Foreign Aid and corruption

Over at Chris Blattman’s latest post, he wrote about a recent anecdote that went like this:

11 year old Liberian plastic bag salesman: “Do you want the poor people to become rich?”

My research manager, Bryan: “Why, yes!”

“Then give me your car.”

In this situation, I would like to attempt to explain to the Liberian boy, why this manner of “help” will not be Pareto efficient. But I doubt he would care much.

One is increasing the welfare of the boy by giving him the car, however your own welfare has fallen because now you do not have a car to move around, and you have lost some value in giving your car away.

An increase in Pareto efficiency would be if you lend the boy US$100 to buy a shop space and more plastic bags so that he can earn 50% more income in a month. Then he repay the loan with a modest amount of interest. In this way, both parties gain utility (welfare), hence efficiency increase.

This is also why microfinance is getting more popular now.

The anecdote that Chris wrote can be related to foreign aid and perhaps to corruption too.

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I’m reading up on corruption and integrity pacts as part of my background research for a project that I’m involved with SIIA (Singapore Institute of International Affairs). The corruption issue is a major obstacle to the efficient disbursement of foreign aid since the donors do not want their aid money to line the pockets of corrupt government officials.

It’s an interesting topic and a very tricky one to resolve as well.

Having stayed in Phnom Penh for half a year, I have experienced first hand the endemic nature of corruption in civil and law enforcement servants. I’ve paid US$15 “fine” to a policeman for wearing a jungle hat on my second day there.

The offence: jungle or military hats are only for military servicemen in Cambodia.

Noting that the average monthly salary in Cambodia is US$40-50, I’ve just paid almost a third of a uniformed civil servant’s salary in 10 minutes.

Corruption is a great obstacle to the progress of a nation as trust, goodwill, efficiency are all sacrificed for the benefits of a selected group of people (mostly those who derive their authority from positions).