| Giving development assistance to countries with weak institutional frameworks, low capacity and often poor law enforcement poses substantial risks. Aid is less effective in a weak governance environment where funds leak due to corruption. Evidence even suggests that aid inflows can contribute to a decrease in public spending, weaken accountability and governance while providing ample opportunities for corruption. Ironically, the donor community has been lending to undemocratic, corrupt and poor governance countries more than to well-managed countries. Aid can have a positive impact on economic and social development if given to countries with good governance systems. As donors become increasingly aware of the linkages between aid effectiveness, governance and corruption more aid should be directed to where it has the most impact. Assisting countries in combating corruption as well as aid aimed at improving governance combined with efforts to reduce corruption in projects are essential in tackling the challenge corruption poses to development aid. Subtopics How corruption undermines aid effectiveness The effectiveness of aid revealed that aid can be “highly effective, totally ineffective, and everything in between,” depending on the quality of policy-making and institutions. It estimated that one percent of GDP in development aid can reduce poverty and infant mortality by one percent in a country with sound management, i.e. good policies and institutions. In countries with poor management, the amounts of aid have not affected the levels of economic growth. There are several channels through which the effectiveness of aid is undermined . The most direct effect is plainly the leakage of funds in development projects. The distorting effects of corruption on projects take effect as early as the project design phase where project requirements are overstated or tailored to fit one specific company, they reach into the bidding process where collusion amongst firms or between public officials and bidders renders competition ineffective, leading to assigning of contracts to underperforming firms at inflated prices. Furthermore, bribes are needed to release funds. Kick-backs further persuade government officials to turn a blind eye to sluggishly implemented projects, staying behind contract requirements, leaving roads unfinished and aid not delivered. Bribes also help to smoothen financial and technical audits and to falsify bills and payrolls. Corruption at the village level includes disappearing aid deliveries or mistargeting, where not the poorest but the best connected and those willing to pay receive aid. Indonesia provides an interesting case for how corruption in aid projects works and why it persists (McCarthy. 2002). Budgetary and governance factors can also severely harm the effectiveness of aid. Ineffective public budgets, low capacity and diversion of public resources are some of the key problems of development aid in African countries. Especially program assistance (commodity support, Balance of Payment support, economic reform lending and debt-relief) is fungible and has been used in the past by African governments to enrich themselves without taking into account the devastating long-term consequences for socio-economic development in their countries. ( Maipose. 2000) Does aid breed corruption? High levels of aid undermine the quality of institutions, which are at the heart of governance. They also weaken accountability mechanisms, encourage rent-seeking behavior and corruption, foment conflict over control of aid, siphon off scarce talent from the bureaucracy and alleviate pressures to reform inefficient policies and institutions. Aid inflow much like natural resources provide opportunities for wealth. They can be spend on public investment or diverted for private use by public officials. A political struggle over aid inflow can cause instability in the short term, potentially destabilizing a country and thus leading to a decrease in wealth for society as a whole and especially the poor. Aid can also be diverted by governing elites towards projects that provide more opportunities for rent-seeking such as capital-intensive projects versus community-controlled and basic needs programs. [1] (Coolidge and Rose-Ackerman. 2000) Similarly, Svensson showed that in countries with competing social groups, an increase in government income does not necessarily lead to an increase in public spending, meaning that inflow of aid does not necessarily contribute to the social welfare of a country. More worryingly, he also showed that expectations of aid alone can enhance rent-seeking behavior and thus reduce the provision of public goods. He concludes by stressing the importance of taking into account the effects of aid on the political process shaping public policy. The findings suggest that aid pledges alone can affect policy-making and rent-seeking behavior without (before) actually any resources changing hands. See also the civil service website for the effects of aid on administrative reform. Levels of aid and quality of governance Given the lack of effectiveness and potentially harmful effects of aid in poor governance environments with high levels of corruption, less aid should be given to countries with high levels of corruption (Burnside and Dollar;Svensson), and more aid to reward countries with good governance, where aid is more effective. However, there is no empirical evidence that this in fact is the case (Alesina and Weder; Svensson). Looking at aid flows up to the early 1990s, Dollar and Pritchettshowed that aid in fact went in equal amounts to countries with poor as well as good governance. This is because the allocation of bilateral aid is mostly influenced by the strategic interests of donors. Scrutinizing bilateral aid flows to various countries revealed that former colonies and political allies attracted a larger share of aid than democratic countries or open economies. Being a non-democratic colony attracted twice as much aid as being a democratic noncolony [2]. At the same time, multilateral aid has been largely uninfluenced by political or strategic interest. Here, aid allocation has been targeted towards lower income countries with good management, which received 30% more than poorly managed countries in the same income and population group. Aid for governance reform and anti-corruption strategies Despite accuracy policy recommendations, if faced practical implications reducing corrupt regimes confronted dilemma. While one hand, giving leaking system is like fetching water with bottom-less bucket, cutting leaves population without benefit did receive under system. This fact that little has been known on tools address often led international donors turn blind eye corruption continue lend as they did. (McCarthyprovides an analysis on why the largest donors to Indonesia, the Japanese Government, the World Bank and the Asian Development Bank under Suharto’s New Order regime continued to lend despite high levels of corruption in the aid portfolio.) This dilemma calls for two approaches: One, in that aid should be directed towards governance reform to improve the very mechanisms through which aid is delivered. This includes capacity and knowledge building, institutional reform which aligns incentives for implementing agencies and public officials with efficient performance and reform of financial management systems which strengthen accountability and transparency. In the end, investing in institutions, knowledge and capacity building is a sine qua non for delivery of better services to the poor. Strengthening sectoral and local institutions to improve service delivery is also imperative given the fungibility of financial aid. As long as budgets are poorly managed and funding allocations based on intransparent and elite-dominated policies financial aid increases overall levels of public expenditure but hardly one specific sector such as education or health. (Dollar and Pritchett. 2001) Second, it means investing considerable thought and resources into protecting development projects against corruption. This includes enforcing the use of proper financial and procurement guidelines including financial and technical audits, setting up complaint databases and follow up processes, beneficiary involvement in project design, implementation and monitoring or participation by civil society organizations and the media. Increasing transparency also proves to be an effective deterrent for corrupt behavior. In short, the existence of corruption is a manifestation of underlying systems of poor governance. This highlights the importance of international aid that promotes governance reform including anti-corruption strategies. The World Bankhas increasingly made this a priority in its work through a four-pronged approach (see World Bank. 2000. Helping Countries Combat Corruption, namely byassisting countries in fighting corruption, mainstreaming corruption concerns in their operations, preventing corruption in World Bank projectsand by supporting international efforts to combat corruption. Other donor organizationshave made strong efforts towards addressing corruption concerns in their lending as well.
[1]Coolidge and Ackerman. 2000. pp. 69 [2]http://www.worldbank.org/research/aid/overview2.htm#policy This page was developed by Stefanie Teggemann. |
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