Corrupt Governments Receive no less Foreign Aid

Based on some measures of corruption - the more corrupt the government is, the more aid it actually receives.

International programs to alleviate poverty include bilateral aid from rich countries to poor countries, multilateral aid from international organizations, grants below market interest rates, technical assistance, and debt forgiveness programs, such as the World Bank/IMF's Highly Indebted Poor Country initiative. The World Bank, in particular, increasingly has focused in its aid programs on issues of good governance, and on the level of corruption among the politicians and bureaucrats of countries that receive aid.

Critics of foreign aid programs argue that aid often supports corrupt governments and inefficient bureaucracies. Supporters of foreign aid programs, on the other hand, argue that aid not only can help to reduce poverty but also is a way of rewarding good policies and honest government. A crucial question is therefore whether good governments receive more foreign aid than corrupt governments. An NBER Working Paper by Alberto Alesina and Beatrice Weder shows instead that corrupt governments receive as much aid as honest ones.

In Do Corrupt Governments Receive Less Foreign Aid? (NBER Working Paper No. 7108), Alesina and Weder find that - based on some measures of corruption - the more corrupt the government is, the more aid it actually receives. According to no measures of corruption that they use do less corrupt governments receive more aid. Also, they conclude that there is no evidence that an increase in foreign aid reduces corruption.

In terms of bilateral donors, the researchers find that Scandinavian countries (the most generous in per capital terms) give more aid to less corrupt governments; Australia also gives less aid to countries with high levels of corruption. The United States, in contrast, stands out for giving more aid to more corrupt governments, other things equal.

The question of whether increased aid leads to increased corruption is the most difficult to answer, Alesina and Weder find. Data on corruption are not only imperfect by their nature, but only have been collected for a large number of countries in recent years. This makes it difficult to measure changes in the level of corruption following changes in the flow of aid. While warning that the results need to be treated with caution, the researchers find evidence of a weak "voracity effect" of foreign aid, meaning that countries that receive more aid tend to have higher levels of corruption. They find no evidence that foreign aid reduces corruption levels in recipient countries.

Alesina and Weder also show that the private sector pays significantly more attention to corruption than official donors do. Foreign direct investment(FDI) flows behave differently from aid flows, because of the negative effects of corruption on investment. A low level of corruption is by no means the most important determinant of FDI flows. But these researchers conclude that, when it comes to corruption, the private sector is significantly more discriminating than official donors.

-- Andrew Balls