Controlling Corruption: Foreign Aid in Low-Governance Environments

Can foreign aid succeed in corrupt environments? Conventional wisdom suggests that it cannot because institutional problems are intractable, aid is fungible, and most aid is political and thus inefficient. In this paper, I argue that multilateral aid can succeed in low-governance environments because corruption scandals create severe legitimacy costs that nowadays force aid agencies to take countermeasures. To curtail these legitimacy costs and thus ensure survival, multilateral aid agencies have invested in large anti-corruption infrastructures and work with recipients to include context-specific, remedial action plans at the project level when appropriate. Since these action plans address fungibility and elite capture through additional audits, procurement controls, staff oversight, and social accountability measures, aid can succeed in low governance environments. To test my argument, I individually coded all 3,437 World Bank investment projects approved from fiscal years 2001-2014 for the use of context-specific, project-level Governance and Anti-Corruption Action Plans (GAAPs). Using matching and Bayesian hierarchical models, I find that projects with GAAPs yields better project outcomes even in low-governance environments. Contrary to recent claims that the only way to control corruption is through collective action, monitoring based on the principal-agent model remains useful and relevant.