In an earlier post I showed that Bill Gates’ supposition that only 2 percent of expenditures in development assistance projects were lost to corruption was wildly off the mark.  I also asserted that such lowball estimates are a major hurdle to more effective aid programs: When corruption losses are lowballed, so are the resources devoted to combating corruption.  If losses are 2 percent of the total budget, then it makes little sense to spend 4 percent of the budget trying to prevent them.  But if losses are 20 percent, then 4 percent spent on audits and investigations is a miserly sum.  If losses are closer to 40 percent, then spending 4 percent borders on criminal negligence.

So where did Gates get the 2 percent figure? It turns out that the likely source for that figure illustrates not only how casually influential people sometimes throw around baseless numbers, but also the perverse incentives that development programs sometimes face to downplay the seriousness of corruption in their projects.

The 2 percent claim seems to have first surfaced during the flap over the extent of corruption in the grants made by the Global Fund to Fight Aids, Tuberculosis, and Malaria.  The Fund is the biggest provider of life saving meds to the developing world, but in 2011 the Associated Press reported that as much as two-thirds of some grants might have been filched.  The two-thirds figure grabbed the headlines, and the Fund was deluged with demands that it explain how so much money meant to save lives could have been lost to fraud and corruption.

As brickbats flew over just how much had been lost and how, the Fund’s then-executive director suggested most losses were due to things like padding travel vouchers and made vague references to 2 percent.  The Gates Foundation had donated several hundred million dollars to the Fund, and Gates rose to its defense with an early version of his “corruption in aid projects is not a big problem” claim.

Gates and those like him don’t downplay corruption in development projects without reason.  Indeed, they do so with the best of intentions.  Despite the generosity of a few wealthy individuals like Bill Gates and George Soros, most development assistance comes from annual appropriations by democratically elected legislators.  Would these legislators be so quick to fund the World Bank, the U.N. Development Program, the Global Fund, or others if these agencies came clean about the extent of corruption in their programs?  What legislator would vote to give taxpayer dollars to an agency that admitted 20 percent of its money was stolen? 40 percent?

Development agencies are trapped in a version of what Malcolm Sparrow dubs the “classic fraud-control dilemma.” Downplaying the seriousness of the problem protects the agency’s reputation and its funding, but at the cost of letting the problem fester.  Confronting the problem head-on risks losing support.

Such fears are not academic, as the flap over the Global Fund showed.  Before the ink dried on the Associated Press story, Germany, Spain, Sweden and the European Union had announced they would freeze payments into the Global Fund pending their own inquiries.  Funding was ultimately restored, but it has not returned to pre-flap levels. The lesson for development agencies appeared to be: Keep your mouth shut about corruption in your projects.  Don’t conduct the kinds of audits that would reveal how much is lost to fraud and corruption.  Let the world think it is “small scale,” say “2 percent.”

But is this the way to deal with what World Bank President Jim Kim recently called “Public Enemy Number One” in the developing world?  Would Microsoft be what it is today if Gates had swept its most severe challenge under the rug?  If he had made critical decisions about the company’s future on the basis of suppositions? Shouldn’t someone in the development world be willing to stand up and say: “Let’s find out how big the problem really is and then find a way to fix it?”  Say someone with a background as a successful entrepreneur?