The Bill & Melinda Gates Foundation has emerged as a major force in the development community – thanks not only to the $28 billion (yes, billion) the Foundation has donated to improve the lives of the world’s poor, but to the license it gives co-chair Bill Gates to speak to development policy. After all, as they used to say of the brokerage firm E.F. Hutton, when a billionaire speaks, people listen — particularly one who gives billions away each year.
Not surprisingly, the letter he and spouse Melinda wrote to serve as the Foundation’s 2014 annual report has been the subject of much attention — excerpted in the Wall Street Journal, quoted in hundreds of press stories and blogs. For the most part, the attention is welcome; the letter nicely puts the lie to several myths that pervade the discussion of poverty and development. But in a section Microsoft’s founder wrote slaying some common myths about foreign aid, he perpetuates another myth, one that is a major hurdle to more effective aid programs: that corruption in these programs, though undesirable, is relatively minor and manageable. That’s just not true.Gates’ discussion of corruption in aid programs begins sensibly enough: “We need to root out fraud and squeeze more out of every dollar.” He then loses his footing:
“But we should also remember the relative size of the problem. Small-scale corruption, such as a government official who puts in for phony travel expenses, is an inefficiency that amounts to a tax on aid. While we should try to reduce it, there’s no way to eliminate it, any more than we could eliminate waste from every government program—or from every business, for that matter. Suppose small-scale corruption amounts to a 2 percent tax on the cost of saving a life. We should try to reduce that. But if we can’t, should we stop trying to save lives?”
What is Gates saying? That corruption in development projects is only small scale? That certainly isn’t true. The World Bank’s 2011 study of corruption in donor-funded roads projects that I authored reported that corruption at the procurement stage ran from 25 percent up to 60 to 100 percent of the initial estimate of the project’s cost with as much as an additional 25 percent filched through inflated claims and fraudulent billing during contract execution. In his field study of corruption in Indonesia’s donor-funded roads projects, MIT economist Ben Olken found corruption losses of 24 percent during construction.
To be fair to Gates, maybe he wasn’t thinking about infrastructure projects but about those supporting health interventions – vaccination programs, AIDS treatment, and so forth (the kind of projects his Foundation funds). But here too, what he says doesn’t track what we know. In a 2007 report the World Bank’s internal investigation unit found that Kenyan Ministry of Health officials were demanding kickbacks of $.20 on each HIV/AIDS rapid test kit distributed. Small scale? The kits run around a $1.00 each, so we are talking 20 percent–not 2 percent–lost to corruption on each kit. Given the number of kits, this means someone pocketed over $1 million. Small scale?
More evidence that corruption in health projects is not so “small scale” appears in a two volume (I and II) report the Bank’s investigative unit released in 2007. Reviewing five health projects in India, the report found that contracts were inflated by 20-40 percent to pay kickbacks (p. 345); neonatal equipment was so defective it shocked the mother and could kill the fetus (p. 13); AIDS test kits were so shoddy they showed individuals were infected when they were not and healthy when they were infected (pp. 355 -56); and so forth and so on.
In my next post I will suggest where Gates got his two percent figure and why it is so damaging. For now, I leave readers with two queries: Would Microsoft be what it is today if Gates had been so casual about its operating numbers? And why are Gates, and others in the development business, so casual when it comes to estimating how much is really lost from corruption?