Ending Extreme Poverty With Domestic Resources: An Interview With University of Sydney’s Chris Hoy

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In a recent working paper titled Gasoline, Guns, and Giveaways, published by the Center for Global Development, Andy Sumner and Chris Hoy asked a relative straightforward question: do developing countries have the scope to raise sufficient domestic resources to end extreme poverty among their people? They found, somewhat surprisingly, that almost three-quarters of global poverty could be tackled through the redistribution of national resources to those in need.

We sat down with Chris to find out more about the research and what it means for those working on government budgets.

IBP: Can you break down your research for us? What were your major findings?

Chris Hoy: We first looked at how much money would be required to bring everyone out of extreme poverty in developing countries and then estimated if there are enough resources available within each country to be able to achieve this. It is generally assumed that most developing countries have insufficient domestic resources to raise taxes and reallocate public spending to fully address extreme poverty. However we were able to show this is no longer the case. Most developing countries have the scope to dramatically speed up the end of poverty using domestic resources right now, without necessarily having to wait for economic growth.

IBP: Were there differences between countries at different income levels? Are middle-income countries better placed to tackle extreme poverty than low-income countries?

Chris Hoy: Absolutely. Most middle-income countries can end extreme poverty through greater redistribution, either via new taxes or redirecting public spending. We show that almost all countries with an income per capita over USD $2,000 (gross national income Atlas Method) could end extreme poverty by increasing taxes on the “rich” alone. If public spending was redirected away from harmful fossil-fuel subsidies and toward funding cash transfers for the poor around two-thirds of extreme poverty would be eliminated, largely in middle-income countries. Further, there is more scope in middle-income countries for redistribution to end not just extreme poverty (income of $1.90 or less per day), but also $2.50-per-day and even $5-per-day poverty.

In general, low-income countries (LICs) were not as well placed to be able to rely on redistribution to end extreme poverty. However, there were some exceptions. In a number of LICs, such as Ethiopia, Mozambique, Tanzania, and Uganda, redirecting fossil-fuel subsidies to cash transfer programs would cover a third to half of total extreme poverty.

IBP: What do the findings imply for aid? Should donors be looking to change how they invest external resources and assistance in tackling global poverty?

Chris Hoy: This research highlights the need for aid donors to explore innovative ways to encourage greater redistribution within middle-income countries. For example, the Australian aid program supported a cutting edge study on how people perceive inequality in Indonesia and what they want the government to do about it. The results showed that over 80 percent of Indonesians are quite concerned about inequality and would prefer it to be much lower. Furthermore, cash transfer programs were the most important policy people wanted the government to prioritize in order to address inequality. Importantly, evidence from around the world suggests that well designed cash transfer programs can have a significant impact on reducing poverty.

This kind of innovative approach to donor engagement not only provided the Indonesian government with evidence that people wanted something to be done about inequality but also gave them an indication as to what people believe are the best ways to address it. Broadening the evidence base for redistribution by integrating technically sound policies with an indication of peoples’ perceptions and beliefs is a promising way to bring about reform.

IBP: In the conclusion of your paper you state, “the causes of global poverty are now a question of political economy rather than resource scarcity…” What are the implications for organizations that work on issues around budgets and public finance?

Chris Hoy: The degree of taxation and redistribution in a country is probably the most important determinant of how much inequality exists. Organizations in this space should continue to focus on raising awareness about how public finance is being spent and how this can contribute to or reduce inequality. For example, through conducting this research I realized the importance of making citizens aware of the share of their budget that is being spent on public “bads,” like fossil-fuel subsidies, and letting them know the huge effect it would have on eliminating poverty if these funds were redirected to cash transfer programs.

A related point is the more organizations that work on issues about public finance are aware of what the communities’ priorities are, the better they are able to represent them and influence policymakers with compelling evidence. In the aforementioned study about perceptions of inequality and support for redistribution in Indonesia, some unexpected findings emerged about what types of policies people prioritize. For example, there was limited support for raising the minimum wage or higher taxes, but strong support for greater finance for small- and medium-sized enterprises.

IBP: Finally, what research are you looking to do next that might speak to some of these challenges?

Chris Hoy: I am exploring how people’s perceptions of inequality shape their support for redistribution, and how providing accurate information impacts upon their views. My research so far has shown people tend to dramatically underestimate the level of inequality and overestimate the scope individuals have to move up into higher levels of income. This leads people to make poorly informed decisions when voting in elections and reduces support for public policies that allow for greater redistribution and upward social mobility. A recent example of this can be seen in the U.S. presidential election whereby many Trump supporters were in favor of significant tax cuts, even though they are unlikely to gain from them and will probably be worse off financially as a result.

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