Corruption of Foreign Aid

Why development aid has failed in Sub-Saharan Africa

OverviewOverview

Aid Based Development Model

�Donors and recipients

�Aid distribution

�How aid leads to corruption

�Corruption and the perpetuation of poverty

�Hidden costs of aid dependency

�A case study: Chad

�Politically exposed persons and the role of western banks

�Possible solutions

Aid Based Development Model

�Donors and recipients

�Aid distribution

�How aid leads to corruption

�Corruption and the perpetuation of poverty

�Hidden costs of aid dependency

�A case study: Chad

�Politically exposed persons and the role of western banks

�Possible solutions

Aid Based Development ModelAid Based Development Model

Donors & Recipients:

�Bilateral Donors-MCC, USAID

�Multilateral Donors-World Bank, IMF, UNDP MDGs

�Recipients countries: Sub-Saharan Africa

Donors & Recipients:

�Bilateral Donors-MCC, USAID

�Multilateral Donors-World Bank, IMF, UNDP MDGs

�Recipients countries: Sub-Saharan Africa

Distribution:

• Budget Support

• Loans/Grants

• Debt relief

• Infrastructure projects

• Distribution among population

• Military intervention

• Humanitarian and disaster relief

• Food aid

Distribution:

• Budget Support

• Loans/Grants

• Debt relief

• Infrastructure projects

• Distribution among population

• Military intervention

• Humanitarian and disaster relief

• Food aid

Forms of CorruptionForms of Corruption

� Patronage Politics

� Cronyism

� Over consumption by the elite class

� Transfer of public funds to non-existent companies

� Displaced Persons

� Public Procurement

� Money redirected into foreign banks

� Resell food aid

� Patronage Politics

� Cronyism

� Over consumption by the elite class

� Transfer of public funds to non-existent companies

� Displaced Persons

� Public Procurement

� Money redirected into foreign banks

� Resell food aid

Foreign Aid and the Perpetuation of Poverty

Foreign Aid and the Perpetuation of Poverty

�Incentive structure is detrimental

�Leads to ethnic violence

• Government benefits off of aid workers

• Natural resource revenue is more easily stolen in an unstable state

• Dutch disease- large capital inflows resulting from foreign aid or commodity windfalls inflates the local currency and causes for uncompetitive exports

�Incentive structure is detrimental

�Leads to ethnic violence

• Government benefits off of aid workers

• Natural resource revenue is more easily stolen in an unstable state

• Dutch disease- large capital inflows resulting from foreign aid or commodity windfalls inflates the local currency and causes for uncompetitive exports

Hidden CostsHidden Costs

�Aid dependency

�Lack of Foreign Direct Investment�In 2006, 1.2 trillion global flows of FDI

�400 billion went to developing countries

�16 billion went into Sub-Saharan Africa

�Conditionality and tied-aid

�Taxes are often not collected - populations forfeits their say in politics

�Spillover effects- inflation, public infrastructure collapse, civil strife, displaced persons

�Aid dependency

�Lack of Foreign Direct Investment�In 2006, 1.2 trillion global flows of FDI

�400 billion went to developing countries

�16 billion went into Sub-Saharan Africa

�Conditionality and tied-aid

�Taxes are often not collected - populations forfeits their say in politics

�Spillover effects- inflation, public infrastructure collapse, civil strife, displaced persons

A Case Study: ChadA Case Study: Chad

Agreement� In 2000, a $4.2 billion “Revenue Management Project” headed by the World Bank and Exxon Mobil to build a 650 mile pipeline from Chad to the coast

� 70% of revenue would go toward poverty reduction programs

� 10% of revenue would go toward “Future Generations Fund”

� “International Advisor Group” in London would monitor the funds

Agreement� In 2000, a $4.2 billion “Revenue Management Project” headed by the World Bank and Exxon Mobil to build a 650 mile pipeline from Chad to the coast

� 70% of revenue would go toward poverty reduction programs

� 10% of revenue would go toward “Future Generations Fund”

� “International Advisor Group” in London would monitor the funds

Once the oil started to flow…

• World Bank lost leverage over Chad’s government

• Idriss Deby (former rebel warlord) stopped cooperating by 2005

rewrote the constitution to serve indefinitely as President.

• Most of the oil windfall was stolen but its impossible to say how much

• Revenue perpetuated conflict w/ rebels in the north and east of Chad

• Still no electricity outside the capital and living conditions are as bad as ever

Once the oil started to flow…

• World Bank lost leverage over Chad’s government

• Idriss Deby (former rebel warlord) stopped cooperating by 2005

rewrote the constitution to serve indefinitely as President.

• Most of the oil windfall was stolen but its impossible to say how much

• Revenue perpetuated conflict w/ rebels in the north and east of Chad

• Still no electricity outside the capital and living conditions are as bad as ever

The Role of Western BanksThe Role of Western Banks

�Politically exposed persons�Foreign aid &natural resource revenue is siphoned into foreign banks

�Bank account set up under the head of state, his/her family, state owned companies,

�Western Banks (Riggs, Citi, HSBC)�Due diligence: who the customer is and where their funds are coming from

�Banks can legally take dirty money if they file a report on a suspicious customer

�Facilitate corruption and state looting

�Equatorial Guinea

�Politically exposed persons�Foreign aid &natural resource revenue is siphoned into foreign banks

�Bank account set up under the head of state, his/her family, state owned companies,

�Western Banks (Riggs, Citi, HSBC)�Due diligence: who the customer is and where their funds are coming from

�Banks can legally take dirty money if they file a report on a suspicious customer

�Facilitate corruption and state looting

�Equatorial Guinea

The way forward..The way forward..

�Strengthen government institutions

�Civilian involvement

�Knowledge of domestic politics

�Sanction Western Banks

�Increase Foreign Direct Investment

�Strengthen government institutions

�Civilian involvement

�Knowledge of domestic politics

�Sanction Western Banks

�Increase Foreign Direct Investment

� Alberto Alesina and Beatrice Weder. Do Corrupt Governments Receive Less Foreign Aid?, American Economic Review, 2002, v92(4,Sep), 1126-1137.

� Carolyn Nordstrom, Global Outlaws University of California Press, 2007 pg 27-35

� Dambisa Moyo. Dead Aid: Why Aid Is Not Working And How There Is A Better Way For Africa (New York: Farrar, Straus and Giroux, 2009).

� Global Witness, “Undue Diligence: How banks due business with corrupt regimes,”March 2009.

� Lydia Polgreen, World Bank Ends Effort to Help Chad Ease Poverty New York Times Sept 2008 (accessed 10 April 2009)

� Lisa Margonelli, The Short, Sad History of Chad’s ‘Model’ Oil Project New York Times Feb 2007 (accessed 10 April 2009

� Paul Collier, The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It Oxford University Press, 2007

� Raymond Fishman and Edward Miguel, Economic Gangsters Corruption, Violence and the Poverty of Nations Princeton University Press, 2008

� Stephen Knack, Aid Dependence and the Quality of Governance: A Cross-Country Empirical Analysis, The World Bank, July 2000

� William Easterly, The Elusive Quest for Growth: Economist’ Adventures and Misadventures in the Tropics The MIT Press, 2002

� William Easterly, The White Man’s Burden: Why The West’s Efforts To Aid The Rest Have Done So Much Ill And So Little Good The Penguin Press, 2006

� Transparency International, Poverty, Aid and Corruption January 2007

� Transparency International, Corruption Perception Index 2008

� Alberto Alesina and Beatrice Weder. Do Corrupt Governments Receive Less Foreign Aid?, American Economic Review, 2002, v92(4,Sep), 1126-1137.

� Carolyn Nordstrom, Global Outlaws University of California Press, 2007 pg 27-35

� Dambisa Moyo. Dead Aid: Why Aid Is Not Working And How There Is A Better Way For Africa (New York: Farrar, Straus and Giroux, 2009).

� Global Witness, “Undue Diligence: How banks due business with corrupt regimes,”March 2009.

� Lydia Polgreen, World Bank Ends Effort to Help Chad Ease Poverty New York Times Sept 2008 (accessed 10 April 2009)

� Lisa Margonelli, The Short, Sad History of Chad’s ‘Model’ Oil Project New York Times Feb 2007 (accessed 10 April 2009

� Paul Collier, The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It Oxford University Press, 2007

� Raymond Fishman and Edward Miguel, Economic Gangsters Corruption, Violence and the Poverty of Nations Princeton University Press, 2008

� Stephen Knack, Aid Dependence and the Quality of Governance: A Cross-Country Empirical Analysis, The World Bank, July 2000

� William Easterly, The Elusive Quest for Growth: Economist’ Adventures and Misadventures in the Tropics The MIT Press, 2002

� William Easterly, The White Man’s Burden: Why The West’s Efforts To Aid The Rest Have Done So Much Ill And So Little Good The Penguin Press, 2006

� Transparency International, Poverty, Aid and Corruption January 2007

� Transparency International, Corruption Perception Index 2008