Dr Michael Carnahan is Chief Economist at AusAID.
History tells us that strong economic growth is a necessary, but not sufficient, condition to sustainably lift people out of poverty. Current and projected growth in Asia means the international community needs to evolve and reposition its development assistance. Done well, it can be a catalyst that supports this rising tide, genuinely raising all the boats. Those who now have the least opportunity can share in this prosperity in the Asian century.
Australia is a part of the most exciting and innovative region in the world; Asia has become the world's economic powerhouse. Our proximity to Asia, natural resource endowment and strong economy opens up a host of opportunities for Australia in the Asian Century.
As a country which has much to gain from Asia's rise, discussions in Australia are often solely focused on the impressive GDP growth figures of developing Asia, which averaged an annual rate of 8.7% over the last ten years. However, the startling success of Asia in aggregate growth terms shouldn't obscure the developmental realities. Asia is still home to two-thirds of the world's poor; over 850 million people subsist on less than $1.25 a day and over 1.7 billion live on less than $2 a day. Excluding China, there are now more people in Asia living on less than $2 a day than in 1990.* Of the 24 nations in East and South Asia, 19 of these are developing countries, and six are low income.
Less than 500km from the Australian mainland over half of the Indonesian population is living on less than $2 per day. Indonesia's annual economic growth of over 5% has supported a major reduction in the share of the population facing severe poverty. But as recent World Bank research shows, these people are at risk of slipping back into severe poverty. Read More
Millions of people in Indonesia are vulnerable to poverty as a result of shocks such as illness, job loss or rapid increases in prices. Women and girls face particular disadvantage with limited female labour force participation (52% compared to 84% for men), maternal mortality (at 228 per hundred thousand, it is among the highest in Southeast Asia) and limited representation in decision-making at all levels of government.
In addition to the immense challenges that poverty poses, policymakers in developing Asia are now faced with rising inequality. As noted in the Asian Development Bank's Development Outlook for 2012, since the 1990s the distribution of income within Asia's fastest growing and most populous economies has become increasingly unequal, despite many economies recording very impressive economic growth figures. This inequality is driven predominantly by the heavy concentration of productivity and earnings growth among a few industries and geographic areas.
The problem with rising inequality is that it increases the risk of instability and conflict, the surest way to return millions to poverty. Ensuring that the benefits of growth are distributed in an efficient and equitable manner will be a major challenge for policymakers in developing Asia.
So where does this leave the Australian aid program? The fundamental purpose of Australian aid is to help people overcome poverty. Even with strong economic growth, hundreds of millions of women, men and children in Asia remain in poverty. However, this strong growth and dynamism means that the way we work with partner government in the region is evolving. It needs to continue to evolve to reflect the changing dynamics in the region. This will ensure that we have the maximum impact on poverty reduction for each dollar that the Australian taxpayer contributes.
Strong economic growth means that the fiscal capacity of many of our partner governments has strengthened. This means Australian development assistance needs to shift more and more to supporting these governments to do their job better. That's why Australia is helping build expenditure and accountability systems that will allow the Indonesian Government to spend its own budget more effectively. AusAID's partnership with the Indonesian Government to assist in strengthening their revenue base means basic services can be properly funded into the future.
We also need to look for new ways to partner to make our aid more effective. Less than 20 years ago Australia had a comprehensive aid program in Malaysia. Now, Malaysia and Australia are working together as co-donors on a project supporting teacher education in Afghanistan. Each year Afghan master teacher-trainers travel to Malaysia for 14 weeks of intensive professional and teacher training developed by the three countries specifically to meet Afghanistan's needs. The project then supports and mentors the teacher-trainers when they return home to 'cascade' what they've learned and train other teacher-trainers, and then on to teachers themselves.
Hugh White recently wrote on this blog that that 'it is so hard to avoid wasting a lot of money when the amounts available are growing so fast'. Quality of expenditure is a central concern. The 2011 Independent Review of Aid Effectiveness looked at this issue in depth, and concluded that, provided certain reforms are implemented (which they are), the aid program could grow effectively. Indeed there has been no correlation between the size of Australia's aid program and the proportion of fraud cases, which has remained well below 0.1% of expenditure since 2005.
Strong economic growth appropriately humbles aid professionals. It reminds us that foreign aid by itself will not transform Asia. It can, however, catalyse the sort of changes that will need to take place if Asia is to realise its potential and grow in a fast, peaceful and sustainable manner.
In the Asian Century, Australia has an important role to play in helping regional governments expand access to and improve the quality of basic education, health services, food security and employment opportunities for vulnerable groups. As aid policymakers, we should be working to reverse rising inequality in Asia through effective development interventions and promoting economic growth that is sustainable and will make genuine inroads into poverty reduction.
* Calculations based on data from PorvcalNet, the World Bank's online poverty tool.
Photo by Flickr user AusAID.