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How much aid ‘leaks’ into corruption?

Double-talk-and-corruption (C Gado)
The double talk of aid and corruption (C Gado)

| DevPolicy Blog

CANBERRA - Is development aid an effective solution to lifting countries out of poverty?

Some argue that aid plays a central role in promoting economic development in the poorest countries, while others are still very sceptical.

A recent World Bank research paper has added to the debate (and garnered a lot of media attention) by drawing a strong link between World Bank aid flows to poor countries and deposits from those same countries in international financial havens like Switzerland, Singapore and the Cayman Islands.

The researchers cannot definitively say that the leakage is due to corruption.

But the various controls used in the study and the fact that there is no similar link found between aid disbursements and offshore deposits in non-haven jurisdictions provides a pretty strong suggestion that the flows are probably for the most part illicit.

Corruption is not a new argument against development assistance. The innovation of the World Bank paper, however, is to provide a precise estimate – suggesting a ‘leakage’ rate of about 7.5% for the average poor country, with that figure rising for more aid-dependent countries.

While certainly an interesting result, it’s important not to draw the wrong policy conclusions about aid and where and how it is delivered (especially for Australia which is currently updating its aid policy).

First, some amount of leakage to corruption is almost inevitable given the kind of countries we are talking about. What do the latest findings add to this?

At first glance, a figure of 7.5% leakage might actually seem pretty good – suggesting over 90% of aid is in fact getting through.

Unfortunately, the estimated leakage rate is very likely an underestimate since it does not capture any diverted funds that stay in the country rather than getting sent offshore.

Equally, though, it also remains far below the estimates of the most strident aid sceptics. On its own then, the 7.5% result hardly amounts to evidence of a grotesque amount of diversion.

A more relevant question is whether the developmental benefits that aid might still be achieving (for example in health, education, infrastructure) are worth the cost.

That’s an issue well beyond the scope of the particular study in focus. The literature on the link between aid and growth, however, provides one answer – with some evidence suggesting that aid given for developmental reasons (rather than commercial or geopolitical ones) tends to have a positive impact on long-run growth.

The paper’s finding that more aid dependent countries tend to see more leakage to corruption must also be interpreted with some care.

The key point again is to recognise that the countries that tend to be more aid dependent also tend to be the most underdeveloped, both in terms of effective governance and in terms of poverty and general living standards.

It has been recognised for some time that there is a deep tension between giving aid to countries where it is most effective (that is, those with better governance) and giving aid to those where it is most needed (typically where governance is weak).

There is no easy answer to resolving this tension. For the most part, it comes down to recognising that trying to promote development in countries where the needs are highest is inevitably more difficult and expensive, including because of corruption.

Cartoon aid corruptionOne might think that the most sensible response then would be to increase the focus on actively mitigating the risk of corruption through tighter oversight and fiduciary controls.

But imposing tighter controls carries its own problems – encouraging aid agencies to impose unnecessarily burdensome administrative procedures, focus on reducing risk rather than managing for results and rely more heavily on foreign contractors and project-based approaches that operate outside local systems.

While serving the purpose of minimising the chance of corruption, this risks merely coming at the expense of undermining the actual developmental benefits the aid is trying to achieve in the first place.

You cannot expect to work in a difficult place on difficult issues and make a difference if you spend all your time ring fencing yourself from what’s going on and making your partners jump through hoops.

For Australia, the most pertinent potential implication of the World Bank research is to raise questions over the heavy focus on aid to the Pacific island countries, which are some of the most aid-dependent countries in the world and therefore ostensibly at higher risk of aid leakage.

While most Australian aid is delivered outside of recipient government systems, that does not apply to budget support operations or co-financing delivered through the multilateral development banks.

There is also the potential for corrupt officials to indirectly benefit from aid projects, for example as direct contractors or subcontractors.

Yet, most Pacific island countries tend to score quite well in international league tables for controlling corruption – suggesting this shouldn’t necessarily be a huge concern. The exception is Papua New Guinea.

But PNG is also an important case in point that the countries that are in greatest need of external assistance also tend to have the weakest governance. Australia’s motivation in giving aid to PNG also goes well beyond development to include other foreign policy considerations such as maintaining Australia’s influence with a key neighbour.

Corruption does happen in developing countries and sometimes aid money ends up in the wrong hands. But this doesn’t mean we should stop trying to help the citizens of the developing world.

Otherwise, in the words of Robert Barrington, executive director of Transparency International UK, we are simply “punishing people twice over”.


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Paul Oates

It's often said that Foreign Aid equates to poor people in rich countries giving to rich people in poor countries.

If one simply looks at the problem of what is the intention behind the process of gifting funds from one country to another, the equation becomes more transparent.

Initially, the first weakness in the notion of foreign aid is the expectation that elected politicians are competent in achieving results. A simple search of a person's history would reveal their ability to achieve results. Most politicians are not practical people who have experience in working with their hands at the coal face to achieve proven results. Mostly, they are professional people who have either been successful in being born into wealth or have accumulated wealth due to acquired verbal skills.

Gone are the days when a leader could refer back to their practical experience to show they know what the real impacts will be from the decisions they make. This then leads to a constant round of claims that they are being successful by stating how much money is being spent on a project or scheme without having any idea what the real impacts will be or being held accountable for the results. One recent State politician constantly got away with stating he had a plan but when that didn't work, he said he had a new plan. It went on for years.

The various log jams along the foreign aid programs start with the ability to actually hold the political leaders who promote the aid programs accountable. The only people able to do that are those taxpayers from the donor country and they don't have any idea or the ability to sift through the expenditure and keep the decision makers responsible. Also, elections only take place every few years and who remembers what happened last week?

The next log jam is the government organisation in the recipient country. If the country is relatively poor, the political leaders have an excellent reason to continually request further aid. It's a constantly self fulfilling prophecy that can't be allowed to end since that might cause the aid stream to stop or reduce.

Then there's the recipient's government structure that has been developed to manage the distribution of aid programs. Clearly, if there is a need for aid, then the recipient nation doesn't have the ability to fund a large enough public service to distribute the aid and effectively then achieve results. If there are successful results, the aid moneys will dry up.

So there needs to be a secondary body, paid for by the donor nation, that is needed to manage the paperwork and distribution of aid money. Those organsations of course must be paid by the donor but this helps decrease the amount to be distributed. The cost of course goes on the bottom line and is not attributed to either the donor or recipient governments since no one in the donor country understands or knows anything about this duplication of government services.

Finally, we assume that some money actually gets to those to who it's supposed to help. All the way done the line, each level of responsibility takes a cut to fund itself. Exactly what will those people do with the funds? Pay their salaries of course.

So some small amount of aid gets to the area it's supposed to help. What experience or accountable practice will then take place? Who will hold anyone accountable for the final results since there has never been an effective feedback loop all along the distribution chain otherwise those in charge would or should lose their positions.

The only form of effective aid is to encourage trade between the two nations involved. Only by having each nation and their leaders stand up on their own two feet is there even going to be an effective solution.

The fledgling must at some time eventually be ordered to leave the nest.

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