At the end of January, Bill and Melinda Gates released their annual letter describing the work of the $38 billion Gates Foundation and their views on the state of global development. The letter—a strong defense of development aid—reignited the embers of a confrontation between proponents and opponents of development assistance, led by champions based at either end of Broadway: Colombia University’s Jeff Sachs (for) and New York University’s Bill Easterly (against). The Twitter (TWTR) exchanges and dueling op-eds were enough to make most development wonks forget about the Super Bowl.
Almost ignored in the firefight is an even more provocative issue raised by Bill Gates in his letter: namely, the suggestion that corruption isn’t nearly the barrier to development that most people think it is. It was an almost unheard of line from a major donor over the past 15 years. As it happens, it is also right.
Gates suggested kickbacks and bribes are “an inefficiency that amounts to a tax on aid”—but not nearly a significant enough problem to justify shuttering support. Gates’s relaxed language is unique among the heads of the world’s donor organizations. Compare, for example, World Bank President Jim Kim. He recently declared that “in the developing world, corruption is public enemy No. 1,” and that “we will never tolerate corruption.”
The difference is easy to explain: Kim has to act tough and declare “zero tolerance” because public opinion in donor countries holds that corruption is the biggest barrier to development—and effective aid—in Latin America, Africa, and Asia. The median survey respondent in the U.S. thinks 60 percent of aid ends up in the hands of corrupt officials. In the U.K., 57 percent of the population reckons that giving aid is pointless because of the level of corruption; more than half (PDF) suggest that the single most important reason poor countries are poor is because of corrupt governments.
Bill Gates doesn’t have constituents to worry about. That means he can paint a considerably more accurate picture of the world without facing the risk of his funding being slashed. Corruption is a serious problem in development. But according to businesses and entrepreneurs across Africa, Asia, and Latin America, it is far from the biggest challenge they face.
The World Bank has survey evidence on corruption covering 73,108 companies across 123 countries. Many of them report paying bribes for government services or in order to get contracts, for example. One of the survey questions asks how large are the “informal payments” solicited in order to win a government contract. In 22 countries, the average respondent suggests the size of such bribes is more than 5 percent of the value of the contract. The average in a further 38 countries suggest sthe proportion is between 2 percent and 5 percent, while in 52 countries the average is below 2 percent. As Gates suggests, there’s strong evidence corruption acts as a real tax in many countries—and not just on aid, but on all government transactions.
But look at another question in the World Bank survey: “What’s the most serious obstacle facing the operation of this establishment?” Companies are given 15 possible answer choices, ranging from access to finance to regulations, infrastructure, tax rates, crime, and corruption. In less than 1 percent of countries was ‘corruption’ the most common answer. In only one out of seven countries did corruption even rank in the top three most common responses. Access to finance ranked first in 29 percent of countries, while electricity was the top concern in more than one out of five countries. Corruption ranked eighth out of the 15 obstacles, equal with customs and trade regulation and labor regulations. That put it below crime and disorder, political instability, informal sector competition, tax rates, and an inadequately educated workforce.
That corruption is a relatively modest concern for entrepreneurs and owners in developing countries might help to account for the weak link between country-level measures of corruption and economic growth over time. A recent analysis of 41 different studies involving 460 estimates of that impact found that less than a third of studies suggest a significant negative relationship between corruption and growth.
Even if it isn’t public enemy No. 1, corruption does remain a serious challenge. The cost of corruption isn’t just the value of the kickbacks—it’s the damage done when the money pays off regulators and overseers who are meant to make sure schools and bridges are built properly, or the bureaucrat who uses aid to buy fake drugs. One reason electricity provision ranks so high among firm concerns in many developing countries is that electricity is stolen with the connivance of utility workers, and construction and supply contracts are sometimes awarded to the largest briber, rather than the most efficient contractor. And corruption is a symptom of a larger problem—poor governance and weak institutions. For all these reasons, civil society groups and donors should push for greater transparency, for reduced regulation and capricious bureaucracy, and for better policing.
But that doesn’t mean that we should give up on government—or on aid. As Gates points out in the letter, “Four of the past seven governors of Illinois have gone to prison for corruption, and to my knowledge no one has demanded that Illinois schools be shut down or its highways closed.” Though corruption in Illinois or India might make government less efficient, those governments still provide vital services. We should focus our “zero tolerance” on absolute poverty and on children dying of diseases that can be prevented with a 20¢ vaccine. Corruption doesn’t come close as a moral stain.
Bill Gates wrote the foreword to Charles Kenny’s most recent book and the Gates Foundation provides funding to the Center for Global Development.