Arnold Kling

Foreign Aid and Corruption

Arnold Kling, Great Questions of Economics
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Foreign aid can be siphoned off by corruption (as Treasury Secretary Paul O'Neill's allusion to Swiss Bank Accounts implies). Alberto Alesina and Francesco Giavazzi propose a solution.

Before providing more aid or debt forgiveness two conditions need to be met. One is "institutional conditionality:" only governments that show serious progress in reducing inefficiency, robbery of public property and corruption, should receive aid.

Reasonable ways to measure corruption do exist; we know which countries are more corrupt than others. This evidence should be used more aggressively by donors to discriminate amongst receivers.

Unfortunately, in most cases the poorest countries, where aid is most needed, are also the most corrupt. So a second condition must be applied: in such cases aid flow should be kept completely out of public channels and administered by non-local groups un-associated with local elites and governments.

Discussion Question. Would corrupt governments accept aid administered this way, or would they feel to threatened by it?

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