• Inside Development

Bursting the banks: The need for aid transparency in resource-rich countries

By Kathryn Joyce25 March 2011

A diamond miner in Kono District, Sierra Leone. Photo by: L. Lartigue / USAID

Can an influx of aid money ever be bad? According to a 2010 report from Transparency International, the risks of corruption and mismanagement of aid funding is very real.

Working with several development and relief groups, TI’s researchers found that a sudden influx of aid into poor or disaster-stricken countries can actually worsen the situation, by “bursting the banks” or exacerbating corruption and power imbalances in economies already lacking in strong management infrastructure or transparency systems.

It’s a scenario very familiar to transparency advocates in the oil, gas and mining sectors, where too often windfall profits in developing nations lead to increased corruption or conflict instead of an improved quality of life for citizens.

With aid and with resource revenues, a government’s capacity to manage new inflows of money responsibly, and to distribute that money transparently, can make the difference in whether funds that ought to be a benefit leave countries better or worse off.

“When it comes to accountability, many of the basic questions are the same for aid and extractive revenue flows,” says Vanessa Herringshaw, Revenue Watch director of capacity building and advocacy, “especially if aid comes as bilateral support, when funds arrive directly into government coffers.”

The key questions are the same in both efforts: Does the amount governments declare that they’ve received match the amount that donors or companies claim was paid? And, how exactly is the money being allocated and spent?

“To answer each of these questions,” says Herringshaw, “we need transparency: of agreements and contracts, of revenue flows to and from government, and of the impact of spending. Whether you’re dealing with private contracts or aid agency agreements, these are all public monies, and we have a right to know how they’re used.”

Craig Fagan, TI senior policy coordinator, says: “When development funding is not brought into the national budget or it is kept in parallel projects, it is impossible to know whether it is helping the people and communities that need it most. In the same way, government revenues gained from extractive industries must be open and accountable to ensure that the nation’s wealth is benefiting its people rather than a small cadre of elites.”

Resource wealth can also influence the aid climate directly, by providing the means for a country to move from aid dependency to self-funded development. But here too, only with the open management of income.

“As has been seen,” says Fagan, “low levels of transparency in aid and natural resource wealth offer the perfect context for mismanagement and corruption.”

Improved transparency can be a hard sell to donors and governments alike, but poor nations facing unexpected crises — or unexpected opportunities — must take the time to develop management capacity and strengthen systems for accountability so that they can steward their money well.

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