Econometrics and Foreign Aid

I’m reading an article by Edward Anderson and Hugh Waddington entitled “Aid and the Millennium Development Goal Poverty Target” published in the Oxford Development Studies, Vol 35, Number 1, March 2007 [or go to the online version and pay $30 to read the article ...].

Needless to say, it’s been a long while since I did the sort of math that requires derivatives, solving for curve maxima, and looking at statistical analysis to determine coefficients.  That’s what this article is about, though.  At this point, you’re probably reconsidering the $30 investment.  The authors go through a pretty rigorous development of an estimated amount of foreign aid required to meet the United Nations (UN) Millennium Development Goal (MDG) of halving the level of poverty in 1990 by 2015.  The poverty level is defined as the number of people living on an average $1/day.

Anderson and Waddington develop the assumptions and solutions, with all the caveats that come with using any data collected and published any where in the foreign aid world, to arrive at a number of about US$50 billion per year, or double the current amount.

Implicit in the calculations are that a country’s growth as measured by the gross domestic product (GDP) is the best way to measure the reduction in poverty.  What about alternative growth indicators that include other factors such as health, environmental degradation, and overall well-being?  We know that our current form of capitalism, with emphasis on not-so-free markets, is incapable of pushing us to environmentally sound, sustainable growth.  And what do we really mean by growth?

So my question is:  What does this analysis look like if we use the more holistic determinants of prosperity and well-being?  How much aid do we need to provide?  Does everyone need to earn $38,611 per capita (2007 US figure  from UNM, also here at BEA) income to feel unfulfilled, while at the same time depleting the earth of all its resources?

I think the answer is no, but coming to that conclusion needs some mathematical gymnastics and some rethinking about what sort of growth is important to us, to our offspring, and to our planet’s ability to sustain our definition of growth.  Sounds like a dissertation, if someone hasn’t already written it.