Tag Archives: development aid

Guest Post: The Millennium Challenge Corporation’s Approach to Curbing Corruption in Development Projects

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Today’s Guest Post is by Chris Williams, Senior Director for Anti-Fraud and Corruption at the Millennium Challenge Corporation, a U.S. development agency. Chris explains the measures MCC takes to prevent corruption from infecting the projects it supports and reviews some lessons it has learned about preventing corruption in large infrastructure projects.  (Full disclosure. I consult with the MCC on corruption prevention although its prevention policies long pre-date my consultancy. I have hounded Chris for some time to write this post, for whatever bias I may have, I think MCC’s corruption prevention efforts provide a model for others in the development community.)

The Millennium Challenge Corporation is an independent U.S. government development agency working to reduce global poverty through economic growth. Created in 2004, MCC provides time-limited grants that pair investments in infrastructure with policy and institutional reforms to countries that meet rigorous standards for good governance, fighting corruption and respecting democratic rights. MCC provides an example of “smart” development assistance, using competitive selection of grant recipients, country-led solutions, country led implementation, and a focus on results to prioritize the use of U.S. taxpayer funds.

A central feature of MCC’s approach, country ownership, is that each partner government receiving a grant from MCC must identify a legal entity to which the government will delegate the responsibility for the projects funded by the MCC. A sign of the importance MCC places on fighting fraud and corruption is that this entity is formally designated the “accountable entity” (generally referred to as an “MCA,” as many are named Millennium Challenge Account Moldova, Millennium Challenge Account Senegal, etc.). This underlines the MCA’s responsibility for ensuring MCC funds are used only for the purposes intended.

MCC doesn’t just assign responsibility for managing fraud and corruption risks to the MCAs, however. Upon establishment of the MCA, MCC immediately begins working with it to put in place financial controls and other standard safeguards to prevent funds from being lost through fraud or corruption.

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To Cut Corruption in the Palestinian Authority, Cut Off Development Aid

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Foreign development aid plays a unique role in the lives of Palestinians, as aid is the “main driver” of growth in the Palestinian economy. For this reason, many people welcomed the Biden Administration’s announcement in April to reverse the Trump Administration’s decision to halt all development aid to Palestinians. Yet widespread corruption in the Palestinian Authority (PA)—which remains the principal recipient of aid to Palestinians—threatens to undermine the effectiveness of aid. Worse, foreign aid to the PA helps perpetuate and exacerbate the PA’s culture of corruption.

Corruption in the PA is deeply entrenched. To illustrate with just a handful of many possible examples: There are allegations that the PA has embezzled development aid money from the European Union. There are reports that the PA spent staggering sums on fake companies and projects, including a non-existent airline. But there are also documented examples of corrupt use of funds. Rather than develop welfare programs to distribute social services or development aid money to the public, the PA allocates the money to salary payouts for security officers and government officials in job placements secured by cronyism. High-ranking PA officials regularly establish their own NGOs and phony companies to attract additional funds from aid programs. Yet for the most part donors have turned a blind eye to the PA’s blatant corruption and mismanagement of development funds. Consequently, despite more than US$15 billion in development aid given to Palestinians in the past thirty years, that aid has failed to reduce poverty or deliver sustainable improvements in ordinary Palestinians’ quality of life.

And it’s not just that the PA’s corruption undermines the effectiveness of aid. Perhaps the even bigger problem is that the flow of development aid contributes to and props up the PA’s culture of large-scale corruption. The more funding the PA can access, the more powerful it becomes, and the more capable it is of embezzling funds and extorting bribes from its populace. Worse still, the costs of the corruption that the aid to the PA fuels are not merely economic costs: In Palestine, corruption contributes to needless violence, political radicalization, and, ultimately, the loss of innocent lives.

The only way to break out of this malignant cycle is for donors to call a halt to unfettered development aid to Palestinian government institutions, which have proven themselves time and again to be too weak and unscrupulous to handle aid without corruption.

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A Closer Look at Corruption, Hamas, and Violence in the Gaza Strip

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The recent violent clash between Israel and Hamas followed a pattern that has become depressingly familiar since Hamas won control of the Gaza Strip in 2006: Hamas instigates violence towards Israel and its civilians; Israel responds with military strikes targeting Hamas’s weaponry infrastructure, but since Hamas has intentionally embedded itself in Gaza’s civilian population, Israel’s strikes inevitably claim innocent lives. The question whether Israel’s response was proportional or excessive saturates the news and media. Eventually the two sides reach a tentative ceasefire, the violence subsides, and attention turns elsewhere—until the vicious cycle repeats.

Most readers, whatever their views on the underlying moral and legal issues, are likely familiar with this pattern. But what does this have to do with corruption? Quite a bit, actually. 

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Do Chinese Aid Projects in Africa Make Corruption Worse? And If So, Why?

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Development aid is a potentially powerful tool for promoting economic growth among the world’s poor. However, development aid is plagued by corruption, in no small part because many of the poorest areas are also the most susceptible to corruption. In addition to that dilemma, some research suggests that the injection of outside funds into existing corrupt societies can actually exacerbate governance problems. Is this true? And does the impact of development aid on corruption (and development) depend on the source of the aid? An important new paper by Ann-Sofie Isaksson and Andreas Kotsadam suggests that the answers are yes and yes—in particular, they find that Chinese aid projects in Africa may worsen local corruption.

To investigate the question whether Chinese aid projects affect local corruption in Africa, the authors combine data from separate sources. For data on local corruption, the authors make use of the Afrobarometer surveys, with data on nearly 100,000 respondents in 29 countries, collected over a 12 year period (2000-2012) in four separate surveys. The authors focus in particular on respondents’ answer to questions about the frequency of paying bribes to avoid problems with the police or to obtain documents or permits. The authors use the geographic location of survey respondents, together with information on the geographic location of 227 Chinese-aid-supported projects in Africa, in order to identify those respondents who live geographically close to a project supported by Chinese development aid. The results are stark: African citizens who live in areas with Chinese-sponsored projects are 4 percentage points more likely to pay a bribe to police, and 2 percentage points more likely to pay a bribe for permits or documents. Given baseline reported bribery rates of about 13-14%, this means that citizens living near a Chinese aid project are about 30% more likely to report paying a bribe to the police, and about 15% more likely to report paying a bribe for a permit or document.

The most natural explanation is that Chinese aid projects tend to stimulate more corruption. There are, of course, a number of other possible explanations, which the authors address and for the most part rule out, or at least suggest are unlikely:

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Can Blockchain Help Bypass the Problem of Corruption in Development Aid?

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Corruption undermines the effectiveness of foreign aid. While precise numbers are hard to come by, numerous press reports suggest that mass “leakages” (a euphemism for probable theft) are all too common. UN Secretary General Ban Ki Moon has reportedly asserted that approximately 30% of foreign aid is lost to corruption, though controversy over the magnitude and impact of the problem remains (see, for example, here, here, and here). The perception of a severe problem has naturally led to searches for innovative solutions, including technological solutions. One possibility that has been garnering some recent attention is blockchain technology. In fact, a few months ago, the Ministry of Foreign Affairs of Denmark, the think tank Sustainia, and the blockchain currency platform Coinify jointly published a report delineating how blockchain technology can be used to “hack the future of development aid.”

Blockchain systems make use of a shared digital “ledger,” in which each transaction contains the history of all previous transactions; because the ledger is transparent and distributed across many computers, rather than stored in a centralized database, it is (allegedly) not susceptible to manipulation or hacking, and ensures the transparency of all transactions (though not necessarily the real-world identities of those engaged in those transactions). Blockchain is probably best known as the technology that makes possible Bitcoin and other so-called cryptocurrencies. But blockchain technology and its applications are rapidly evolving, and many have already begun to see how this technology can be used as a tool to combat corruption, for example by increasing transparency in land records and by using blockchain systems to support anti-money laundering efforts. Now, companies such as Disberse, AID: Tech, and Donorcoin are developing blockchain-based fund management systems that, their proponents contend, can help reduce corruption in development aid. Blockchain technology would allow donors to transfer money to end users directly (and instantaneously), bypassing the formal financial institutions and corrupt bureaucracies that have often been the source of financial leakage, and preserving a transparent record of all transactions. This would help ensure that aid money goes to where it is intended to go.

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Curbing Corruption in Development Projects: Memo for the World Bank Board of Governors

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The wAnnual meetingsorld’s finance ministers serve as the governors of the World Bank and meet this weekend to review the Bank’s activities over the last year and set policy for the coming one.  The annual meeting is the first since the OECD released a remarkable document, one that subtly but unmistakably  damns the development community for failing to curb corruption in the projects it finances. In skillfully-crafted prose that points the finger at no one miscreant while charging all with dereliction of duty, the OECD’s Council for Development identifies weaknesses large and small in the corruption prevention efforts of both bilateral and multilateral development organizations and urges major reforms.  Corruption in development projects not only defeats the reason development aid is provided but, as the council stresses, many times leaves the recipient worse off than had no aid been extended in the first place.

The Bank’s Board of Governors should make the report and its recommendations the focus of their meeting. For two reasons. Continue reading →

Preventing Corruption in Development Projects: The World Bank’s La Guajira Project

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Report Number No: 38508-CO for a Proposed Loan in the Amount of US$ 90 Million to the Department of La Guajira with the Guarantee of the Republic of Colombia for a Water and Sanitation Infrastructure and Service Management Program is probably not the first place one would turn for advice on preventing corruption in development projects.  But it should be.  For annex 11 contains a text book example of how to identify and mitigate the risk of corruption in a donor-funded project.

The annex is part of the project appraisal document, the paper the World Bank’s Board of Directors relied upon in February 2007 in approving a $90 million loan to the Department of La Guajira in Colombia to upgrade the department’s water and sanitation services.  The loan was for the purchase of equipment and construction of civil works in some dozen or so municipalities and pilot water and sanitation projects in several remote rural areas.  While the project document made a strong case for the project’s benefits, it minced no words when it came to the risks of corruption the project faced: “The Department of La Guajira has a reputation for weak governance, corruption, and the continued presence of parallel institutions which have prevented public sector efforts to meet citizen needs in an equitable and effective manner.”  To be sure the message was not lost on board members, the authors went on to warn that “corruption, public sector malfeasance, capture by elites and special interests, and the paucity of accountability and transparency” is endemic in La Guajira and is the reason why the department remains so poor.

After reading such a clear, candid statement of the project’s corruption risks, one might question the sanity of any board member who voted to put $90 million of World Bank funds at risk.  But in fact an unvarnished analysis of the risk of corruption in the project is the first reason why the board was right to approve the loan the corrupt environment in La Guajira notwithstanding.  Project managers cannot prevent corruption in their projects if they are in denial about the risks they face.

The second reason why the board was right to approve the project loan is the chart that appears in the annex. Continue reading →

How For-Profit Businesses Can Reduce Corruption in Development Aid

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Although for-profit businesses often are epicenters of corruption-related problems, there are opportunities for small and medium enterprises (SMEs) to reduce corruption in development aid—particularly in locales and sectors where NGOs and the government do not seem to have an impact, or where the NGOs and governments are themselves part of the problem. Development practitioners and policymakers should consider greater use of for-profit businesses, as opposed to non-profit NGOs, for implementing development projects.

There are several reasons why SMEs may be able to successfully run for-profit social ventures that are potentially more resistant to corruption: Continue reading →

Cracking Down on Corruption in Haitian Customs

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Billions of dollars in international aid to Haiti has been lost due to corruption, and this corruption epidemic has hindered many of the good-faith efforts to provide assistance in the wake of disasters. Of the many layers of bribery, fraud, and deceit that plague aid delivery, the one that interests me the most concerns the front-line Haitian Customs officers.

My interest stems in part from personal experience: In August 2016, I was part of a small project to engineer and build a clean water system in Haiti, which required importing equipment and supplies. As a matter of law, the items we were attempting to bring into Haiti were exempt from tax on account of their use in a non-commercial setting and our association with an NGO. Yet despite the fact that this was clearly stated on the Customs form, the Customs officials insisted that we had to pay tax on the goods, told us further that we had to pay in cash directly to the Customs officer, and reduced the tax payment we engaged in bargaining. It seemed like a bribery racket, especially with the insistence on cash payment without giving us an option to make a payment to a government agency officially. Our experience was, alas, typical: Over the past few years, there have been multiple reports of individuals being extorted for cash at Haitian Customs, with officials often unwilling to follow their own guidelines, a situation that seriously hinders the timely provision of non-profit aid.

The Haitian government is aware of the problem, and in 2013 launched a general crackdown. Yet despite a handful of successes—such as the arrest of a prominent Haitian businessman who was involved with multiple Customs officers in a corruption ring that involved contraband and trafficking—the crackdown doesn’t seem to have led to a meaningful reduction of inconsistent and corrupt Customs practices. While additional reforms to the anticorruption laws and improved internal auditing would help, there are a few other steps that the Haitian government could take that would help to combat the sort of corruption that many importers, including my own team, have encountered in Haitian Customs: Continue reading →

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

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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? Continue reading →