Freitag, Februar 17, 2006

How much corruption can the Third World afford?

We all know how the NGOs pull at our heartstrings with pictures of starving children and destitute families. It's part of their massive guilt trip marketing: give us money and we'll alleviate misery.

We also know how much NGOs consume of their financing in self-perpetuation and luxuries for those that run them.

Oh? We don't?

That's right, we really don't. NGOs are notorious about not disclosing their funding. We really don't know how much they are actually doing with the money and how much money goes to fund things that have nothing to do with what problems they claim to be addressing. There is, to put it mildly, a major accountability problem with NGOs.

But that's not really the major point I want to make here.

The good folks over at The Brussels Journal have an excellent post up about the corruption problem that the world is facing: foreign aid is fueling the already endemnic corruption in many parts of the Third World, and we're rapidly reaching the point where corruption is winning the upper hand.

In other words, we're reaching the point where helping is hurting, because the need becomes institutionalized and therefore will never be eliminated.

In other words, the inmates are now in charge of the asylum and have discovered that you can induce psychoses with the mood-altering drugs used to combat them in different doses.

That's right: what has happened here is that in the name of doing good, the doors have been opened for corruption beyonds the dreams of mere local government, beyond the dreams of perhaps anyone but the most rapacious of despots.

The writeoff of Third World debt really, really bad for at least three reasons.

1) It makes a mockery of the concept of sovereign debt. International lenders take a look at country risks and place an interest rate increase on countries that are poor candidates for being able to service or repay their debts. They don't stop lending to poor risks: they simply charge them more. They have to in order to protect their investments, anything else would be incredibly negligent financial management. By eliminating sovereign debt risk, you remove any and all incentives for Third World countries to improve their risk standing by doing sensible things like getting their government finances under control; having the kind of economic policies that reduce the need to devalue their currencies constantly (see Brazil and Argentina); improving efficiency within the local economy so as to gain higher levels of productivity and return on investment and last but not least, investing in a sensible manner to maximize the utility of that scarce resource called capital. By eliminating sovereign debt risks, you open the door to wasteful prestige investment projects that actually don't help anyone but the few actually invovled in the project.

2) You are rewarding, in a big, big, hugely big, way institutionalized corruption. One of the major problems facing the Third World is not that they are so heavily indebted, but rather that their rulers pissed all that money away on projects that have turned out to be completely useless. This has been to a significant degree the result of corruption, either that of the East/West (we'll give you money to buy a power plant, but you gotta buy it from one of our companies, who will be charging you significantly more than what you would have paid for it if it had been publicly tendered) or local (building a steel plant in the middle of nowhere in order to reward cronies and political supporters). Given that many Third World countries rely heavily on aid, aid is a permanent player in government finances (check government budgets in the Third World to see what I mean) and the opportunities for abuse are manifold and institutionalized.

3) It ruins the playing field. While I am highly critical of NGOs - I think that they may well be the major reason for failed states and the increasing irrelavance of international law, but that's another post entirely - their fundamental goal, of helping the needy and alleviating distress, is laudible. Once you start writing off debt without eliminating corruption, you are rewarding corruption and telling everyone involved that the important thing isn't helping people, it's making sure that you get your slice of the pie. That is what is happening right now: countries are being granted debt relief on the premise that they at least put up the appearance of elininating corruption, yet these countries are in such dire straits as the result of corruption that the aid keeps on flowing despite the corruption, and the debt relief is granted despite the corruption. What this means is that Third World despots can maximize their income by agreeing to fight corruption, increase the corruption and ensure that your economy is in such a shambles that you'll be able to nonetheless pull in the cash without actually having to do anything about it.

Bono had an interview in Der Spiegel a couple of weeks ago that in many ways is heart-rending: he knows the endemnic corruption, he knows that these governments know that they can skim and scam, and he doesn't have any answer except to hope that it will get better.

The real challenge in fighting corruption is that corruption is its own best friend.

I'd like to make a modest proposition: that the aid that the West pays right now is more than adequate to improve the infrastructure of the Third World, i.e. to provide clean water and adequate hygiene and health care, as well as to provide the means for individuals to escape crushing poverty via microfinancing.

Instead, western aid is increasing the problem, making things so much worse that the West is rapidly heading to the point where it will be condemned to finance corruption on a scale we have never contemplated in order to prevent mass starvation and crushing poverty.

We already have a situation where a mixture of corrupt government, corrupt NGOs and corrupt supranationals (UN, WHO, etc) extracts monies from the industrialized west as more or less a form of institutionalized extortion, doing only the minimum necessary to prevent mass death and the maximum possible to ensure that the situation doesn't change.

The answer to my question, then, is simple: the Third World cannot afford any corruption. Every penny that goes to Switzerland in private numbered bank accounts; every penny that goes to pay for high NGO salaries and luxuries; every penny that disappear along the way to cover "administrative costs", all end up doing just one thing: continuing the problem, not solving it.

Corruption isn't some sort of petty problem: corruption kills. Corruption, when it becomes endemnic, destroys societies and renders economies.

What is the saying? That if you aren't part of the solution, you are part of the problem?

It's going to get worse before it gets better. A lot worse.

We can only hope, like Bono, that it will get better.


Jay Denari hat gesagt…

Hi, John,

Wow. A column I largely agree with!

I think the rank and file people in the NGOs and global organizations are well-intended, but the national leaders they're dealing with often are not. The best way to solve the problem isn't to eliminate foreign aid, it's to structure it in a way that it gets delivered directly to the villages, bypassing the governments, and that means getting more PEOPLE involved on our end to go to these places and do the work necessary to help these people. When aid is abstract, expressed as money or goods without making definable people responsible for what happens with that aid, it almost invariably disappears into a rathole and ends up in some official's pocket.

Regarding debt forgiveness, we should hold those leaders accountable for what they did with the money/goods; if it didn't get to the people in need, they need to be brought up on international criminal charges for embezzlement & similar crimes. This is a global problem and needs a global solution.

John F. Opie hat gesagt…

Hi Jay -

Thanks. :-)

I would also agree that foreign aid doesn't need to be eliminated, but safeguards have to be in place that it isn't wasted. We're talking, literally, billions of dollars: it's a crime against humanity that this has gone on as long as it has.

Holding leaders responsible for debt is a tad problematic: the leader may not have encurred the debt; they may not be findable; they may not have benefitted at all. But the key thing is accountability.

And there is no greater accountability than having everything open and public, with the terms of loans and conditions clear and above-board. But most importantly, failure to be accountable must be punished by the market: that is the only method that will consistently and successfully work.

International law simply doesn't have the enforcement tools to take care of making sure that, if the case ever comes to "court" and the perps are convicted, that the perps actually are punished.

Your solution would work if there was a functioning international court system with a functioning international constabulary to enforce its decisions, backed by international laws set up by an international executive and ratified by an international congress.

In other words, in our imperfect world without any of the above, you cannot enforce any decisions by the international court, who will be making the law up as they go along.

Better leave it to the markets to punish countries: if they want to have access to international capital, they then need to behave like responsible actors. Countries like Venezuela - which right now is behaving like white trash who just won the PowerBall lottery, vindictive and petty on the one hand and irresponsible on the other - who don't need the money for whatever reason can go and do what they want: countries with a business plan to pull themselves out of poverty that actually makes sense (and will take 30 years of financing!) will be treated with enormous respect by the banks: it's in their business interest to do so.

But like I said, thanks. :-)