Legal approaches to eliminating corruption won’t ever work, and can often make the situation worse. The best way to deal with corruption is to change the underlying incentives. As coalition size increases, corruption becomes a thing of the past. As we proposed for the IOC and FIFA, increasing the number of members responsible for choosing the site of the games could end graft. The same logic prevails in all organizations. If politicians want to end massive bonuses for bankers then they need to pass legislation that fosters the restructuring of corporate government, so that chief executive officers and board chairs really depend on the will of their millions of shareholders (and not on a handful of government regulators). As long as corporate bosses are beholden to relatively few people they will provide those few key supporters with fat bonuses. Big bonuses might not be popular with the public or even with their many shareholders, but the public and unorganized shareholders can’t simply depose them. Insiders at the bank can. Legislating limits on compensation will simply force CEOs to resort to convoluted and quasi legal means. Such measures cannot improve corporate transparency or make balance sheets easier to understand.
Those seeking to regulate corporate compensation and put businesses on the straight and narrow path of enhancing shareholder welfare would do well to examine closely the rules by which corporations are ruled. First-blush fixes, such as are often proposed by government officials, play well with their political constituencies but also violate the fundamental logic of governance and so are likely to undermine good corporate governance. Consider the problem of corporate fraud. We have amassed considerable evidence that securities fraud is more likely to be committed by firms with financial problems and a large coalition than by firms with comparable financial problems and a small coalition. After all, executives who depend on a relatively large coalition are particularly vulnerable to being replaced when corporate performance is poor. Being at greater risk of deposition, larger coalition executives try to hide poor corporate performance through fraudulent reporting.20 What is more, one of the best early-warning indicators of corporate fraud is that senior management is paid less—not more—than one would expect given the firm’s reported performance!
The same issues hold when examining governments. Politicians can introduce all sorts of legislation and administrations to seek out and prosecute corruption. This looks good to the voters. But such measures are either a façade behind which it is business as usual, or they are designed as a weapon to be used against political opponents. Neither a smokescreen nor a witch hunt will root out sleaze. But make political leaders accountable to more people and politics becomes a competition for good ideas, not bribes and corruption. Of course leaders don’t want to be more accountable. It reduces their tenure in office and gives them less discretion. That’s why we must next turn to the difficult problem of how to get leaders to agree to such actions.
7
Foreign Aid
ADEMOCRAT’S LOT IS NOT A HAPPY ONE. SHE MUST continually try to find better policy solutions to reward her large number of supporters. And yet her hands are tied. She has little discretion in her policy choices. Her pet projects must be subjugated to the wishes of her large body of supporters, and she can steal virtually nothing for herself. She is like a selfless angel, appearing to place the concerns of her people over her own interests. That is, until she turns her attention overseas.
When it comes to foreign policy, a democrat is prone to behave more like a devil than an angel. In fact, in targeting her policies at foreign governments she is likely to be little better than the tyrannical leaders who rule those very foreign regimes.
In this chapter we explore five questions about foreign aid. Who gives aid to whom? How much do they give? Why do they give it? What are the political and economic consequences of aid? And what do the answers to these questions teach us about nation building?
For any who were starting to think of democrats as the good guys, this will serve as a wakeup call. Most of us would like to believe that foreign aid is about helping impoverished people. The United States Agency for International Development (USAID), the primary organization for allocating US aid, advertises itself as “extending a helping hand to those people overseas struggling to make a better life, recover from a disaster or striving to live in a free and democratic country. It is this caring that stands as a hallmark of the United States around the world.” Making the world a better place for its inhabitants is a laudable goal for donors. Yet the people in recipient nations often develop a hatred for the donor. And recipient governments (and donors too) often have different views about what the money should be for. As we will see, democrats are constrained by their big coalition to do the right thing at home. However, these very domestic constraints can lead them to exploit the peoples of other nations almost without mercy.
The Political Logic of Aid
Heart-wrenching images of starving children are a surefire way to stimulate aid donations. Since the technology to store grain has been known since the time of the pharaohs, we cannot help but wonder why the children of North Africa remain vulnerable to famine. A possible explanation lies in the observations of Ryszard Kapuscinski. Writing about the court of the Ethiopian emperor Haile Selassie, Kapuscinski describes its response to efforts by aid agencies to assist millions of Ethiopians affected by drought and famine in 1972:1 Suddenly reports came in that those overseas benefactors who had taken upon themselves the trouble of feeding our ever-insatiable people had rebelled and were suspending shipments because our Finance Minister, Mr. Yelma Deresa, wanting to enrich the Imperial treasury, had ordered the benefactors to pay high customs fees on the aid. “You want to help?” the minister asked. “Please do, but you must pay.” And they said, “What do you mean, pay? We give help! And we’re supposed to pay?” “Yes,” says the minister, “those are the regulations. Do you want to help in such a way that our Empire gains nothing by it?”
The antics of the Ethiopian government should perhaps come as little surprise. Autocrats need money to pay their coalition. Haile Selassie, although temporarily displaced by Italy’s invasion in the 1930s, held the throne from 1930 until overcome by decrepitude in 1974. As a long-term, successful autocrat, Selassie knew not to put the needs of the people above the wants of his essential supporters. To continue with Kapuscinski’s description:First of all, death from hunger had existed in our Empire for hundreds of years, an everyday, natural thing, and it never occurred to anyone to make any noise about it. Drought would come and the earth would dry up, the cattle would drop dead, the peasants would starve. Ordinary, in accordance with the laws of nature and the eternal order of things. Since this was eternal and normal, none of the dignitaries would dare to bother His Most Exalted Highness with the news that in such and such a province a given person had died of hunger.... So how were we to know that there was unusual hunger up north?
Selassie fed his supporters first and himself second; the starving masses had to wait their turn, which might never come. His callous disregard for the suffering of the people is chilling, at least until you compare it to his successor. Mengistu Haile Mariam led the Derg military regime that followed Selassie’s reign. He carried out policies that exacerbated drought in the Northern Provinces of Tigray and Wollo in the mid 1980s.2 With civil war raging in these provinces and a two-year drought, he engaged in forced collectivization. Millions were forced into collective farms and hundreds of thousands forced out of the province entirely. Mass starvation resulted. Estimates of the death toll are between 300,000 and 1 million people. From the Derg’s perspective the famine seriously weakened the rebels, a good thing as Mengistu saw it. Many of us remember Live Aid, a series of records and concerts organized by Bob Geldof to raise disaster relief. Unfortunately, as well intentioned as these efforts were, much of the aid fell under the influence of the government.3 For instance, trucks meant for delivering aid were requisitioned to forcibly move people into collective farms all around the country. Perhaps 100,000 people died in these relocatio
ns.
There is no shortage of similar instances, where aid is misappropriated and misdirected by the recipient governments. To take just one prominent example, the United States gave Pakistan $6.6 billion in military aid to combat the Taliban between 2001 and 2008. Only $500 million is estimated to have ever reached the army.4 Nevertheless, aid continues to flow into Pakistani coffers. Given the stated goals of aid agencies, once it becomes clear that money is being stolen, one would expect them to stop giving. Alas, they do not.
Indeed, to dispel any pretense that donors are having the wool pulled over their eyes, it is worthwhile to consider the Kenyan case. In her book, It’s Our Turn to Eat, Michela Wrong describes the exploits of an idealistic bureaucrat, John Githongo. He was appointed anticorruption czar by the new Kenyan president Mwai Kibaki.5 Given the notorious corruption of his predecessor, Daniel Arap Moi, Kibaki ran on an anticorruption ticket. International aid agencies began once again to lend to Kenya at attractive rates. When the IMF gave Kenya a $252.8 million loan, the Economist reported that the finance minister was overheard whistling “Pennies from Heaven.”6
Githongo quickly discovered that the government thought his agency’s function was more to cover up corruption than to root it out. When he realized the corruption went all the way to the president, he made secret tape recordings, then fled to Britain and provided international organizations and banks documentary evidence of the corruption. He was not alone in his claims. The British ambassador to Kenya, Edward Clay, in beautifully florid language, described the corruption as ministers eating “like gluttons” and “vomiting on the shoes” of donors.
Although some years later the IMF and World Bank would eventually stop lending to Kenya, this was not the immediate reaction. Indeed, the international financial community shunned Githongo rather than the wrongdoers. His information was ignored and he became a pariah at development meetings. Banks and bureaucrats acted like people so desperate to eat at a restaurant that they continued to ignore the health department’s warning that the kitchen was overrun by rats. Githongo now makes a meager living as a lecturer and consultant. Edward Clay became persona non grata in Kenya and was discreetly retired by the British government. Both Githongo and Clay effectively ended their careers by “doing the right thing.”
It is hard to believe that aid agencies remain so naïve as to not understand how misused their funds are. Perhaps the truth lies in another aim of the USAID—“furthering America’s foreign policy interests.” Perhaps the United States is more interested in having a reliable ally in its fight against global terrorism and needs assistance combating Somali pirates in the Indian Ocean.
Against this harsh view, that aid is about recipients selling favors overseas, is the rhetoric of Kenya’s first president, Jomo Kenyatta, who at his Independence Day speech in 1963, said:We shall never agree to friendship through any form of bribery. And I want all those nations who are present today—whether from West or from East—to understand our aim. We want to befriend all, and we want aid from everyone. But we do not want assistance from any person or country who will say: Kenyatta, if you want aid, you must agree to this or that. I believe, my brothers, and I tell you now, that it is better to be poor and remain free, than be technically free but still kept on a string. A horse cannot choose: reins can be put on him so he can be led around as his owner desires. We will not be prepared to accept any aid that will tie us like a horse by its reins.7
As upright as this speech may initially sound, Kenyatta is in fact being disingenuous. Are aid agencies willingly throwing away money? Or are they getting something in return? We suspect that the key statement in Kenyatta’s speech was “whether from West or from East.” In spite of his idealistic words, he was covertly telegraphing that his government remained open to bids from both sides.
Political logic suggests that democratic donors are ready to turn a blind eye to theft and corruption when they need a favor. If you remember, Sergeant Doe of Liberia received over $500 million from the United States during his decade in power. And the United States got a lot in return: “We [US] were getting fabulous support from him on international issues. He never wavered [in] his support for us against Libya and Iran. He was somebody we had to live with. We didn’t feel that he was such a monster that we couldn’t deal with him. All our interests were impeccably protected by Doe.”8
With the end of the cold war, the United States had much less need for Doe’s support. Only then did it find its moral scruples. In 1989 it published a report, which we quoted earlier but is nonetheless worth repeating:[Liberia] was managed with far greater priority given to short-term political survival and deal-making than to any long-term recovery or nation-building efforts.... The President’s primary concern is for political and physical survival. His priorities are very different from and inconsistent with economic recovery . . . President Doe has great allegiance to his tribes people and inner circle. His support of local groups on ill designed projects undercut larger social objectives.9
The truth is, foreign aid deals have a logic of their own. Aid is decidedly not given primarily to alleviate poverty or misery; it is given to make the constituents in donor states better off. Aid’s failure to eliminate poverty has not been a result of donors giving too little money to help the world’s poor. Rather, the right amount of aid is given to achieve its purpose—improving the welfare of the donor’s constituents so that they want to reelect their incumbent leadership. Likewise, aid is not given to the wrong people, that is, to governments that steal it rather than to local entrepreneurs or charities that will use it wisely. Yes, it is true that a lot of aid is given to corrupt governments but that is by design, not by accident or out of ignorance. Rather, aid is given to thieving governments exactly because they will sell out their people for their own political security. Donors will give them that security in exchange for policies that make donors more secure too by improving the welfare of their own constituents.
The fact is, aid does a little bit of good in the world and vastly more harm. Unless and until it is restructured, aid will continue to be a force for evil with negative consequences—moreover it will continue to be promoted by well-meaning citizens who in making themselves feel good are blinded to the harm they are inflicting on many poor people who deserve a better lot in life.
Let’s be clear, democrats act as if they care about the welfare of their people because they need their support. They are not helping out of the goodness of their hearts, and their concern extends only as far as their own people—the ones from whom they need a lot of supporters. Democrats cannot greatly enrich their essential backers by handing out cash. There are simply too many people who need rewarding. Democrats need to deliver the public policies their coalition wants.
Autocrats, on the other hand, can richly reward their limited number of essential backers by disbursing cash. Money, which good governance suggests should be spent on public goods for the masses, can instead more usefully (from the autocrat’s perspective) be handed out as rewards to supporters. And since private goods generate such concentrated benefits to the people who matter (and a good leader never forgets that who matters is all that matters), autocrats forsake the public policy goals of the people. It is not that they necessarily care less about the people’s welfare than do democrats; it is just that promoting the people’s interest jeopardizes their hold on power. Remember the story of Julius Caesar!
Herein lies the basis for making foreign aid deals. Each side has something to give that the other side holds dear. A democrat wants policies his people like, and the autocrat wants cash to pay off his coalition.
Suppose there are two nations, A and B, each with a population of 100 people. The leader in each nation has $100 with which to buy political support. Suppose nation A is a democracy and its leader needs to keep fifty people happy in order to stay in power. In contrast B is an autocracy and its leader needs to keep five people happy. Suppose the people of both nations care about some policy initiative taken up by
nation B. For instance, to take a common cold war situation, the policy might be nation B’s stance towards the Soviet Union. The citizens in nation A prefer that B adopt an anti-Soviet stance. Suppose the value of such a stance to each of the people in nation A is equivalent to $1. The citizens of nation B don’t want socialism outlawed and they don’t want their government to take an anti-Soviet stance. Indeed, since it is their country’s policy at stake, let’s assume that the people of B care about their government’s policy much more than the people in nation A. To keep our example simple, suppose that if B takes the anti-Soviet policy, then this is equivalent to a $2 loss in welfare for each of the 100 people in B.
In nation A, the leader has $100 to make fifty people happy. If he hands out the money to his supporters then each gets $2. The leader in nation B has fewer people to satisfy. If he handed out all his money, then each of his five supporters would get $20. Now, suppose the leader in B agrees to change to the anti-Soviet policy in exchange for cash. The essential questions are how much does B need and how much is A willing to pay to make this deal work?
The leader of B would only agree to trade policy for aid if it made his coalition better off. The switch in policy is equivalent to a $2 loss for each of his supporters (and each of the inconsequential remaining 95 people in B who are not influential), because they don’t like the policy. So the leader of B would never agree to the anti-Soviet stance unless the “aid” money he gets for doing so is larger than this loss. Since he has 5 supporters to keep happy, and each supporter suffers a $2 loss, he needs at least $10 in aid to offset the political cost of turning anti-Soviet. That is, an extra $2 for each of his 5 essential backers is the minimum required to change B’s policy to anti-Soviet.
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