Govern Like Us: U.S. Expectations of Poor Countries

One reason that some poor governments have not established effective governance of their territories, much less ideal governance, is that they are too poor to do so.¹ They have much less revenue per capita to spend, and unlike rich liberal democracies that are financed largely through taxation of citizens and businesses, poor countries must get their money from much less desirable sources.

At independence, poor dependencies became poor countries. Their new governments were charged with building a state to the limit of their international borders. However, they were equipped only with a colonial administration of limited ambition that may have been dependent on external subsidies to pay its expenses. One of the core challenges of poor governments—just as it was for Western governments when they were actively engaged in state building—has been to build an adequate stream of revenue.

Most people understand that poor countries have poor governments, and that because they are poor they govern less, but if the available data are even in the right ball park they suggest governments of much more limited means than people imagine. The consequences of government poverty are reflected in the quality and extent of offerings like public education and health, the inability to pay civil servants regular salaries, or the inability to establish territorial control when it is challenged.

But poor governments not only govern less; they govern differently. Unable to build a strong domestic tax base because their populations are so poor, poor governments rely on sources like foreign aid, printing money, or even criminal activities. All of these have undesirable side effects that further undermine their ability to provide public services or the rule of law.

Absent a list of poor governments, this book focuses on poor countries. Poor countries have poor governments, but as was pointed out in chapter 1, the cost of governing any territory is likely to be variable, depending on factors such as area, population size and density, geographic challenges like deserts or being landlocked, or having poor or troublesome neighbors.

I mentioned Burundi and Democratic Republic of Congo as examples of two poor countries facing different governance challenges. However Burundi, which is slightly smaller than Maryland, with an estimated population of 10.4 million in 2014, has different challenges than does the Democratic Republic of Congo, which is roughly one-fourth the size of the United States with an estimated 77 million people.² The estimated 2013 GDP per capita, purchasing power parity is $600 for Burundi and $400 for the Democratic Republic of Congo. National wealth is at best a very crude way of getting at the poverty of governments.

A slightly better measure would be revenue per person, which would show how much per person a government has to spend.³ But we lack good information about government revenue in poor countries, which makes use of any such measure problematic. Both the Government Finance Statistics Yearbook, produced by the International Monetary Fund (IMF), and the World Development Indicators, produced by the World Bank, have only spotty data on government revenue in low income countries. For example, as of 2012, the World Bank data set, World Development Indicators, offers data on government revenue for the Central African Republic only in 2004; Burundi from 1991 to 1999; and there is no data for countries such as Chad, Haiti, Malawi, Guinea-Bissau, or North Korea. Revenue can be teased out from another indicator that is offered: revenue as a percentage of GDP. The Central Intelligence Agency publishes government revenue for all countries in current exchange rates, but their numbers differ substantially from the numbers offered by the World Bank and the IMF. Data for some countries is available for current years, and for others the available data is a few years old. The CIA data also does not seem to properly account for the revenue of federalist states, reporting only the revenue of the national government.

There are several reasons why the data is spotty. One reason is that poor governments themselves may not know how much revenue they have. It costs money to hire educated people, keep and maintain good records, control corruption, and audit and publish government accounts. In some cases, it may also be because governments do not want their finances to be public. And finally, it may also be difficult to tell what should be counted as government money and what should not. Some governments intermingle public and private money, or get money from unauthorized or criminal sources that are not part of the public accounts.

Nor do we usually have good data on the population of poor countries. It costs money to conduct a census. They are conducted every number of years, and the results are highly political and sometimes subject to influence. Most population data for poor countries is an educated guess, an interpolation from the last conducted census.

With those very large caveats, table 4.1 shows back-of-the-napkin estimates of revenue per capita of poor governments based on available data. By way of comparison, in 1902 in the United States total government spending at federal, state, and local levels was about $438 per person per year in 2011 dollars. In 2013, it was $13,782 per capita.⁴ This is for everything that government does, at all levels of government, including debt service, paying the civil service, national defense, and public health and education. Using the CIA data, which is in current exchange rates and so does not account for price differences in different countries, revenue per capita was about $109 in Niger in 2014, $75 in the Democratic Republic of Congo, $73 in Afghanistan, and $74 in Burundi.⁵ It is easy to see how important aid is to the poor governments that receive it. Using 2012 data on official development assistance from the Organisation for Economic Co-operation and Development, in Niger, foreign aid bumps the revenue per capita up from $109 per person per year to $161. Uganda had about $89 per person; with aid, it rises to $135. Afghanistan, with $73 per person, has $285 per person with development aid, reflecting large aid flows to support the government as the war continues. These numbers look a little better if we attempt to compensate for the different prices of goods in different countries by using purchasing power parity—but not that much better.

Note: GDP per capita PPP, revenue, and population from Central Intelligence Agency, World Factbook 2014, www.cia.gov/library/publications/the-world-factbook/; 2012 purchasing power parity from World Development Indicators, World Bank, “PPP conversion factor, GDP (LCU per international $),” http://data.worldbank.org/indicator/PA.NUS.PPP; official development assistance 2012 from Organization for Economic Co-operation and Development, “Query Wizard for International Development Statistics,” http://stats.oecd.org/qwids/.

We can conclude that there is no data that suggests that poor governments can afford to provide the kind of public goods and services to the entire population that rich liberal democracies now do, or even the much more modest basket that the United States provided to a subset of the population at the turn of the twentieth century. The gap appears to be monumental. According to this data, in 2013 the U.S. government still had more than 100 times the amount to spend per person than Uganda had, even counting the development aid that Uganda receives.

When a government is poor, it governs less in every way. Poor governments struggle to hire and pay an adequate number of literate or skilled workers, and the government is often woefully understaffed, particularly in areas outside of the capital. By far the largest complaint of government workers is inadequate and irregularly paid salaries. Although the question of the adequacy of salaries is a difficult one in countries where much of the population lives in extreme poverty and private sector employment opportunities are limited, there is a large gap between official salaries and government worker aspirations to a stable, middle-class lifestyle. Much of the civil service lives below the poverty line, with official salaries that are inadequate to pay for basic family needs. Salaries are not only meager, but also may be paid irregularly. Some workers may not have received their wages for months or even years. In 2005, for example, Liberian civil servants went on strike to attempt to reclaim eighteen months of unpaid salary.⁶ Junior government employees in Liberia earned between $9 and $13 per month.

The inadequacy and irregularity of government wages means that if lower-level government workers are to survive, they must either find additional, more lucrative work or find ways to turn their government job to personal profit. Similarly, the inadequacy and irregularity of the payment of government pensions also motivates some government workers to think of how to profit from their jobs while they still have them.

A World Bank study did spot checks of schools and clinics and found that teachers and doctors were often missing from their posts during times when they were supposed to be working. In Uganda, 27 percent of primary school teachers and 37 percent of doctors were missing. “In poor countries, substitutes rarely replace absent teachers, and so students simply mill around, go home or join another class, often of a different grade. Small schools and clinics are common in rural areas of developing countries, and these may be closed entirely as a result of provider absence.”⁷ Sometimes absent workers are busy tracking down their missing salaries; sometimes they are engaged in other economic activities like farming, petty trading, or running private businesses.

It is not only salaries that are in short supply, but funds to pay for supplies of every kind. This leads to a familiar sight in poor countries—schools with teachers, but no desks or chalk, hospitals with doctors, but no medicines, a government official without a desk, a chair, or paper and a pen. In Bangladesh,

In Cambodia, before the government began to partner with international nongovernmental organizations to run clinics, much or all of the operating budget of the clinic disappeared before it reached the clinic, as the money wended its way through layers of bureaucracy.⁹ Doctors were paid $20 per month and nurses were paid $15; accordingly, they spent almost all of their time away from the clinic running private practices.

Without workers or supplies, poor governments cannot provide quality goods and services to their citizens, whether they are roads, schools, hospitals, electricity, access to clean water, or justice. In 2009, only about 23 percent of people in low-income countries had access to electricity.¹¹ In 2008, about 35 percent had access to improved sanitation facilities, and 63 percent had access to improved water sources (compared to more than 99 percent in high-income countries). About 14 percent of roads in low-income countries were paved, compared to 87 percent of roads in high-income countries. In poor countries, there was only one telephone line for every 100 people; in rich countries there were 47.

Delivery of public goods and services is very unequal, concentrated in city centers. But in poor countries, most people live in rural areas.¹² Even within cities, service delivery is uneven. Rapid urbanization has overwhelmed city services, giving rise to slums and shanty towns where many people do not have access to basic water and sewerage services. Slum dwellers make up a large percentage of urban dwellers for a number of poor countries—for example, Central African Republic (95 percent), Chad (90 percent), Niger (82 percent), and Mozambique (80 percent).¹³

Poor governments have been under both international and domestic pressure to increase services, to divide the same limited resources more thinly among more people. For example, the Millennium Development Goals, a set of goals agreed on by a number of governments in 2000, set universal primary education as a goal for the world to achieve by 2015.¹⁴ As the prescient British parliamentary under-secretary of state for the colonies observed in 1965 regarding African independence,

The moment you get fully representative government—one man, one vote—any political party, any government, is going to be under terrific pressure to spread education universally, but very, very thin. And nothing eats money more rapidly than universal free primary education. And yet, you may say, it’s the inalienable right of every child to have it.¹⁵

In the face of this pressure, many poor country politicians have declared the abolition of school fees and free universal primary education—repeatedly. Such declarations need to be made repeatedly because they fall short in practice. The resources to implement them are lacking. An analysis by the World Bank found that, in order to meet the goal of universal primary education by 2015, forty-seven developing countries would have to increase their education budgets from $8.5 billion to $21 billion; it concludes that “these countries, as a group, would not be able to achieve the goal without sustained and significant external financial support.”¹⁶

Without this increase in resources, while children will not be turned away for lack of school fees, neither are they guaranteed a teacher, a classroom, or a textbook.¹⁷ Many countries have met the increased demand by having students come in shifts, halving the duration of the school day for each student. In Conakry, Guinea, eighty-five students come to the classroom for morning classes; then they go home to make room for the afternoon shift. There are no bathrooms; no clean drinking water; no fans. Crammed four to a desk, there is no place to write.¹⁸ In Zambia,

Many years of over-use of school buildings, through multiple sessions and large classes, coupled with the near-absence of public funds for school maintenance and repairs, have left most schools in an unacceptably poor physical condition. Almost half the rural schools do not have their own source of safe drinking water, while urban schools have grown well beyond their planned size, but without any commensurate increase in sanitary facilities.¹⁹

In Kenya, the declining quality of public education has led to a mass exodus from the system:

The [Ministry of Education] is aware that the quality of education has taken a nose-dive with the rapid quantitative expansion of primary education…. Consequently, parents who can afford to pay fees in private schools have removed their children from public schools and put them in private schools that have moderate class sizes and where teaching and learning is visibly taking place.²⁰

Uganda adopted universal primary education in 1997 as the fulfillment of a popular campaign promise.²¹ The surge in enrollment from poor families previously excluded by school fees was not matched by the resources to ensure that children had schools, teachers, and books. While the worst of the overcrowding was eased by donor-financed classroom construction, teacher morale plummeted and teacher absenteeism rates are among the highest in the world.²² One early observer commented that, taking the deterioration of quality into account, he could not tell if the cost of education had changed at all.²³ The director of a small NGO in Uganda that is focused on children’s education wrote:

I have seen how the great idea of free primary education has fallen short and in many cases failed because the framework was not in place for it to succeed. Picture this: you get hired to work as a teacher at a free government primary school. You are placed at a school in a remote village that is not your own. You show up to teach only to find that three of the other teachers aren’t there and haven’t shown up for weeks. You get to your class and the room is packed, with uniform-less (in Uganda all primary school students wear uniforms), shoeless, bookless, hungry children. Your classroom should only have 40 children, yet one hundred have come. Now because the other teachers have not shown up all of the other classrooms are looking to you as well. You wanted to help children learn but when the majority of the children in your classroom do not have a pencil or books it is very hard. Then you add in random attendance, where a child is there for a few days then not for a few weeks. You’ve been teaching for three months now but you haven’t been paid, there is some problem with salaries being paid out, but it was stated that this would be solved quickly (that was three months ago).

While politicians like to point to rising enrollment rates, such a measure overlooks the fall in the quality of education that can result, for example, in high dropout rates. An expert emphasizes: “Overall, it seems that nearly a quarter of children in Commonwealth Africa do not stay in school long enough to acquire permanent literacy and numeracy skills—a tragedy for them and a poor use of public resources. Any claims to have reached [universal primary education] based on figures for initial enrollment will be bogus.”²⁶ It also overlooks the question of whether high enrollments will be domestically sustainable. Foreign aid plays a significant role in financing the expanded offer of education. The United Nations estimates that in 2008, Liberia, Mali, Rwanda, and Zambia financed more than 50 percent of their education budgets from external sources.²⁷

Public health systems are similarly underequipped, dependent on foreign aid, and under pressure to expand their offer of services. Whereas the United States has one doctor for every 413 people, and Sweden has one doctor for every 265 people, Somalia has one doctor for every 28,571 people, Liberia has one doctor for every 71,428 people, and Tanzania has one doctor for every 125,000 people.²⁸ The government of Niger, a country about twice the size of Texas, is planning to double the number of doctors in its employ—in 2011 there were fewer than 300.²⁹ In 2011 in Sierra Leone, there were only four gynecologists and two pediatricians in a country of five million people.³⁰ In 2010, foreign aid financed 24 percent of public health spending in Cambodia, 38 percent in Haiti, 47 percent in Rwanda, and 64 percent in Malawi.³¹

Clinics may also lack electricity, water, basic equipment, medicines, or regular operational funds. A survey of health facilities in Al Jawf governorate in Yemen found

a considerable shortage in Al Jawf public facilities with respect to the availability of basic infrastructure items such as clean water, electricity, toilets, ground telephone lines, and sewage systems. No facility in the governorate had any means of transportation including the two hospitals and the eleven health centers. Ground telephone lines were non-existent in 96% of all facilities; only 18% of health centers had ground telephone lines, and neither of the two hospitals had phone lines. All public sector hospitals and health centers had toilets available, compared to just 50 percent of health units. Electricity was also limited, with 66% of health units and 27% of health centers having no electricity.

Clean water was also scarce—44% of health units and 36% of health centers lacked this crucial service. The most significant observation was in Barat Al-anan rural hospital which lacked water although it was using 22 of 34 rooms (65%) to provide health services for 6 hours a day, working 30 days per month as emergency days.³²

These shortages have tragic consequences for the quality of care, and make it difficult to tell when unofficial fees are necessary to make up for equipment shortages and missing salaries or are profiteering. In Uganda,

When Ms. Nalubowa, 40, a peasant farmer and a mother of seven, arrived at the decrepit hospital in Mityana, said her mother-in-law, Rhoda Kukkiriza, nurses demanded a bribe of about $24 and more money to buy airtime for a cellphone call to the doctor, accusations the nurses have denied. Ms. Kukkiriza said she had less than a dollar left after spending $2.40 to buy a razor blade, gloves and other items the hospital lacked. Unable to pay the bribe, Ms. Nalubowa was taken to the maternity ward and left unattended, her mother-in-law said.

Prison conditions in poor countries are life-threatening. In windowless overcrowded cells without beds, toilets, or medical care, with little food or water, prisoners suffocate or, often aided by malnutrition, succumb to tuberculosis, cholera, HIV, and other diseases. Abuse and torture are common. A New York Times article described the life of a prisoner in Malawi:

But the worst part may be that in the case of Mr. Sikayenera, who is accused of killing his brother, the charges against him have not yet even reached a court. Almost certainly, they never will. For some time after November 1999, justice officials lost his case file. His guards know where he is. But for all Malawi’s courts know, he does not exist.³⁶

The prisons in Zimbabwe have been described as “death traps” where “even a short prison sentence could mean death.”³⁷ Guinea-Bissau has recently finished constructing its first prison. Previously, detainees were kept in an old colonial house in the center of the capital. While there were no beds, electricity, or running water, the good news for the prisoners was that they easily escaped by climbing onto the roof and jumping to a neighboring house.³⁸

Poor democracies may be too poor to pay the cost of their own elections. Internationally, the cost of organizing elections varies from $0.70 per voter in Ghana, to $7.50 in Russia, to more than $20 per elector in Afghanistan during ongoing war.³⁹ The 1994 elections in Mozambique cost $65.5 million, and the 1996 elections in Nicaragua cost $45 million. The bulk of these costs were financed by donors.⁴⁰ Cambodia spent $24 million on its national elections in 1998, $15 million in 2002 on commune elections, and another $11 million in 2003 on National Assembly elections for a total of $50 million on one election cycle, or in total more than 10 percent of the government’s budget in 2003.⁴¹ In many cases, foreign aid underwrites the cost of elections in poor countries—because poor governments cannot afford to pay for these elections themselves. The United States has pledged $30 million for the Democratic Republic of Congo’s elections in 2016.⁴²

Finally, poor governments can even be too poor to deal effectively with organized challengers to their claims of territorial control. Mali is a poor, landlocked, West African state about the size of Texas and California combined. Mali was a darling of foreign aid donors, frequently touted as a model of democratic governance. However, the government has never had firm control of the north, or been able to supply the north with public goods and services. From Bamako, Mali’s capital in the south, to the northernmost parts of the country is a distance of more than 850 miles. The north of Mali includes portions of the Sahara desert. It has a harsh climate and a population of one to four people per square kilometer living in abject poverty, including, among others, the nomadic Tuaregs.⁴³ The periodic rebellions in the north rose to the level of civil war in January 2012. In March 2012, just three months before the scheduled Malian presidential elections, the Malian military staged a coup, on the grounds that it was being called on to fight in the north without adequate equipment.⁴⁴ Tuareg rebels took advantage of the confusion in Bamako to seize large sections of northern territory, and on April 6, declared the independence of the new state of Azawad. The government of Mali was unable to prevent the rebels from abusing the population, fighting among themselves, and destroying ancient monuments. An international military operation, led by the French, was needed to reclaim key towns such as Gao, Timbuktu, and Kidal.

Poor countries lack the capacity to implement individual income tax, and most poor country citizens are so poor that the amount of taxes they could pay would not offset the cost of collecting them.

All countries can make some use of the individual income tax, but it can be a major revenue source only if certain prerequisites are satisfied. A list of conditions proposed in 1951 included the following: (1) the existence of a predominantly money economy; (2) a high standard of literacy; (3) prevalence of honest and reliable accounting; (4) a large degree of voluntary compliance on the part of taxpayers; (5) a political system not dominated by wealthy groups acting in their self-interest; and (6) honest, reasonably efficient administration.⁴⁵

To these prerequisites, several more can be added, including a citizenry that is sufficiently wealthy and has a sufficient population density that the taxes collected more than cover the cost of collecting them, a system for the resolution of disputes that is effective, accessible, and perceived as fair, and a system for finding and identifying people and businesses and tracking their income and tax payments. Poor countries lack all of these.

Income taxes make up about 36 percent of revenue in poor countries (compared to 54 percent in rich countries), and most of this is corporate income tax, levied on a relatively small community of registered businesses.⁴⁶ Many businesses evade taxes, staying unregistered to avoid taxation and government harassment. Even the registration process itself can be expensive, difficult, and harassing. According to the World Bank’s “Doing Business” survey, in 2011 it took 100 or more days to register a new business in Laos, Haiti, and the Republic of Congo, and more than 200 days to register in Guinea-Bissau. Each administrative step and each delay is an opportunity for a government official to extort a bribe. Accordingly, many businesses prefer to remain in the shadows, forming part of the “shadow” or “informal” economy—where much of a poor country’s economic activity takes place. By one estimate, the shadow economy makes up on average 26 percent of poor countries’ GDP, compared to 14 percent in wealthier countries.⁴⁷ In Pakistan, “fewer than three million of Pakistan’s population of 175 million pay any income tax. A huge and buoyant informal (underground) economy, estimated to be anywhere from 30 to 80 percent of the real economy, goes untaxed and unrecorded.”⁴⁸

For those that are registered, evasion is rampant through underreporting. Poor country economies operate on a “cash” basis—credit cards and checks are rarely used. Many people and businesses do not have bank accounts, although the spread of cell phone technology is also expanding access to mobile banking in some countries. One of the important features of a cash economy is that financial transactions leave no paper trail. This makes it difficult to calculate the basis of taxation or to enforce laws against tax evasion. “It is said in Vientiane [Laos] that businesses keep three sets of books: one for the tax office, one for the tax office when it says it wants to see the real set of books, and the real set.”⁴⁹ The rich and politically powerful are often able to use their influence to avoid paying taxes, while the violent and dangerous are able to draw on a different set of evasive tactics.

One approach that poor governments use to try to collect taxes is to get businesses to collect taxes for them. A chief source of revenue for poor countries is taxes on consumption and production, including value added taxes (VATs), which many poor countries adopted in the 1990s with the encouragement of the International Monetary Fund. One estimate is that such taxes are responsible for about 43 percent of government tax revenue.⁵⁰ A VAT is a tax on the final consumption of goods and services and is an alternative to the retail sales tax.⁵¹ Under a VAT, taxed businesses must register, and the sellers collect taxes from purchasers that they must remit to the government. However, the seller is allowed to offset this remittance by any VAT tax that the seller paid when acting as a purchaser. In theory, the ultimate impact of this is that intermediate businesses will not pay any tax, and instead the entire tax burden will rest on the final consumer of the good or service.⁵²

The VAT system hopes to reduce tax evasion because purchasers who hope to claim a VAT credit will insist on properly documented transactions with receipts and because even if a business down the chain fails to collect the tax from its purchasers, taxes will have already been collected from that business.

Another source of domestic finance is taxes on imports and exports. Taxes on international trade are an important source of government revenue in many poor countries. In Benin, Nepal, and Togo, taxes on trade made up more than 15 percent of government tax revenue in 2010, and in Bangladesh they made up 24 percent.⁵⁴ Taxes on trade are easier to collect than income taxes because they are collected at customs checkpoints where taxpayers present themselves and have an incentive to pay in order to ensure that they can move their goods across the border. Political resistance to such taxes is lower because the cost of taxes can be passed on to the ultimate consumer of the good, who, if annoyed by high prices, will not know where to place the blame. With taxes on trade, the complicated problems associated with monitoring income levels are absent; the goods are physically present, their nature and quantity can be verified, and a single schedule of taxes is applied to the goods.

The ease of administering such taxes should not be overstated, however. The ability to extract tax revenue depends on the government’s ability to stop goods at the border. Most poor countries lack the ability to police their borders effectively. Smuggling is lucrative, involves organized crime, and undermines government revenue collection.⁵⁵

Moreover, revenue from taxes on trade fluctuates with global trade flows. The high volatility of government revenue makes planning and multiyear financial commitments difficult. This is a particular problem for poor countries, because many of them have been dependent on only a few exports such as cotton or copper since colonial times. This created booms and busts in revenue during the colonial period, and the same problem continues today.⁵⁶ In 2009, on average, a poor country’s top three exports accounted for 60 percent of all of its exports. This percentage is higher for poor countries in Sub-Saharan Africa, and in some cases, such as Niger, Guinea-Bissau, Congo, and Sao Tomé and Principe, they account for more than 90 percent of all exports.⁵⁷ According to the World Bank, today the list of twenty least-diversified economies includes fourteen oil and gas exporters; if these are excluded, the bottom twenty is made up of countries that tend to be small, poor, landlocked, and African.⁵⁸

Foreign aid is another important revenue source for many poor governments. While foreign aid is a small fraction of the budgets of rich governments, in a poor country it can double or exceed the government’s public spending and finance a significant percentage of national economic activity. But aid flows are volatile and unpredictable—much more so even than the poor country’s revenue flows.⁵⁹ This makes it difficult for poor governments to make multiyear commitments. The volume of foreign aid is high when the world economy is doing well, and low when it is doing poorly—which is exactly the time when poor governments most need it. Where aid is conditioned on the completion of policy reforms by the recipient government, the recipient government may not be willing or able to complete those reforms and aid disbursements may be slowed or halted.

Foreign aid is a mixed blessing. By definition foreign aid supports activities that the government itself cannot—and so projects are unsustainable unless they result in a reduction of government expenditures or an increase in government revenue. Donor projects may have hidden costs for recipient governments in the form of recurring costs, such as maintenance and operational costs. Donors are happy to send technical experts to help a poor government engage in law reform—or even to condition aid on law reform—but do not consider the costs of implementing the laws that they write. They assume that poor governments will ensure implementation from their own resources. This contributes to “the gap” between law on the books and law in action.

Donor policy preferences can overwhelm recipient government policy preferences. Aid can be conditioned on the recipient government’s completion of specific policy reforms. The conditionality of World Bank and IMF loans has historically been very controversial. Many researchers today believe that attempts to force recipients to undertake policy reforms through the carrot of aid or the stick of aid withdrawal have not been very successful, whether or not they agree that the recommended reforms were a good idea. Aid earmarked for specific activities, such as improving school enrollment rates for girls or making credit available to the poor, may reflect intellectual trends in the West more than the recipient’s priorities. An example is the intense focus of foreign aid donors on HIV/AIDS in Africa, including in countries where the rate of HIV infection is low. In Sub-Saharan Africa,

Some observers worry about the economic consequences of aid—that poor countries will engage in unsustainable spending, or that the presence of aid will reduce the incentives for poor governments to build robust tax systems to solve their revenue problems. Still others have raised the question of the economic impact of large inflows of foreign currency, which can cause local currency to appreciate, benefiting importers but harming exporters.⁶¹ Development experts worry about whether poor governments are receiving money faster or in higher volumes than they can sensibly manage and spend it given their limited capacities.⁶²

Others are concerned with the political impact of aid. Governments that get money from sources other than taxation of the citizenry may be less accountable to their populations and have less incentive to grant civil and political rights and provide public goods, while their populations may lack a sense of entitlement and a right to accountability.⁶³ Some are concerned that the involvement of foreign donors in providing public services and goods may marginalize recipient governments and undermine their legitimacy, although there is as yet little empirical evidence that this is true.⁶⁴ Foreign aid flows may be distributed as patronage, propping up leaders who otherwise would not be able to remain in power. Indeed, sometimes foreign aid is given for just this purpose.

Poor governments also borrow domestically. While richer countries might float bonds, inviting investors to lend them money in return for interest, poor governments have a history of defaulting on loans and difficulty borrowing from private investors. Instead, they “borrow” by simply not paying their bills for wages, goods, and services. These “domestic arrears” can be considerable. Guinea-Bissau, for example, financed its entire budget deficit in 2003 through domestic arrears, which is a fancy way of saying that it declined to pay its bills.⁶⁵ This strategy has a number of unpleasant side effects, however. The first class of creditors who don’t get paid on time are civil servants who don’t receive their wages and are then forced to find other income. Suppliers to government may raise their prices in anticipation of finding themselves unwilling holders of government debt or of having to bribe government officials in order to get paid.

Poor governments also borrow internationally. In the late 1990s, forty-one poor governments had been dubbed “heavily indebted” by the World Bank and the International Monetary Fund, meaning that they were effectively bankrupt, owing more than they could ever repay. A coalition of Western nongovernmental organizations, organized under the umbrella organization Jubilee 2000, played a key role in lobbying for rich countries to “drop the debt” of the heavily indebted poor countries. Through debt relief initiatives, the original debt stock of those countries was largely erased, although poor governments continued to borrow during and after debt forgiveness.⁶⁶

To prevent poor countries from once again becoming heavily indebted, the International Development Association, the arm of the World Bank that provides aid to poor countries, shifted from issuing only loans to issuing grants or a mix of the two. Countries with the most risk of becoming heavily indebted are only eligible for a lesser amount of grants; those with an intermediate level of risk are eligible for a mix of grants and loans.⁶⁷ However, these efforts can succeed only if other creditors also refrain from lending, and after debt relief, the improved financial position of poor governments has once again made them attractive to lenders. China, Kuwait, Brazil, India, South Korea, and Saudi Arabia have all begun to lend into Africa.⁶⁸ In 2007, China announced $3 billion in low-interest loans, in addition to interest-free loans for Africa.⁶⁹ Vulture funds are also buying up old debt and suing the newly solvent governments for payment, diverting the benefits of debt relief.⁷⁰

Finally, there are money-making strategies of desperation. Some poor governments find that the best way to make money is … to make money. When they want money, they simply print more. By issuing money to pay debts, governments get something for the price of a piece of paper, a profit called “seigniorage.” The only problem is that increasing the supply of money can cause inflation—a general rise in prices. Everyone who holds money suddenly finds that his or her money does not go as far as it used to. In this sense, seigniorage is like a tax—the government exchanges paper for goods and services, and everyone else pays.

All governments print money and so all governments get the benefit of seigniorage. However, poorer countries (who have more trouble borrowing) make use of the power of printing money more often. On average, poor countries get about 22 percent of their revenue by printing it, compared to 1.7 percent of revenue for rich countries.⁷¹ Where governments overindulge in this benefit, people become aware that the value of their money is eroding and exchange their money for other assets with more stable values as fast as they can. At the same time, they expect the value of the currency to continue to erode, and they raise their prices for goods and services in anticipation. Like everyone else, the government finds that its purchases have become more expensive, and it prints larger amounts of money to cover them. The result can be “hyperinflation”—where all confidence in the currency is lost and its value plummets through the floor.

In Zimbabwe, President Mugabe printed money to fund the implementation of government projects for his increasingly shaky government.⁷² In February 2007, the rate of inflation had reached 1,594 percent, rendering a new issue of national currency obsolete before a single bill was spent and leaving mounds of it piled in warehouses.⁷³ As of June 5, 2008, Zimbabwe’s currency was trading at an average of one billion to the U.S. dollar; analysts claimed annual inflation rates of 1.8 million percent by May.⁷⁴ In a desperate attempt to rally political support in advance of presidential run-off elections, the government promised free education, health care, and food for the needy and free fuel for the transportation sector, and ordered the central bank to print the money needed to cover these programs.⁷⁵ A loaf of bread cost 600 million in Zimbabwean currency; a two-liter bottle of cooking oil about five billion.⁷⁶ Finally, the Zimbabwean unity government was forced to abandon the local currency altogether.⁷⁷ One hundred trillion dollar notes in Zimbabwean currency are now for sale on Ebay as collectors’ items.

Poor governments also rely on sources of revenue that never show up in budgets and cannot be audited, which renders their finances opaque and undermines both the rule of law and government accountability. This is part of the reason why it is difficult to say how much money poor governments have. Government money is sometimes commingled with private money. To be sure, such comingling should not disguise the fact that the greater flow is of government money into private pockets and bank accounts, but the flow in the opposite direction, the use of commingled or private funds for government expenditure, also occurs, although it is not as well documented.⁷⁸ For example, in some communities, local leaders call community meetings and assign contributions of money or labor to households in order to build roads, water and sanitation systems, schools, health centers, dams and irrigation systems, and electrical systems, or to organize cleaning of public areas.⁷⁹ Large surveys in a number of developing countries have suggested that 20 to 50 percent of households contribute to these local works. In Indonesia, this type of informal tax is an important source of local public finance, about half as much as budgeted amounts.

Many government service providers also request extralegal private payments from service users, such as when the police demand gas money in order to investigate a crime or a court clerk requests paper in order to produce a judicial decision. Because government workers may be without the tools and supplies to do their jobs, the necessity of these levies and the distinction between these private payments and bribes are often unclear.

Governments may also finance themselves through criminal activities. Government positions can be leased or sold; government authority and discretion can be sold; government property can be stolen or used for personal benefit. While individuals and small networks can certainly engage in such activities on their independent initiative, governments at the highest levels may permit such activities both as a way of financing the government wage bill and of rewarding political supporters by giving them government posts and allowing them to turn them to personal profit. Government actors are permitted to supplement their often meager and unpredictable salaries with whatever they can beg, bully, extort, or fleece from citizens or each other, or can capture by stealing or borrowing the government resources in their charge.

The amounts that government officials obtain through bribes can so far surpass their official salaries as to render salaries superfluous. People are willing to work without salary in government positions that offer the possibility of deriving good income through bribery, sale of influence, or embezzlement, and government agencies have people working in them who have no official position but have been allowed to volunteer their labor in return for a share of the profits. A former director of customs of one poor Sub-Saharan African country was banking about one million dollars a year from his post; customs agents up and down the hierarchy helped themselves to revenue, before the remainder trickled into the treasury. The new director of customs was able to substantially increase revenue, not only through personal restraint, but through urging his subordinates to restraint. He explained, “I don’t tell them not to take,” an impossible request to enforce and an unreasonable expectation when official salaries are low and irregularly paid, “I tell them to take less.” As a public servant in the Democratic Republic of Congo said, “With our average salaries of less than US$30 a month, how can we survive without accepting bribes? We know quite well that it is forbidden by law, and that we are harming our country. But if we don’t do it, then we can’t have food for ourselves and our children, and we can’t send them to school.”⁸⁰

Allowing government officials to supplement their salaries in this way means that the returns of corruption, at least in part, help finance the government wage bill. If these flows were stopped tomorrow, so that the government could only attract the workers that it could pay, there would be an exodus from government service, and it might even be difficult to fill some skilled positions.

Poor governments also finance themselves by counterfeiting currency, cigarettes, or pharmaceuticals; trafficking in drugs, illegal arms, and technology; money laundering; smuggling; or looting and plundering neighboring countries. The proceeds go to private pockets but can also be used to finance government activities. Typically, both government and nongovernment actors are involved in the network and reap benefits from the activity, as in illegal logging in Cambodia, or smuggling in Laos, which involves “collusion between importers, customs officers and local Party members … with the savings in tariffs shared between the importer and the officials (who may have to pay a portion up the local Party hierarchy).”⁸¹ The Lao military has been implicated in the drug trade as well as the illegal wildlife trade, although the government denies it.⁸²

The United States has long been concerned about North Korea’s financing activities, which have included “drug trafficking, gold smuggling, illegal sale and distribution of endangered species, trafficking of counterfeit U.S. currency, and rare earth metals.”⁸³ The United States has accused the government of North Korea of counterfeiting Federal Reserve notes and circulating them abroad.⁸⁴ The counterfeiting “apparently helps fund travel abroad, meet ‘slush fund’ purchases of foreign goods, and subsidize the lifestyles of the privileged class in Pyongyang.”⁸⁵ North Korean diplomats and government officials have been arrested repeatedly for drug trafficking, while drug traffickers engaged in the shipment of heroin and methamphetamine to Taiwan and Japan reported that the goods had been loaded onto their boats by uniformed North Koreans.⁸⁶ According to the U.S. State Department, “These reports raise the question whether the North Korean government cultivates opium illicitly, refines opium into heroin, and manufactures methamphetamine drugs in North Korea as a state-organized and directed activity, with the objective of trafficking in these drugs to earn foreign exchange.”⁸⁷ One consequence has been a North Korean addiction to crystal meth of epidemic proportions.⁸⁸

The Congressional Research Service notes that:

Areas of DPRK criminal activity commonly cited include production and trafficking in: (1) heroin and methamphetamines; (2) counterfeit cigarettes; (3) counterfeit pharmaceuticals (for example “USA” manufactured Viagra®); and (4) counterfeit currency (e.g., U.S. $100 bill “supernotes”). Media reports also indicate that North Korea may be engaged in insurance fraud as a matter of state policy…. Conservative/mainstream estimates suggest North Korean criminal activity generates as much as $500 million in profit per year, with some estimates reaching the $1 billion level.⁸⁹

Some countries can raise government revenue by plundering their neighbors. Ugandan and Rwandan involvement in the conflict in the Democratic Republic of Congo gave their armies access to the gold-producing regions of that country. A panel of experts appointed by the United Nations concluded that the conflict was instigated by a network of government, military, and business elites for the purpose of exploiting Congo’s natural resources. The 2002 report identified key actors.⁹¹ Among the named members of the Ugandan network were senior government and military officials, including the Chief of Military Intelligence and Lieutenant General (Retired) Salim Saleh, President Museveni’s younger brother. Human Rights Watch notes that notwithstanding the results of a Ugandan investigation that recommended further investigation of criminal charges against Salim Saleh among others, no action by the Ugandan government has been forthcoming.⁹² In 2006, he was appointed minister of state for microfinance, an important area of programming for foreign aid donors.⁹³

The Rwandan involvement in the conflict was reportedly managed by the Congo Desk of the Rwandan Patriotic Army:

Because of reliance on these commingled, extralegal, or criminal funding sources, the official data on government revenues and expenditures is incomplete. Governments also cannot be held accountable for the way they manage or spend such funds. More fundamentally, perhaps, the reliance on these sources means that “government revenue,” as a separate pot of legally obtained public funds may not exist or, at best, is fuzzy, with some funds that are clearly public and others that are harder to categorize. This makes it difficult to say what actions, actors, or resources are governmental, or how much revenue the government really has. As a consequence, transparency, public accountability, and the rule of law are undermined.

Independence governments were given legal claims on territory out to the limits of the colonial boundaries and left with the task of state building—including in some cases exploration, pacification, and conquest—and governance. To accomplish these tasks they need revenue. However, poor governments have little revenue, and what revenue they have is from less stable and desirable sources than the revenue of rich liberal democracies. They cannot afford to staff their own governments, pay their own workers, build or maintain government infrastructure, arm their soldiers and police, or equip their civil servants. They cannot afford to deliver universal public goods and services such as public education, public health, or social safety nets for the poor, or even to assure law and order. The strength and quality of their governance is an inverse function of the distance from the capital. Most of their populations live in rural areas with little access to government services, but even in the capital, public goods and services are insufficient for the number of people and of poor quality by global standards. Poor governments must, of necessity, govern less.