New SCSC research explores how and why aid goes astray

This week tabloid headlines screamed that the UK spends too much on foreign aid. Oh, and by the way, it is all either wasted or siphoned off by corrupt elites. The irony was that the headlines were driven by the announcement of the latest Aid Transparency Index, which ranks donors according to how transparent they are about their spending. If donors were not making huge efforts to become more transparent, the tabloids would not be able to run these stories.

Development aid – where wealthy countries giving money to support the long-term development of poorer countries – is always controversial. Governments hesitate to look too generous with distant foreign populations while their own people are feeling the pinch. And the tension mounts with every scandal suggesting that corrupt governments siphon off aid, so that it never reaches the intended recipients.

The donor community has responded in part by bypassing governments, channeling aid directly to civil society organisations and communities. But that puts donors in an awkward position: if they challenge or bypass recipient governments, they might get thrown out altogether.

Far better would be for aid agencies to learn to better control the way in which governments spend their funds. Yet until now, aid agencies have had only blunt tools available to check whether recipient governments use aid for agreed purposes – rather than handing it out to cronies so that it ends up being spent on the flashy cars or villas that feature in tabloid accounts.

A new research project led by Olli Hellmann, Mihály Fazekas and myself, and funded by the British Academy/Department for International Development Anti-Corruption Evidence programme, addresses this problem. We develop an innovative methodology using detailed procurement data made available since 1998 by major donors including EuropeAid and the World Bank. More than 50% of development aid is delivered through procurement.

From this ‘big data’, we calculate targeted proxy indicators of corruption. These are based on analyzing co-variation in ‘red flags’ in the process of awarding contracts (e.g., extremely short tender periods) and outcomes on procurement markets (e.g., only one bid received). The methodology has been widely endorsed by both academic and development communities.

We then use these indicators to systematically study two questions relating to the causal determinants of corruption in foreign aid, with a strong focus on the context in recipient countries.

First, we explore how the risks of corruption in aid spending are affected by the political context in recipient-countries. We expect that the degree to which power is centralized and the level of political competition will affect the techniques used to steal money, as well as the market outcomes.

Second, we test how different institutional control mechanisms work – in and of themselves, and in these different political contexts. Some tools might work better in centralized regimes, others where power is more dispersed.

Our findings will help donor agencies to develop more efficient delivery and monitoring mechanisms for their aid, tailored to the risks in a specific context. We will also make our data analysis tools available to donors so that they can incorporate them into their evaluation frameworks beyond the life of the project. We hope to deliver not only a better understanding of how corruption occurs and can be controlled, but also concrete tools to help donors ensure that aid reaches its targets.

Liz David-Barrett