestically also spend more on foreign aid. The findings also hold when mapping aid against spending overall, net social expenditure, and average spending levels across time.

Figure 1: Countries that spend more domestically also spend more on foreign aid

ODA_vs_Social ExpenditureSources: Net ODA Disbursements; GDP, current US $; Gross Social Expenditure

While we may not be able to pinpoint why certain countries tend to be generous both at home and abroad, what we do know is that spending money on poverty programs, whether domestic or international, requires an empathy and understanding that public resources are well spent on such activities. The arguments underlying these programs therefore apply equally to all kinds of social spending.

Furthermore, one must consider the proportional trade-offs between domestic social spending and international aid. Our colleague and Senior Fellow Tony Pipa tweeted, “The U.S. has enough resources to address both domestic and global poverty.” According to OECD data, the average developed country spends 60 times as much on domestic social spending as on aid. So halving aid would still not yield enough money to increase domestic social spending by even 1 percent.

The real constraint on both domestic social spending and aid is political will, not finance. Policymakers, as well as civil society, need to look hard at the evidence of impact and then play a part in ensuring that the political system delivers money to programs that reduce poverty at home and abroad.

Both aid and domestic social spending should be seen as investments that yield considerable social returns, but both are more often than not characterized as charitable giveaways with no benefit to the rest of society. Breaking this mindset is one the challenges facing the internationally agreed-upon Sustainable Development Goals (SDGs), with their emphasis on “leave no one behind.”

The SDGs are universal, and now, thanks to Deaton and others studying poverty in rich countries, we have evidence that they are as relevant in developed as in developing countries.

Rather than talking about the relative priority of spending on poor Americans versus poor Africans, Deaton should join the effort to build a global movement where country governments and social leaders, acting individually and together, promote activities where there is evidence of sustainable development outcomes, both domestically and internationally.