A GREAT Commentary on the trouble with Foreign Aid - written by a South African:
"Corruption" is often cited as a major obstacle to development. Some economists - like Jeffrey Sachs - try to play down its effect, arguing that Third World corruption isn't necessarily any worse than what you see in the developed countries. That may be true (it depends on the country - Nigeria's corruption is a helluva lot worse than anything in the West) but even if it is, it ignores the possibility that there is a causal relationship between foreign aid and corruption. Increasing foreign aid - even to relatively non-corrupt governments - may inadvertently feed and encourage the corrupt tendencies of their elites.
Corruption tends to flourish in countries where are there are vast amounts of money flowing around - too much to regulate or even accurately account for - and most of it has to flow through the government. The bigger the size of the transaction, the greater the likelihood that someone, somewhere along the chain will decide to skim some money off the top. The classic stimulus for that type of situation is the existence of domestic oil reserves. Check out the 2004 Corruption Perceptions Index - it's no coincidence that the Nigerians, the Venezuelans, the Russians, and the staggeringly corrupt Saudis are all sitting on some of the world's biggest oil wells.
Isn't it possible that large quantities of foreign aid can have a similar effect? After all, foreign aid packages artificially recreate many of the corruption-inducing conditions that are also found in oil-producing states. They bring vast quantities of money flowing into a country, and in a way that ensures that much of it will have to pass through the government at some point. Mobutu Sese Seko's Zaire (which was the "beneficiary" of millions of dollars of completely unaccountable aid from the US) may be the best illustration of this phenomenon, but there are plenty of others. Kenya, Uganda and Zambia (which scored 2.1, 2.6 and 2.6 respectively on the CPI) are all big-time aid recipients.
Now here's the kicker. Imagine a situation where a) Underdeveloped countries qualify for large amounts of foreign aid, and b) Foreign aid is easy to steal, ie. it is given with little or no conditionality attached. If both of these prerequisites are met, it will be entirely rational for elites to ensure that their countries remain underdeveloped for perpetuity. It creates a paradoxical situation where successful development actually compromises the elites' biggest source of largesse.
The only way to prevent this from happening (other than cutting off foreign aid entirely) is to create a countervailing disincentive against stealing. Donor countries must give foreign aid only on a very strict conditional basis. It needs to be made clear from the start that the moment corruption becomes prevalent, the aid gets turned off. To their credit, the Americans have been trying to do exactly that: all US aid money is now tied into something called the Millennium Challenge Account, which is only accessible to countries that adhere to strict conditions of good-governance.
Bear that in mind next time you hear representatives from some African country whining about the need for "aid without conditionality". "Aid without conditionality" gives governments a direct incentive to keep their citizens poor, which is reason enough to reject the whole idea. In fact, I think South Africa has been incredibly lucky in the sense that we're rich enough to be disqualified from most foreign aid schemes. Foreign aid constitutes only 0.4% of our GDP, as opposed to 4.9% in Kenya, 13.3% in Uganda, and a whopping 27.3% in Zambia. And our rank on the CPI, though not terrific at 4.6, is way better than any of those countries. Let's all give a cheer for not being saddled with the debilitating effects of foreign aid.
http://commentary.co.za/?mod=viewblog&id=1345
"Corruption" is often cited as a major obstacle to development. Some economists - like Jeffrey Sachs - try to play down its effect, arguing that Third World corruption isn't necessarily any worse than what you see in the developed countries. That may be true (it depends on the country - Nigeria's corruption is a helluva lot worse than anything in the West) but even if it is, it ignores the possibility that there is a causal relationship between foreign aid and corruption. Increasing foreign aid - even to relatively non-corrupt governments - may inadvertently feed and encourage the corrupt tendencies of their elites.
Corruption tends to flourish in countries where are there are vast amounts of money flowing around - too much to regulate or even accurately account for - and most of it has to flow through the government. The bigger the size of the transaction, the greater the likelihood that someone, somewhere along the chain will decide to skim some money off the top. The classic stimulus for that type of situation is the existence of domestic oil reserves. Check out the 2004 Corruption Perceptions Index - it's no coincidence that the Nigerians, the Venezuelans, the Russians, and the staggeringly corrupt Saudis are all sitting on some of the world's biggest oil wells.
Isn't it possible that large quantities of foreign aid can have a similar effect? After all, foreign aid packages artificially recreate many of the corruption-inducing conditions that are also found in oil-producing states. They bring vast quantities of money flowing into a country, and in a way that ensures that much of it will have to pass through the government at some point. Mobutu Sese Seko's Zaire (which was the "beneficiary" of millions of dollars of completely unaccountable aid from the US) may be the best illustration of this phenomenon, but there are plenty of others. Kenya, Uganda and Zambia (which scored 2.1, 2.6 and 2.6 respectively on the CPI) are all big-time aid recipients.
Now here's the kicker. Imagine a situation where a) Underdeveloped countries qualify for large amounts of foreign aid, and b) Foreign aid is easy to steal, ie. it is given with little or no conditionality attached. If both of these prerequisites are met, it will be entirely rational for elites to ensure that their countries remain underdeveloped for perpetuity. It creates a paradoxical situation where successful development actually compromises the elites' biggest source of largesse.
The only way to prevent this from happening (other than cutting off foreign aid entirely) is to create a countervailing disincentive against stealing. Donor countries must give foreign aid only on a very strict conditional basis. It needs to be made clear from the start that the moment corruption becomes prevalent, the aid gets turned off. To their credit, the Americans have been trying to do exactly that: all US aid money is now tied into something called the Millennium Challenge Account, which is only accessible to countries that adhere to strict conditions of good-governance.
Bear that in mind next time you hear representatives from some African country whining about the need for "aid without conditionality". "Aid without conditionality" gives governments a direct incentive to keep their citizens poor, which is reason enough to reject the whole idea. In fact, I think South Africa has been incredibly lucky in the sense that we're rich enough to be disqualified from most foreign aid schemes. Foreign aid constitutes only 0.4% of our GDP, as opposed to 4.9% in Kenya, 13.3% in Uganda, and a whopping 27.3% in Zambia. And our rank on the CPI, though not terrific at 4.6, is way better than any of those countries. Let's all give a cheer for not being saddled with the debilitating effects of foreign aid.
http://commentary.co.za/?mod=viewblog&id=1345
