Andrew Balls, National Bureau of Economic Research Digest
National Bureau of Economic Research Digest
November 1, 1999

Andrew Mwenda’s criticism that “countries that are deserving don’t get aid,” is supported in part by the findings of a 1999 research project by the US nonprofit organization, the National Bureau of Economic Research (NBER).

Authors Alberto Alesina and Beatrice Weder of “Do Corrupt Governments Receive Less Foreign Aid?” (NBER Working Paper No. 7108), found that, based on some measures of corruption, the more corrupt the government, the more aid it actually received and that there was no evidence to show that an increase in foreign aid reduced corruption. While warning that the results needed to be treated with caution, Alesina and Weder found evidence of a weak “voracity effect” of foreign aid, meaning that countries that received more aid tended to have higher levels of corruption. Their research also suggested that the private sector was significantly more attentive to issues of corruption than official donors because of the negative effects of corruption on investment.

Patricia Adams, author of Odious Debts: Loose Lending, Corruption and the Third World’s Environmental Legacy, agrees. In a 2005 debate over the international legal Doctrine of Odious Debts, Adams said the private sector has had “no trouble” using existing law to prevent loans from becoming odious debts.

“In much lending and project finance today the lenders know the purpose of the loan and an elaborate set of representations and warranties binds the borrower,” she said. Private sector financiers from the beginning take on the risk of the investment and must use due diligence to establish whether the companies they loan to are using funds for their intended purpose or not in order to defend the loans, if need be, in future and claim repayment.

Rather than donor aid, Adams recommends the rule of law: strong penalties for those who borrow and lend irresponsibly are more powerful weapons in the fight against corruption in multilateral loan deals.

Adams argues that donor aid causes corruption because huge sums of public funds are transferred, state to state, without public accountability and transparency and are misused by donor and recipient governments alike for influence pedalling, vote buying and manifestly personal purposes.

“No one should be surprised by the correlation between donor aid and corruption,” she adds. “They go together.”