Controlling Corruption in Development Aid : New Evidence from Contract-Level Data

Following scandals about corruption in foreign aid, and in a political climate that increasingly questions the legitimacy of development assistance, donors are under pressure to control how their funds are spent. At the same time, they also face pressure to trust recipient governments to disburse project funds themselves, so as to build capacity in developing countries. This paper assesses under which conditions donor regulations are successful in controlling corruption in aid spent by national governments through procurement tenders. By mining procurement contracts funded by the World Bank in 100 countries over the period 1998-2008 for corruption “red flags”, we create a dataset that provides an unprecedentedly accurate picture of corruption risks in the spending of aid across the developing world. Through propensity score matching and regression analysis, we find that the 2003 World Bank regulatory reform aiming to control corruption was effective in reducing corruption risks: lowering single bidding on competitive markets by 3.8-4.3 percentage points. This effect is greater in countries with low state capacity