The Aid-Corruption Paradox: How Should the U.S. Allocate Foreign Aid?

The United States spends about $34 billion annually on foreign aid, frequently to countries that have abysmal corruption track records (see the exact allocations here). Although a portion of that money, almost $6 billion, goes to humanitarian aid, the remainder is intended for development purposes. There has been a great deal of discussion about whether the United States should continue giving this aid, exemplified by the debate between Jeffrey Sachs and William Easterly: Professor Sachs argues that the West can eliminate African poverty if it increases the amount of aid, while Professor Easterly insists that foreign aid thus far has not only been ineffective, but has actually caused greater harm to aid-receiving countries, in part due to corruption. Easterly-like skepticism of foreign aid due to corruption (a topic that has been discussed previously on this blog) seems to have permeated public opinion, resulting in what has been labeled “aid fatigue.” Such fatigue endangers the foreign aid system, as taxpayer support is necessary if the U.S. hopes to continue or increase its aid programs.

Unfortunately, choosing to withhold aid from corrupt countries altogether would be to deny aid from the majority of the world’s poorest countries. Corruption and poverty are correlated, resulting in an “aid-corruption paradox”: often the countries that are in the greatest need of foreign aid also have extremely corrupt governments. Thus there will inevitably be a trade-off when giving development aid: either we will be ignoring the countries in greatest need, or we will give to those countries but accept that a portion of the funds may not serve their intended purposes. How then should countries such as the United States determine where to allocate their development aid?

While there is arguably a moral imperative to provide aid to the neediest, the desire to provide the majority of aid to the poorest countries must be balanced against how effective the aid money will be in those countries. It seems common sense that a corrupt government would divert some or all of the aid it receives away from its intended purposes. This not only deprives the poor of the benefits of aid, but can also perpetuate corrupt governments by sustaining them financially in the long run. Some empirical studies have demonstrated a direct link between the quality of governance in a country and positive aid outcomes. Other studies suggest that foreign aid negatively affects governance in recipient countries by strengthening existing corruption, creating distortions in the public sector (by wasteful government spending that is falsely labeled as development expenditure), or by creating a “rentier state” effect, a term for states that generate revenue from external sources, hindering the development of democratic institutions. Therefore, aid money may not simply be wasted, but may instead prompt greater corruption. There is also an opportunity cost to sending aid to corrupt governments, as this aid could have instead gone to a country that, while perhaps less needy overall, would have utilized the money more effectively and would not be as vulnerable to the aforementioned distortions in governance structures.

All that said, even in countries plagued by corruption, foreign aid may still do some good. Even if a portion of aid money is stolen or diverted, at least some of that money may be spent for its intended purposes. Donors cannot necessarily make a blanket determination of how they assume a country will spend its aid solely based on corruption in the government. Corrupt governments may decide to allocate some of the funds towards their intended purposes either to maintain public support or out of fear that donors will cut off funding if they do not. Unfortunately, the later reason may only carry weight if the donor country has actually severed aid from governments that misused aid money in the past, which would support allocation of aid only to less corrupt countries. Still, it may be that a government will allocate a portion of the aid to development projects in order to maintain peace and support from its constituencies. If a corrupt government is willing to use a portion of the aid to help its citizens, foreign aid can achieve at least some of its intended goals, albeit in an inefficient manner. From a moral perspective, in situations of extreme poverty, receiving just a portion of the aid is better than receiving no aid. Additionally, some studies have actually shown that certain foreign aid can reduce corruption in the recipient country (although with the caveat that the reduction effect was greater in countries that were already less corrupt).

Unfortunately, it seems that in practice, the U.S. does not balance necessity with efficacy, and instead prioritizes a third consideration: self-interest. Studies have found that less corrupt governments do not end up receiving more foreign aid. Even worse, a study by Easterly shows that the high percentage of corrupt countries that receive aid from the U.S. is not actually explained by the fact that these are the poorest countries. Easterly showed that 76% of the U.S.’s aid went to corrupt countries while only 29% of its aid went to the least developed countries. Perhaps some citizens may believe that the U.S.’s focus on self-interest is justified, preferring their tax dollars to have at least tangential benefits to Americans. Indeed, it seems naïve to suggest that self-interest should not play any role in aid allocation determinations. Nevertheless, acting based on self-interest runs counter to the fundamental moral purpose of foreign aid, ignores the above-mentioned corruption concerns, and makes any anticorruption rhetoric from the U.S. fall flat. If we truly want foreign aid to contribute to development and to cure the aid fatigue among the public, the U.S. must adjust its basis for granting foreign aid to a system that weighs need with likelihood of success.

2 thoughts on “The Aid-Corruption Paradox: How Should the U.S. Allocate Foreign Aid?

  1. Aid and/or donation are in-heritage practice of capital economy to make popularity from depressed section, which is very well known establishment of democracy. From Bill Gates to Trump are well known for aid. US-led Western countries donates much to developing or under developed countries through NGOs and governmental agencies in developmental purpose, actually for some hidden purpose, mainly for diplomatic lobby. It is vividly corruption. The amount of aids are really remarkable for elevation of poor peoples. But, due to the hidden agendas, the actual targeted beneficiaries are eliminated from this list, and the same tradition will remain as long as the hidden agendas will continues.
    It is very simple: x+x=2x, never x.x or x/x. Part of Corrupted earned money is being invested to make corruption in spread, nothing else. Aids and donations are part of economy, never it will be a loss game of capital economy. In economy, there is no place of donation, then how fool argument should proceed??

  2. Hi Carina, I enjoyed reading your post. You touch upon several key issues that certainly leave one questioning the current US foreign aid system. Unfortunately, I would think that the aid-corruption paradox is not limited to the US and other donors are faced with the same issues. I am curious, in regards to “Easterly showed that 76% of the U.S.’s aid went to corrupt countries while only 29% of its aid went to the least developed countries,” how does the US compare to other major donors? Within your research, did you see a trend among donors?

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