Does Corruption in Recipient Governments Interfere With Foreign Aid?

[ProbablyFaiz]

Link post

Introduction

This post is part of a series on common myths and misconceptions about charity. Taking time to learn the facts will help prevent the spread of misinformation and inspire more people to use their resources effectively to improve the world.

Does corruption in recipient governments interfere with foreign aid?

A common criticism of giving aid to low-income countries is that the money gets siphoned off by corrupt local officials before it can do any good.

Corruption can interfere with aid. However, by donating through reliable and effective charities, it is possible to make a big difference through charitable giving, even in areas where corruption is widespread.

No one can deny that corruption has sometimes prevented aid money from achieving its intended goal. But the solution is not giving less, but giving “smarter.”

One way to reduce the danger of corruption is to donate to programs which do not deal in valuable goods which officials could divert. Another is to give to charities that reliably monitor the impact of their programs, ensuring that their work is actually improving lives, rather than lining a few pockets. For example, the Against Malaria Foundation (AMF) is particularly careful to avoid and discourage corruption while carrying out its distributions. You can learn more about AMF and similarly reliable charities through charity evaluators like GiveWell.

Even many governmental aid programs, which have historically attracted significant criticism for corruption and fraud, now have measures in place to ensure that aid money goes where it is most needed. Done right, foreign aid can actually be used to encourage local institutions to become less corrupt and serve their communities more effectively. Instead of pressuring governments to cut foreign aid spending, we should pressure them to be more transparent about their activities and impact, so that funds are directed to the most effective programs.

By giving to effective charities, we can make a positive impact in low- and middle-income countries. Take the Giving Pledge today and join a worldwide community dedicated to solving the key challenges of our time.

[jablevine]

“Elite Capture of Foreign Aid” is a relatively recent (and high-profile) attempt at quantifying the loss of foreign aid to “leakage”. Here’s the abstract:

Do elites capture foreign aid? This paper documents that aid disbursements to highly aid-dependent countries coincide with sharp increases in bank deposits in offshore financial centers known for bank secrecy and private wealth management, but not in other financial centers. The estimates are not confounded by contemporaneous shocks such as civil conflicts, natural disasters, and financial crises, and are robust to instrumenting with predetermined aid commitments. The implied leakage rate is around 7.5 percent at the sample mean and tends to increase with the ratio of aid to GDP. The findings are consistent with aid capture in the most aid-dependent countries.

Leakage is higher than we’d like but not as big as some fear. An especially important finding is on how aid interacts with institutional strength and political economy in the recipient country:

While the leakage estimates reported above are averages for those countries with annual aid from the World Bank above 2% of GDP, we show that leakage rates exhibit a strong gradient in aid-dependence, both within this sample and beyond. On the one hand, lowering the threshold to 1% of GDP (sample of 46 countries), we cannot reject the null hypothesis of no leakage. This suggests that the average leakage rate across all aid-receiving countries is much smaller than the estimates obtained from the main sample, which account for less than 10% of all World Bank aid. On the other hand, raising the threshold to 3% of GDP (sample of 7 countries), we find a higher leakage rate of around 15%. This pattern is consistent with existing findings that the countries attracting the most aid are not only among the least developed but also among the worst governed (Alesina and Weder, 2002) and that very high levels of aid might foster corruption and institutional erosion (Knack, 2000; Djankov et al., 2008).