Draft:Aid and corruption

Introduction

It is essential to understand the relationship between Aid and Corruption, as corruption can significantly undermine Aid effectiveness. Corruption can manifest in various forms, each of which can distort the intended impact of aid in recipient countries. Over the past few decades, international organizations and donors have sought to develop strategies to limit corruption in order to enhance aid effectiveness. After World War II, wealthy countries began allocating a portion of their governmental expenditures to support developing nations, aiming to boost their productivity. However, corruption and weak Institution continue to act as significant barriers to the proper utilization of foreign aid.

Relationship between aid and corruption

In the short-run

Several studies find a significant relationship between foreign aid and corruption. Research suggests that aid can fuel corruption, particularly in countries with weak institutions; . The impact of aid on corruption also depends on how it is distributed. Some donors mitigate corruption risks by directing aid to non-governmental institutions, such as Non-governmental organizations (NGOs), or by providing only humanitarian aid that can be immediately distributed through non-governmental actors. Mahmoud et al. (2015) find similar results.

In general, corruption does not necessarily reduce the amount of aid a country receives. However, when Alesina and Weder (2002) analyzed donors individually, they found that Scandinavian countries account for corruption in recipient nations and reduce their aid accordingly. In contrast, countries like the United States prioritize democracy but do not necessarily consider the quality of that democracy. Lopez (2015) also finds that corrupt countries receive more humanitarian aid but less funding for infrastructure or production. She argues that this dynamic could create aid dependency, as nations with corruption and weak infrastructure struggle to increase productivity, leading to continued reliance on humanitarian aid.

Dzhumashev and Hailemariam (2021) examine the impact of aid on economic institutions and find that aid significantly improves economic freedom, regulation, labor and business environments, and government efficiency. However, these effects are primarily significant in International Development Association (IDA) countries.

In the long-run

Studies show mixed effects of aid on corruption. Menard and Weill (2016) find no evidence that foreign aid affects corruption, arguing that corruption does not influence the amount of aid received, even when controlling for different types of aid. However, their study focuses on the long-term impact of aid, suggesting that receiving aid does not influence corruption over time. In contrast, Daud (2015) focuses on the Nigerian case and finds that foreign aid has an impact both in the short and long run. He suggests that aid continues to be allocated to Nigeria despite widespread corruption, driven by political interests.

Menard and Weill (2016) acknowledge that while aid may not have an immediate long-term impact if provided at a single point in time, sustained and continuous aid over time could potentially influence corruption in the long-run.

Effect on the political regime

Studies show mixed results because foreign aid does not alter a country's political regime; rather, it reinforces the existing government. If a country is democratic, aid can strengthen its democratic institutions, whereas in an authoritarian regime, aid may consolidate authoritarian rule by increasing government revenue. The same applies to corruption—aid can either reduce or exacerbate it depending on the political context. These findings are supported by Dutta et al. (2013) and Uberti & Jackson (2020).

Mechanisms

The primary way in which aid influences corruption is by strengthening the power of the incumbent. According to Kuncic (2011) and Uberti & Jackson (2020), political parties use foreign aid to buy votes or fund electoral tactics, particularly in countries with weak institutions; . Min et al. (2023) highlight that aid is often misallocated—regions that politically support the ruling party receive the majority of aid and funding, while opposition-held areas receive little to none. This results in greater financing and local projects for pro-incumbent regions, further entrenching the ruling party’s position.

Additionally, Cruz & Schneider (2017) find that politicians often engage in undeserved credit claiming. Even when foreign donors design and finance development projects, local politicians take credit for their success, using these achievements to boost their popularity and increase their chances of re-election. This manipulation of aid allows incumbents to consolidate power, reinforcing existing political inequalities.

Solutions

McCorley et al. (2020) analyze the impact of the 2003 World Bank reform aimed at controlling aid through tighter oversight and increased market openness. They found that these measures were effective in reducing corruption, particularly in states with low state capacity. In contrast, in countries with stronger state institutions, political elites often resist anti-corruption measures, as corruption serves as a source of revenue for them. In contrast, Charron (2011) found that the anti-corruption measures promoted by international organizations were effective, but not universally across all donors. Multilateral donors, such as international organizations, succeeded in reducing corruption and controlling aid allocation, whereas bilateral donors (countries) were less successful in this regard. This discrepancy could be attributed to the political motivations of bilateral donors, whereas multilateral organizations are less influenced by such political incentives. Therefore, one potential solution to prevent corruption in aid allocation is to allocate more resources to international organizations and strengthen the implementation of anti-corruption measures.

Avis et al. (2018) and Ferraz and Finan (2008) both find that audits are an effective tool in reducing corruption, not only by directly impacting the audited institutions but also by generating lasting effects and strong spillover benefits; .

Conclusion

The relationship between foreign aid and corruption is complex and context-dependent. In the short run, aid can fuel corruption, particularly in countries with weak institutions, but it can also contribute to economic improvements and more effective governance in certain cases. The impact of aid on corruption varies significantly in the long run, with some studies suggesting that aid does not influence corruption over time, while others find that it may continue to perpetuate corrupt practices. The political regime also plays a key role in determining the relationship between aid and corruption, with democratic regimes potentially benefiting more from aid in terms of strengthening democratic institutions. Effective solutions to mitigate corruption in aid allocation include reforming the distribution of aid, increasing oversight, and focusing on international organizations that are less likely to be influenced by political motivations. While challenges remain, continued efforts to strengthen the anti-corruption framework and ensure the effectiveness of aid programs are crucial in achieving meaningful development outcomes.