The Pitfalls of Foreign Aid

How to tackle the poverty problem at its roots

By Luis Fernando Arce, Staff Writer

ASSUMING RESPONSIBILITY

2012 is approaching, and more people than I’d like to believe assure me that the world is coming to a turning point and headed downwards. I’m not sure if it will or not, but speculation over that fact is a topic for a different paper. However, to our great dismay, their supporting evidence is not the movie 2012, or even the Mayan predictions, but the increase in frequency and magnitude of the disasters happening around the globe.

Perhaps it’s because I’ve put on my pessimistic sunglasses, but it seems that more and more political unrest is occurring around the world, many exacerbated by the fury of nature, others by the wrath of corruption. Egypt, Tunisia, Greece and the United Kingdom come to mind.

These phenomena, of course, are not new. Natural disasters and political unrest have been occurring in countries around the globe for as long as civilization has stood; and for nearly as long, the idea of being charitable and helping those who seem in need has stood parallel to it. In the New Testament, Jesus tells a story about the Good Samaritan, who stopped to help a man whom he had never met before; move forward in time and we begin to see charity itself turn into an institution.

Today, most of us are familiar with charitable organizations, both private and public, and at some point or another in our lives we donate money so that it may reach a faceless image somewhere in the world and help them survive, if only for one more day… or so we’d like to assume.

AID – THE PRIVATE AND PUBLIC WAY

Foreign Aid is money or resources transferred from one country (developed) to another (underdeveloped) without expecting full repayment. In order to qualify as Aid, the money must be identified as part of an Official Development Assistance program, meaning that all loans or transfers must be made with the explicit purpose of generating economic development in the recipient country. The loans must be made with less stringent repayment options, and must have no commercial ambitions attached.

Foreign Aid is also divided into two camps: Public Development Assistance, which includes donations given directly from one government to another or donated by multilateral agencies such as the IMF and World Bank, and Private Development Assistance, referring to private non-governmental organizations and institutions, such as the Red Cross or Free the Children.

When citizens opt to donate money, they do it through private, non-profit, non-governmental organizations, which take the donations and allocate them to the different projects they have in place. Moreover, citizens are also able to join these organizations as volunteers and travel abroad to put in hands-on work on projects involving construction of houses, schools, hospitals, etc. Private organizations focused on foreign aid are one of the channels through which private citizens can become active in the issues happening abroad.

[pullquote]Humanitarian aid, for Africa, has taken the form a “debilitating drug” to which the continent has become addicted.[/pullquote]

On the other hand, multilateral institutions and governments involved in foreign aid transfer their funds directly to the recipient government. As far back as 1970, the richer governments that were members of the United Nations pledged to direct up to 0.7% of their Gross National Income towards foreign aid, a target that only the Scandinavian countries, the Netherlands and Luxemburg have met, and for which the U.S. has ranked nearly last among OECD countries, with 0.15%.

There is an open and sometimes heated debate regarding whether government or private organizations are more efficient, not only in delivering aid, but in helping the beneficiary countries erect a more stable political and economic system than previously held. But it has come abundantly clear to many that neither has been entirely good at it, prompting many people to refuse donating money, afraid of “where the money will really end up”.

“Kenya now joins countries like Pakistan in being labelled corrupt,” reads an article in the Calgary Herald business section. “It is because of this reputation that Canadians appeared reluctant to donate generously towards relief aid when Pakistan faced devastating floods last year.”

While the stark reality is that most of the countries that are beneficiaries of foreign aid are corrupt, there are underlying causes that either sustain the corrupt regimes or allow them to continue unfettered. Now, although that may seem grim, the fact that western democracies and donors of foreign aid are largely responsible for these conditions is outright dismal.

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.

AIDING (and Abetting?)

It seems almost inevitable that corruption will continue to occur in certain places around the globe. The recent elections in Haiti were a joke, and most African countries are riddled with corrupt officials, most of whom take office because they know it will give them “unfettered access to the treasury,” according to Dr. Dambisa Moyo, an economist and author who believes that aid being sent to Africa is simply not working.

In her book, Dead Aid, she claims that “six decades of Western aid has itself been an unmitigated political, economic and humanitarian disaster for most parts of the developing world.” Focusing on Africa, she suggests that although there is a “moral imperative” for humanitarian aid, many of the solutions that it offers are mere bandages put over an infectious gash that no one seems to want to address. She suggests that what needs to be done is not to alleviate the surface problems, but to amend the core issues that allow corrupt officials to remain in power.

She criticises government-to-government aid, and aid given by institutions like the World Bank and IMF, for what she considers irresponsible and counterproductive lending. Her argument, essentially, is that the humanitarian aid, for Africa, has taken the form a “debilitating drug” to which the continent has become addicted.

She cites that although the countries received over $1 trillion in aid over the last 60 years, more than half the population still lives in squalor and on less than a dollar a day, per capita income is lower than in the 1970s, over $20 billion annually go towards debt repayment, and all of this at the expense of African education and healthcare.

Of course much of the reason for this is the connection of aid to corruption in Africa. Most government officials have extensive records, including embezzlement, violence, corruption, and many more charges. As such, most of the money and resources sent as aid don’t get to the people, but instead get caught somewhere in the bureaucratic red tape, thusly leaving the country in constant need for more money.

[pullquote]Starvation is a political matter, not an economic matter.[/pullquote]

Mr. Baker concurs with this. He argues that the “more corrupt a government, the more aid is stolen and the more the situation is complicated.” In cases like this, the money is stolen during the procurement and delivery stages, as they are the ones who will make it available to the country. Moreover, once some of the money is finally delivered to contractors and other workers to complete projects such as building roads, hospitals or schools, Mr. Baker says, there is also the danger that they too will “rip off money from what is allocated to them.”

They do this by building under specifications, cutting corners, getting cheaper materials, and a number of other ways that will allow them to keep some of the money. Mr. Baker continued to explain that although not as common, it must not always have to be local contractors; foreign contractors that come to put in work may also partake.

“There was a time,” said Mr. Baker, “when the world bank felt that up to 20% of its allocations ended up as corrupt proceeds….in the combination of corruption and inefficiency.”

Both Mr. Baker and Dr. Moyo agree that a large chunk of responsibility (past and future) lies in the hands of western democracies and western institutions. It is imperative be able to follow recommendations, provide better accountability, and achieve more transparency.

Indeed, in a piece titled Corruption and Foreign Aid, from the Ludwig von Mises Institute, it is claimed that economists Alberto Alesina and Beatrice Weder have found that “there is no evidence that nations and multinational institutions direct their foreign aid to less corrupt governments and away from more corrupt governments.” Jose Tavares, in an essay titled Does Foreign Aid Corrupt? for the New University of Lisbon, claims a 2002 study by Alesina and Dollar used “bilateral trade data to show that the amount of aid is weakly related to the recipient country’s economic performance and strongly related to indicators of cultural and historic proximity between the countries.”

Moreover, Dr. Moyo argues that despite a hearing before the U.S. Senate Committee on Foreign Relations in May 2004, where Jeffrey Winters, a professor at Northwestern University, argued that the “World Bank had participated in the corruption of roughly $100 billion of its loan funds intended for development,” the institution has continued to pour money into the country indiscriminately. In yet another instance, “the IMF gave the country the largest loan it had ever given an African nation,” even after one of their appointees to the Central Bank warned them that no creditors would get their money back because of the rampant corruption.

Resonating what Dr. Moyo suggests, the Ludwig von Mises Institute argues, citing Alberto Alesina and Beatrice Weder, that “government-to-government ‘gifts’ actually make government worse over time in terms of both government corruption and economic growth and creates…a ‘voracity effect’ in recipient countries.” Dr. Moyo calls this dependency.

THE POLITICS OF HUNGER
When I asked Mr. Baker, “Why keep doing it?”, thinking that I was referring to sending money, he answered that it was because the people nevertheless do need it. “There are no black and white circumstances in foreign aid,” he said. Sometimes issues have to be muddled through because of the end result. Referring to the relief that the Taliban provided to Pakistanis in the wake of their recent super-flood, since donations weren’t coming from the west, he said, “I don’t object. The immediacy of the need may justify accepting assistance,” even from the Taliban.

But then I clarified my question, and told him that what I was referring to was why keep sending money directly to the government. Why not cut the middle man out? He said because it was impossible. No sovereign would want to give up their right to be the administrator of the country’s finances. As such, his solution was not to stop sending aid, but to build a better, more accountable and transparent global financial system.

As stated before, he believes that the World Bank and the IMF, along with western democracies, must undergo a process of introspection so as to fix our own shortcomings and the avenues on which corruption abroad can piggyback (like, for example, through Offshore Bank Accounts). Speaking of the World Bank and IMF particularly, he believes that their conditions for lending funds or providing foreign aid must be tailored not to the advantage of the western democracies, but to the situation of the recipient country so as to help them become not dependent on aid but self-sufficient.

Dr. Moyo, on the other hand, although also critical of western institutions, including our governments, has proposed a different method to curtail corruption and to therefore make aid actually work. She proposes a sort of capitalist intervention, at least speaking of Africa.

She cites Ghana as an example, “a country where after decades of military rule brought about by a coup, a pro-market government has yielded encouraging developments.” She is referring to the fact that now farmers and fishermen “use mobile phones to communicate with their agents and customers across the country to find out where prices are most competitive … [which] translates into numerous opportunities for self-sustainability and income generation–that, with encouragement, could be easily replicated across the continent.”

She furthermore proposes that Africans enter bond markets, get active in micro-financing and demand revised property laws. And in order to erect a middle class, which every self-sustainable economy needs, she suggests that Africans enter into commercial investment agreements with the Chinese.

While this sounds logical, and even prosperous, one cannot help but wonder if there aren’t other priorities than erecting a business or economic network? Building a sustainable economy that gives opportunities for people to generate their own income is essential, but will mere “encouragement” really help replicate what has happened in Ghana across the world when there are areas of just over one square mile stuffed with one million people? And although competitive pricing may have worked in Ghana, we’ve seen how competitive pricing proved disastrous for Haiti.

Donor nations in the West should not stop sending aid, but should instead formulate stringent conditions, ensuring rigorous accountability and transparency regulations by recipient nations.

Of course that is not to say that the burden is on the beneficiaries’ shoulders alone. The world needs a more transparent system of financial flow. That the West admits mistakes in policies and agreements is a first step; erecting new ones to account for those mistakes is the one that is needed next.

As our conversation neared the end, Mr. Baker vehemently assured me that there is “no need for starvation in the world. There is more than enough food…so starvation is a political matter, not an economic matter. A government is either too corrupt or too incompetent (or both) to prevent people access to food. We don’t need anyone starving.”

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