Foreign Aid And Hidden Costs Of Corruption

Pacific Islands Development Program, East-West Center With Support From Center for Pacific Islands Studies, University of Hawai‘i


By Jason Brown

APIA, Samoa (Samoa Observer, March 12, 2014) – Much has been written over the years, including by this newspaper, about whether aid is a form of corruption.

In an interview last Friday, Prime Minister Tuilaepa Sailele Malielegaoi attempts to portray a soft version of this corruption, describing aid from rich countries as self interest.

"They do it because it is their overall belief that if they can raise economic growth in smaller countries, these countries will have enough money so in the future, they will turn around and buy goods from the bigger countries. So aid is not some strange type of Christian belief to love, it’s not that. It’s their own selfish motives for the future. They are investing in their own future."

This sounds wise and knowing, but is, however, far too diplomatic to fully explain the criticism that aid is a way of promoting corruption.

One organisation, Global Financial Integrity, estimates that more than ten times the amount in aid disappears from poor countries in what it calls "illicit flows", the money ending up in rich country tax havens and "low to zero" tax banking centres.

These illicit financial flows take many forms but often take see suppliers underpaid for exports, everything from oil to fish.

Government officials in poor countries turn a blind eye to these underpayments, either because they’re corrupt themselves, or they’ve been ordered to turn a blind eye by corrupt politicians. Or both.

What little aid is paid often ends up going to already rich elites in those poor countries – consultants, contractors, politicians, and their supporters, a form of cronyism.

Some people suggest that rich countries should stop supplying aid and start paying fair prices for trade.

Raymond W. Baker is the director of Global Financial Integrity and, in 2012, he explained those views this way:

"This juxtaposition of foreign aid and illicit outflows naturally raises the question: why should Western powers, which are currently struggling with their own economic problems, continue giving aid to developing economies if so much money is just going to flow back out illicitly?

"Are we wasting our money?

"Or worse, are we fueling the problem?"

The simple answer, he said, is that research does not find "any" connection between foreign aid sent to a particular country and illicit money flowing out of that same economy.

Aid money tends to be highly monitored, he notes, and it is generally directed toward poverty alleviation and improving social services - efforts which, "if anything, would likely curtail illicit outflows, which are driven in part by income inequality."

He points to the example of China, which in 2009 suffered illicit outflows of $291 billion while only receiving about $1 billion in aid.

So aid is not just a polite way of saying corrupt trade.

Mr. Baker makes clear the real problem of aid here:

"A more nuanced analysis of the issue reveals that, while officials in developing nations are not innocent in the matter, financial structures created and maintained by Western economic powers are the main factor facilitating the illicit flow of money out of the developing world.

"A shadow financial system consisting of tax havens, secrecy jurisdictions and anonymous corporate vehicles makes it easy for corrupt dictators, terrorists, drug traffickers and tax evaders to quietly shepherd their funds out of the developing world and around the planet without notice.

"The problem is endemic, with more than 60 tax havens scattered across the globe offering low to no taxes on profits booked in non-functioning entities. Nearly all of these jurisdictions, which include economic powers like the United States and United Kingdom, offer secrecy services enabling entities to form behind trustees and nominees such that no one, including law enforcement, can figure out who are the real owners.

"As long as this tax haven secrecy exists, developing economies will continue to hemorrhage vast sums of money. Yet, just as developed Western economies created this opaque financial system, they can dismantle it."

Global Financial Integrity is an anticorruption organisation that attempts to get down to the cold, hard facts, and identify just how much money is lost due to corruption.

Except that money is never truly lost.

Some people know exactly where the ‘missing’ money has gone.

Just that those people keep that knowledge secret.

Which is why another organisation, the Tax Transparency Network, measures corruption by how secret each country is. As previously reported, Samoa was listed in 2013 as the most secretive in the world, based on the number of laws that restrict access to certain categories of information.

According to the Financial Secrecy Index, Samoa has a secrecy ranking of 88, compared with 78 for Switzerland, the world’s biggest and most famous tax haven.

Since 2012, a huge expose of tax havens, including Samoa, by ICIJ, the International Consortium of Investigative Journalists, has seen pressure on western governments to loosen secrecy and tighten up on tax evaders.

That pressure is having an effect.

Last month, the European Parliament voted in favour of proposed anti-money-laundering rules that would require the ultimate owners of companies and trusts incorporated in the European Union to be listed in public registers in EU countries.

"Public registries of the real owners of companies and trusts will give police, tax authorities, journalists and civil society a vital tool to track illicit money trails," said Robert Palmer of British corporate governance nonprofit group, Global Witness.These laws are even more important now that an increasing number of governments – Australia being the latest example – are pushing trade instead of poverty as a target for aid. Increased ‘aid for trade’ means increased opportunities for corruption.

But, as pressure grows on bigger countries to be more transparent about secret "shell" companies, smaller tax havens like Samoa will also come under increasing pressure to keep quiet about those same sort of companies.

Because the aid secret that is not talked about here is that most rich country governments are heavily influenced by huge companies that fund political parties.

It is these same companies that benefit most from lax tax laws.

So when rich countries insist on "zero tolerance" of corruption in aid spending, they ignore the fact that Samoa is enabling that very same sort of corruption for their biggest companies.

And that’s one of the reasons why small countries get millions in aid.

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