In February 2020, a scandal erupted at the World Bank when Dr. Pinelopi “Penny” Goldberg, the Chief Economist of the organization, abruptly resigned after just fifteen months in the role. She didn’t give her reasons for leaving, but the Economist speculated that a paper titled ‘Elite Capture of Foreign Aid’ lay at the heart of the controversy. The authors of this controversial paper, which included Bob Rijkers from the World Bank’s Development Research Group, argue that aid corresponding to 1% of GDP leads to an increase in deposits in tax havens by 0.075% of GDP. A closer look into these figure reveals an astounding proposition: there is a 7.5% leakage of foreign aid to the personal bank accounts of politicians and bureaucrats of the recipient country.
To put these figures into perspective, member states of the Organization for Economic Cooperation and Development (OECD) contributed $147 billion in aid last year. According to the numbers mentioned above, that’s a whopping $11 billion in the pockets of the elites of the recipient country, in just one year. This paper was one of the first cases of an international aid institution proclaiming that the foreign aid they have been providing for decades to support the poor ends up going into the Swiss bank accounts of the autocrats ruling those countries.
It’s worth noting that this was by no means a revelation. The World Bank’s research unit merely echoed what researchers and academics have been saying for years. In 2002, Alberto Alesina from Harvard University and Beatrice Weder from the University of Mainz found that many of the countries receiving large foreign aid have high levels of corruption and that there is no link between foreign aid and corruption.
William Easterly from NYU, the greatest skeptic on foreign aid, has written a lot about the efficacy of foreign aid. His ‘White Man’s Burden’ is peppered with examples of how foreign aid tends to do more harm than good. He illustrates his point using several examples, from aid being used to fund dictatorial and autocratic regimes, to this chart, which states that as aid to Africa has increased, growth in the continent has plummeted.
As you read the book, like an exasperated Easterly, you tend to think, ‘Why does the developed world pursue the same failed foreign aid policies if it tends to be such bad economics? ’ University of Chicago professor Ethan Bueno de Mesquita’s works provide some interesting answers. In his book ‘Political Economy for Public Policy’, Bueno de Mesquita argues that policies that look like bad economics, in fact, tend to be very good politics.
He writes: “The rich world’s pursuit of failed foreign aid policies (those that that prop up dictators, hurt the poor and fail to achieve their stated goals) isn’t a question for a development economist but a political scientist.” Foreign aid isn’t provided just to support the poor or pursue utopian policies. It is also an important political tool used to gain policy concessions from recipients. So, what are these concessions, and why are they significant?
The game-theoretic model mentioned in Bueno de Mesquita’s ‘Political Economy for Public Policy’ is useful in understanding the political economy of foreign aid. But, before diving into specifics, it is crucial to understand two main terms: ‘Selectorate’ and ‘Winning Coalition’.
These were coined by Bueno de Mesquita’s father, Bruce Bueno de Mesquita, whose research also focused on this subject. The ‘Selectorate’ includes the ‘population that has some chance of a role in the selection of the leader’. The ‘Winning Coalition’, on the other hand, refers to the ‘portion of the Selectorate needed to keep a leader in power’. Simply put, a leader needs the support of the Selectorate to get in power, and of the Winning Coalition in order to retain it.
With this in mind, let us consider countries A and B. A is rich and B is poor. A wants B to make a policy concession for its own benefit. What could such a compromise include? Say you are the President of the United States (US) and the largest company in your country wants to build an oil rig in Egypt. This would greatly benefit your nation because the oil rig will help the company earn high revenues that, in turn, would increase your country’s tax collections. You want this project to proceed, but you also know that Libya may attack Egypt because of their sworn enmity for each other, thereby potentially affecting your project. So, what do you do in such a situation? Simple. The US provides millions in foreign aid to Libya to help address security and humanitarian challenges in the country. You use this aid as leverage to get a guarantee from Libya that it won’t attack Egypt. At least not this oil rig.
Now, imagine that Libya has a democratic government in which the President won a landslide election by sparking a nationalist anti-Egypt sentiment within the country. If you were the President of Libya who won the presidency on a campaign focused on confronting Egypt, would you accept this cash from the US and abandon your plans to attack on Egypt? The answer is most likely no.
What we find here is that it is difficult to influence elected democratic leaders because the people who elected them (the ‘winning coalition’) would not want that to happen. But what if Libya is a dictatorship and the dictator only depends on a smaller group of people (army generals, big businessmen, selected politicians, and so on) to stay in power? Now would you accept this cash handed to you by the US? Of course, you would. You do not rely on the support of your citizens to retain your position, which means that you can focus on only you and your winning coalition’s interests. In such a scenario, you will accept this money without hesitation and circulate it among your cronies who help you consolidate your rule. Moreover, you will most likely also use this money to arm yourself against any future uprising that will threaten your regime and crush the freedoms of your citizens that might trigger such a situation.
Now, if you are the US government that’s still interested in building that oil rig, would you prefer to deal with democratic Libya or dictatorial Libya? The answer is, of course, straightforward, when one considers that democratic leaders and governments are tougher to manipulate. This lies at the heart of why rich countries continue to fund oppressive regimes; these regimes give the developed world the policy concessions they desire but continue to crush their own citizens in their narrow-minded pursuit of erasing the limits on their power. Ultimately, Dr. Penny Goldberg’s resignation only exposed the tip of the iceberg. Upon closer inspection, it is revealed that the world revolves around ‘politically optimal but economically suboptimal’ decision-making, thus pushing aid further out of the hands of those who need it most.
Why Does the World Prefer to Fund Autocrats and Dictators?
Autocrats make strategic concessions without committing to domestic social reforms.
August 22, 2020
Former Libyan Dictator Muammar Gaddafi