The Pitfalls of Foreign Aid

ASSESSING CORRUPTION

When trying to assess the level of corruption that occurs within the walls of private charities, an economist in the New York Times opines that there is “no single measure [to] tell us how well a charitable organization spends the money it raises, or how it compares to other charities.”

Indeed, the reason why people feel reluctant to donate money is that they fear that the funds will be misallocated. And this fear is not entirely unfounded, according to Raymond W. Baker, Director of Global Financial Integrity, a Washington-based think tank that promotes the hindering of illicit financial flows and the enhancement of global development.

However, according to him, the discrepancies between the resources that charities allocate and the resources that actually make it into the country may not necessarily be due to corruption. Since a “great deal of what is allocated is in the form of services being rendered by the giving organization to the foreign country and that service is in terms of personnel,” the actual services rendered may fall short of the goals set out at the beginning. Many times, it is merely due to incompetence.

Mr. Baker and I recalled the Katrina flood in 2007, and when I asked if corruption had anything to do with the slow response time, given the fact that the disaster was right at home and that the political arena was relatively stable, he scoffed and quickly responded: “No. It was incompetence.”

Moreover, he suggested that although some companies do come forward when they find that corruption has occurred within their organization, this “may not [represent] the majority.”

As our conversation progressed, it became apparent that although Mr. Baker was answering my questions regarding the corruption that happens within the recipient governments, there was more to be said about the donating governments or institutions and their role in the corruption that occurs overseas.

FAILED POLICIES

When I asked him who he felt was responsible for the networks that misappropriate foreign aid funds, his answer divulged a great deal about his opinion of western democracies and their relation to recipient countries’ corruption.

For one, he condemned the nature of secrecy involved in the Global Shadow Financial System.
“Much of the big money stolen on contracts and aid efforts through corrupt proceedings disappears internationally through the global shadow financial system and comes back to our western economy,” he said.

[pullquote]More than one trillion dollars bleeds out (of Africa) and ends up in our western societies.[/pullquote]

“More than one trillion dollars bleeds out and ends up in our western societies. We in the west create the structures that facilitate the movement of that money (through tax havens, secret jurisdictions, offshore accounts, etc).”

He added that to do so – to increase transparency in the global financial system – is a “matter of political will” on our part.

There is also the matter of what the aid actually does for the recipient countries. Because foreign aid is usually considered “tied aid,” the recipient countries are expected to abide by the conditions and requirements set out by the donor countries. Though Mr. Baker agrees with conditionality, he asserted that he disagreed with the Washington Consensus, the set of regulations and conditions that spanned from the 1980s to 2008, which sought to reform developing countries economically so as to make them more attractive to open-market policies.

What these conditions did was to “[dictate] an excessive level of economic requirements before the country [could] get the loan.” In this context, we saw catastrophic results, as it drove most recipient countries further into a debt they could not serve, causing some economies to default on their loans or to sink into perpetual debt. Mr. Baker recommended that to avoid the repetition of such an experience, “western countries must look inwards” and ensure that we too have requirements set in place not only to lend the money but to ensure its proper allocation and use.

A similar instance can be witnessed in Haiti today. As Haiti was encouraged by western countries to liberalise its economy in 1994, the country opened its doors to what would become a constant influx of subsidized products from American farmers. As a result, the rice production in Haiti suffered tremendously and consumers became victims to “volatile global food prices,” says an Oxfam report, as quoted by Mark Boyle in an article written in BBC News.

About a decade and a half before, Haiti had been virtually self-sufficient in rice. But today, Boyle argues, “it imports some 80% of its rice and 60% of its overall food supply.”

Another fudged policy, as admitted by former president Clinton, was the subsidies he introduced for U.S. farmers during his presidency. In the same article, Boyle quotes Clinton saying, “‘it may have been good for some of my farmers in Arkansas, but it has not worked.’” And that is no surprise. Because American farmers receive $434 million in subsidies annually, it is extremely cheap for them to export their rice to Haiti, making rice produced in that country more expensive to buy. This not only causes problems for the Haitian farmers who cannot feed themselves or their families, but according to Boyle it “exacerbates the rural-urban drift” as farmers move to the city in search of employment.

This has deeper implications for the standards of living. As farmers leave the countryside, they seek opportunity in the capital, Port-au-Prince, to find employment. However, the city has a capacity for just a few hundred thousand people, and now it is swollen with a population of over three million. The sustained growth means that most people live in “badly-constructed blocks, most of which crumbled in January’s devastating earthquake,” leaving over a million people homeless. Not to mention, of course, the inevitable squalor that arises in an overcrowded space (which was already poor to begin with).

The lack of hygiene, space, and proper sewage system in the country are some of the reasons why the cholera epidemic – something so easily treatable – has broken out of control.

Indeed, an article written in the Toronto Star suggests that “the number of people in the country with septic tanks decreased by 162 per cent between 1990 and 2006,” meaning that most people do their business in makeshift toilets which they later empty into the ravine.

However, it has not been entire local corruption or incompetence that has exacerbated this problem: as the article claims, quoting a 2008 report, there was a sanitation master plan to be implemented in 1998 by then left-leaning president Jean-Bertrand Aristide, for which the Inter-American Development Bank had loaned $54 million with the purpose of “planning a waste water system and improved potable water access in 15 towns and cities around the country.” This loan was blocked by the United States as “part of its informal embargo” against the president.

[pullquote]Many people to refuse donating money, afraid of “where the money will really end up.”[/pullquote]

And how could we not mention Food Aid. Although it seems as if we could never donate enough food for those who’ve undergone catastrophes like what’s happened in Haiti, the reality is that after a while, excessive dumping of food staples in a place trying to recover is only counterproductive. In the beginning, the influx of food is good because it lowers prices and people are able to afford the food; however, if kept for a sustained period of time, it means that the local economy – the rural economy, which is the heart of Haiti – will suffer, as rural Haitians aren’t able to sell their own products. This is why a report by Oxfam has suggested that Haitians buy food aid from their local shops whenever possible.

As such, donors must be conscious of where to put their efforts and where to allow the locals to help themselves. One has to wonder, for instance, how much of the rice that is sent to Haiti is sent there as aid and how much is dumped there because it is so cheap to export it there.