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Financing Failure: How Foreign Aid is Mismanaged

Nicholas M. Guariglia - 3/25/2008

Who can explain the logic of first propping up a seemingly friendly autocrat, then disregarding the autocrat’s disloyalty, only to end this trifecta by subsidizing it all along? Take for example the late Yasser Arafat, whose decades of murdering diplomats and overseeing hit-squads was legitimized overnight by overt international assistance. Somewhere along the line, it was deemed that any hypothetical Palestinian state required the presence of an imposing “strongman,” someone to keep the apparently crazier folk down. (So who better than a Jordanian to do it?)

Until the time of his death, Arafat lived comfortably plush with Western goodies. Pressed to be more transparent by the United States, Arafat’s own finance ministry once hired American accountant Jim Prince to uncover what happened to millions of lost expenditures; alas, it was discovered that Arafat held a secret portfolio worth close to $1 billion –– yes, that’s “billion” with a “b” –– of investments in companies like Ramallah’s Coca Cola plant, a Tunisian cell phone corporation, and venture capital funds in the Cayman Islands.

In 1997, the Palestinian Authority’s own auditor office reported that $326 million (or 43%) of its annual budget was “missing.” Of the 57% of the budget that was, in fact, accounted for, Arafat’s “security forces” –– ahem, al Aqsa Brigade suicide bombers –– accumulated 35%, and Arafat himself took up 12.5% (which was probably being shuffled to mistresses abroad and his Parisian wife). Less than 10% of the Palestinian Authority’s budget was actually going to the Palestinians.

The international political economy is littered with examples such as this, where altruism has gone astray. Take for example Hisham Maki, friend of Arafat and then head of the Palestine Broadcasting Services, who, aside from his $18,000 annual salary, became a millionaire by taking bribes and selling PA-owned equipment, all with the approval of Arafat.

You get the point.

This is a common theme across the so-called “Global North” states; countries drenched in economic connectivity and political liberalism, confident in their self-sustainability but unsure of their selflessness. It needn’t matter if a European parliamentarian’s counterpart comes in the form of a shady Third World tyrant, wearing gun holsters to the U.N. General Assembly, smashing his boots on the podium, awash in guns and, invariably, Western butter.

Look at Africa, for instance: Nigerian leader Olusegun Obasanjo estimated that corrupt dictators across the continent have stolen approximately $140 billion from their own citizens since independence four decades ago. How ironic: just this past month, the Economic and Financial Crimes Commission (EFCC) opened a scathing file on Obasanjo and his government for gross mismanagement of foreign aid, personal enrichment, and embezzlement. The Coalition Against Corrupt Leaders (CACOL), an NGO dedicated to the recovery of stolen public funds, alleges that “President” Obasanjo himself has stolen billions of dollars from the Nigerian people.

Malawi has come under increasing pressure from its aid donors, as well. The British High Commission released a statement in Lilongwe, in effect declaring that the Malawi regime took large quantities of British-delivered corn and sold it off under fraudulent circumstances. “Britain and other donors have expressed concern about the management of national food reserves,” the High Commission proclaimed, ending with a call to Malawi’s “anti-corruption bureau” to investigate the situation

The corruption amounted to such an astonishing level that in 2001 the United States, through the U.S. Agency for International Development (USAID), diverted $6 million of $7 million in aid to another (apparently more responsible) country. The U.K., too, put hold on development aid to Malawi due to bribery and fraud.

There is nothing that mandates states to a) allocate aid funds to other states, and b) to do so without first requiring prerequisite assurances that it will be spent in a manner the donor state knows will be successful. In the 1970s, the United Nations tried measures to convince states to designate part of their GDP to a global effort to end poverty, and the General Assembly Resolution clarified the initiative:

In recognition of the special importance of the role which can be fulfilled only by official development assistance, a major part of financial resource transfers to the developing countries should be provided in the form of official development assistance. Each economically advanced country will progressively increase its official development assistance to the developing countries and will exert its best efforts to reach a minimum net amount of 0.7 per cent of its gross national product at market prices by the middle of the Decade.

The entire notion that it is immoral statecraft to withhold financial aid assistance to an authoritarian regime is a faulty premise to begin this discussion with. We are compelled to respect the very subjective concept of sovereignty, thus when the world allots monies for starving North Korean citizens, it is doing so by first shuffling the funds through the pockets of yes-men in the Pyongyang regime.

Some argue that even if a large percentage of aid is siphoned off by the regime for its own personal purposes, and the intended recipients do not receive as much as they were supposed to, this still inevitably helps, in some regard, a deteriorating humanitarian situation. But this argument does not see the forest for the trees. All too often, butter does become guns, and donor states are put into a conundrum not unlike the oil market today. Like the petroleum market, loopholes in the foreign aid market, and states that exploit the professed humanitarianism of donor states, situations arise where donor states end up subsidizing those who want to kill them –– and are unabashed and unashamed to admit it. In many instances, recipient states are actually given the means to do this.

The renowned Joseph Stiglitz, former Chief Economist and Vice President of the World Bank, has his own take on the issue of aid, and he has used his apparent loathing of the International Monetary Fund (IMF) to explain his rational. If the IMF suspends aid packages, like the $127 million in lending to Ethiopia, due to fears over the country’s budgetary position, Stiglitz feels this would force Ethiopia to essentially ascertain most of its revenue solely from taxes, which means foreign aid money cannot be spent without the Ethiopians first living up to the IMF’s standards. While the IMF may argue that foreign aid is too unreliable to be relied upon, Stiglitz has argued in various books –– for which he is a Nobel laureate –– that foreign aid is more stable than any tax revenue, particularly in countries with economic conditions such as Ethiopia’s.

We must keep this theory in mind, so, as the G-8 calls for more aid to poor African states –– failed and failing states, alike –– we have a template in Zimbabwe for what not to do, and one in Botswana for what to do.

Under the brutal kleptocracy of Robert Mugabe, Zimbabwe has still managed to be the recipient of large sums of international aid. Not that long ago, before this influx in economic “assistance,” Zimbabwe was one of the most prosperous states on the continent. Today, however, it is a mess; a total economic and humanitarian catastrophe, with a twisted political apparatus and a ludicrous inflation rate (that world’s highest, at over 1,000%). In 1995, one U.S. dollar exchanged for eight dollars in Zimbabwe; presently, one U.S. dollar exchanges for 100,000 Zimbabwe dollars. Around eight-in-ten people are without work. Hunger is prevalent and mass famine is always a lingering possibility.

As with all problems international in scope, we must always look at the political nature of the actor in question. Botswana is Zimbabwe’s neighbor, and has the second-highest rate of AIDS in the world; its greatest “feature” is the Kalahari, and if Zimbabwe is drought-plagued, chances are so is Botswana. And yet, Botswana is ostensibly immune from such economic mismanagement and sleazy internal corruption.

The people of Botswana are, in comparison to other worse-off Africans, thriving. And their success is not a testament to foreign aid, but to a modicum of liberalization, the rule of law, upheld contractual and financial agreements, and the like… all traits which have rendered it Africa’s least corrupt state (according to Transparency International), and one of the developing world’s greatest investment opportunities.

Mugabe’s charges of racism, colonialism, and cynical Western-inspired globalism do not hold up much water either, when you take into account that Botswana, as well, was a former British colony and was once subject to the unjust system of colonization. Complaining about nonexistent external enemies while continuing to mismanage all foreign aid, as Mugabe does, will get you nowhere. Yet crafting private property rights –– the antithesis of Mugabe’s vision –– or shuffling foreign aid to a middle class, rather than Swiss bank accounts of your “inner circle” of force protection, will bring you a long way.

So how can donor states ensure that they aid they give will be used appropriately? What are donors to focus on? Transparency is key, obviously… but so is simplicity. Andrew Natsios, former administrator to USAID and American civil servant, came to Seton Hall and spoke to diplomacy students just a few weeks ago. He mentioned the utmost importance in micro-loans, and how when the United States directly supported small businesses abroad –– through NGOs, and not foreign government ministries –– far better empirical results came about than when we aided large “pie-in-the-sky” projects.

Something as so simple as infrastructure is tantamount as well. Natsios commented that the proudest he had ever been in his long career as a civil servant was when his team of contractors finished a highway road, before expected, from Kandahar to Kabul –– a project that resulted in the beheadings and death of several contractors. Rather than package aid in something like sheer expenditures, something as banal as a road can go far in terms of getting an LDC “on its feet,” so to say. The ability to transport goods is crucial for any developing state.

Individual and private donations have been effective as well. While the U.S. leads the world in donations given, it is relatively low on the scale in terms of the percentage it gives. But the generosity of a people, however, should never been confused or conflated with the tight-purse of a government. According to latest estimates, American citizens privately give at least $34 billion overseas –– more than twice the U.S. government’s official foreign aid package. The donations are broken down like so:

* International giving by US foundations: $1.5 billion per year
* Charitable giving by US businesses: $2.8 billion annually
* American NGOs: $6.6 billion in grants, goods and volunteers.
* Religious overseas ministries: $3.4 billion, including health care, literacy training, relief and development.
* US colleges scholarships to foreign students: $1.3 billion
* Personal remittances from the US to developing countries: $18 billion in 2000

Professor William Easterly deduces this worldview on this issue into two overarching opinions: those who are “planners” and those who are “searchers.” Planners seek a top-down prescription from the outside, whereas “searchers” look for alternatives through bottom-up gross-roots solutions. This is similar to the approach J.W. Smith advocates, which suggests that the primary purpose of aid needs to empower local people (think micro-loans). Aid is good, but other forms of assistance is better; or “trade, not aid” as the economist Amartya Sen states. Smith concurs “do not (them) the money, build them industries instead.” This may be a little to cold to devise as an international economic policy, but we can rally around the old saying my late grandfather would often state: “Give a man a fish, he’ll eat for a day. Teach a man to fish, he’ll eat for a lifetime.”