Corruption of Foreign Aid. Why development aid has failed in Sub-Saharan Africa

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1 Corruption of Foreign Aid Why development aid has failed in Sub-Saharan Africa

2 Overview 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

3 Aid Based Development Model Aid Based Development Model 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

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5 Forms of Corruption Forms 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

6 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

7 Hidden Costs Hidden 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

8 A Case Study: Chad A 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 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

9 The Role of Western Banks The 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

10 The way forward.. The way forward.. Strengthen government institutions Civilian involvement Knowledge of domestic politics Sanction Western Banks Increase Foreign Direct Investment

11 Alberto Alesina and Beatrice Weder. Do Corrupt Governments Receive Less Foreign Aid?, American Economic Review, 2002, v92(4,sep), Carolyn Nordstrom, Global Outlaws University of California Press, 2007 pg 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 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