Elite Capture of Foreign Aid
Not surprising but not good and not good for support for foreign aid. Still we report it all at MR.
Do elites capture foreign aid? This paper documents that aid disbursements to highly aid-dependent countries coincide with sharp increases in bank deposits in offshore financial centers known for bank secrecy and private wealth management but not in other financial centers. The estimates are not confounded by contemporaneous shocks—such as civil conflicts, natural disasters, and financial crises—and are robust to instrumenting using predetermined aid commitments. The implied leakage rate is around 7.5% at the sample mean and tends to increase with the ratio of aid to GDP. The findings are consistent with aid capture in the most aid-dependent countries.
Jørgen Juel Andersen, Niels Johannesen and Bob Rijkers, forthcoming in the JPE.
Comments
I'm against governments giving foreign aid. The purpose of government is to let us do collectively what we cannot do individually. Since we can give foreign aid individually it is wrong for government to do it.
I suppose an exception is when it's bogus foreign aid with the purpose simply of bribing foreign Big Men. In which case Elite Capture is the whole point of the operation.
Previously reported by Tyler in October. :)
Tyler's Oct 12th post includes a link to an ungated version (pdf) of the paper.
"The implied leakage rate is around 7.5%"
I think that "domestic" aid in wealthy countries is captured at least at similar rates. Think SALT-deduction, mortgage interest rate deduction, farm subsidies.
A more interesting question is what percentage of foreign aid is captured by elites of the giving country.
The Trump-Ukraine brouhaha gave us a peek at that aspect of foreign aid. Do nothing jobs for connected relatives, "contracting" gigs for politically connected retainers, contracts and sweet heart deals funded directly by the aid.
Frankly, I’d be shocked if it wasn’t many times the 7.5% referenced in the paper captured by the receiving country’s elites. Which goes a long way to explaining why such aid is sacrosanct.
Foreign aid is unjust, unconstitutional and uneconomic. It's hard being a young, neophyte economist and finding this out but we all have to grow up and deal with reality some time.
How is it unconstitutional?
There's no enabling clause authorizing the federal government to levy tax dollars from citizens to spend on non-citizens.
"The Congress shall have Power To lay and collect Taxes, Duties, Imposts, and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States..."
Not the general Welfare of Israel, Haiti, Ukaine, etc.
Good lord, is this a serious conversation? I have been in the field with the foreign aid establishment, COIN, and helping US businesses in poor countries for decades, and also serving in a very senior US government position in this area. Most recently I came into possession of extensive financial data concerning a massively corrupt African country and not a single department -- CIA, FBI, Justice, Treasury or State -- even wanted to review it much less take it from us. The USG actively wants to ignore and even suppress this information until it becomes a headline (think Angola and ICIJ). Does anyone think that the USG didn't know about the massive corruption of the dos Santos family in Angola before ICIJ outed them? Puleeze. The enemy is at the gates so we throw goodies over the parapets to keep them at bay, and they squabble over the scraps instead of breaking down the gate. Sure we would love to see someone graduate from the foreign aid regime to modernity, but then we need to ask the question first posed by the Oracle of Alaska; "How's that goin' for ya"? Answer? Zero (think Southern border). No country has ever graduated from the "Third" to the "First " world riding on a wave of advice and money from foreign aid. No sorry; So. Korea, Taiwan, Chile, Singapore, and (briefly) So. Africa all graduated by rejecting their foreign aid addiction and rationalizing their economies by authoritarian regimes. Yes I know, Uruguay seems to have broken free, and Costa Rica too. 20 years ago Easterly's number was $2+ trillion that we had pissed down a rat hole. What is it now? And the hits just keep on coming...
I suppose the question is whether the deposits preceded the aid or followed the aid. The former suggests corruption in the aid-giving country (organization) whereas the latter suggests corruption in the aid-receiving country. Of course, the answer is likely corruption at both ends. Money, what is it good for? Corruption.
Did anyone ever believe that foreign aid went to the poor and needy? Talk about a sucker being born every minute.
Well...some of it does. Measuring where it goes is obviously important.
As discussed when this was previously posted on MR, 7.5% is actually a really small portion of the aid (but this is only one type of capture...).
I was going to mention that food aid tends to end up in a lot of mouths, including the poor and needy, but decided to fly over the point in the interest of promoting comment brevity, which means to be concise when replaying to what another person writes in their comment.
The only aid to a country is doing business with it so something like the Chinese approach. Mere aid creates only dependency.
Because corrupt elites don't capture the lion's share of the benefits. If you believe that no sense, I have some industrial plants in the Rust Belt to sell you.
"The U.S. manufacturing sector as a percentage of the U.S. GDP peaked in 1953 and has been in decline since, while major U.S. cities in the Northeast and Midwest (such as Buffalo, Chicago, Cincinnati, Cleveland, Columbus, Detroit, Indianapolis, Jersey City, Kansas City, Minneapolis-Saint Paul, Duluth, Minnesota, Milwaukee, Newark, Pittsburgh, Rochester, St. Louis, and Toledo) saw or are continuing to see total population declines greater than one-tenth of peak U.S. Census populations typically starting around 1950." -- Wikipedia
Noted here in the Athens of America: "wicked pissah shawkaaahh!"
> Still we report it all at MR.
Provided that the "elites" in question are in "aid-dependent" countries.
MR will never criticize Zuckerberg, Dorsey, tech-exes (Scott, Jobs, Jurvetson) for their far-left social activism disguised as philanthropy....
Tyler in particular receives significant funds from these people for his FastGrants program.
Yes, foreign aid corruption exists. Repurposing 25% of foreign aid into Letters of Marque and Reprisal would be ideal. Improve foreign institutions by subtraction (of corrupt people). Probably a tough sell politically, tho.
And you could argue that a lot of aid to US localities is similarly corrupt, but legal. Government built "low income" housing is notoriously inefficient. Local housing authorities deserve a similar Letter of Marque.
This result has been known anecdotically for decades and from Easterly’s expose book 20 years ago. This recent paper just "proves it" with more granular data and fancier econometrics. Having said that, let’s not throw out the baby with the bathwater. There are conditions under which aid can be more effective that are described in the book "The Bottom Billion." Some percentage of corruption will always be there, the point is to minimize it and to maximize the part that goes to help the poor.
This has been fairly well established as a problem for a number of years, especially in Africa and Indonesia.
It doesn't seem overly cynical to think that much "aid" is respectable bribery. "You just had a coup. We are suspending aid until you have a civilian as president." "Aid" may provide some cash for the higher-ups but I suspect it's most important function is to provide jobs or money for lots of lower-level supporters. There are no leaders without followers.
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