NOVEMBER 27, 2017

BLOCKCHAIN IN FOREIGN AID

HOW

ELISE MAARSCHALKERWEERD

GENEVA SCHOOL OF DIPLOMACY & INTERNATIONAL RELATIONS

MIR Autumn 2017: Emerging Trends in Global Trade, Supervisor: John Hancock
 Blockchain in Foreign Aid

Fighting Corruption with Technology

Correspondence:

Elise M.L. Maarschalkerweerd

Chemin du Ruisseau 50

01280 Prevessin-Moens, France

elise.maarschalkerweerd@gmail.com

+31683656851

Geneva School of Diplomacy and International Relations

Class: Masters of International Relations

Semester: Autumn 2017

Course: Emerging Trends in Global Trade

Supervisor: John Hancock

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Abstract:

This research paper takes a qualitative approach on using Blockchain technology to

tackle government corruption in foreign aid. It is a thematic, literature-based study of

corruption theory attempting to understand its roots. Moreover, this paper aims to identify

solutions to corrupted governments and to offer a practical answer to this problem.

Keywords: Foreign aid; Trade; Government corruption; Political Corruption; Blockchain;

Bitcoin; Bilateral Aid; Multilateral Aid

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Table of Contents
Introduction 4
Motivation 4
Social Relevance 5
Academic Relevance 5
Literature Review 5
Theoretical Framework 7
Definitional Framework 7
Conceptual Framework 10
Research Design & Methodology 11
Methods of Data Collection 11
Possible Limitations & Complications 12

1. The Relation between Trade and Foreign Aid 13

2. Corruption in Foreign Aid 14
Responses to Corruption in Foreign Aid 15
3. Blockchain as a Tool for Accountability 17
Distribution 17
Public Access 18
4. Results & Conclusion 20
Conclusion 21
Discussion 21

Bibliography 23

Table of Figures
Figure 1. Authority Structures of Virtual Currencies. Source: (Baron, O'Mahony, Manheim, &
Dion-Schwarz, 2015, p. 9). ................................................................................................. 9
Figure 2. Interaction Effect of Bilateral Aid Allocation. Source: (Schudel, 2008) .................. 14
Figure 3. Accountability Relationships in International Development Aid. Source: Winters,
M.S. (2010) ....................................................................................................................... 16
Figure 4. How Blockchain works. (Ingenious Minds Consultants, 2017). .............................. 17

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Introduction
In the last two decennia, we have witnessed a tremendous technological revolution that

has shaped every aspect of our daily lives. Searching information, collaborate, communicate,

media, entertainment, banking, shopping, today, a world without internet is hard to imagine. It

has brought about many positive changes, but also it has some darker sides to it. Values of

privacy and transparency are being seriously threatened, and as a result economic activity is

not always safe and secure. Blockchain is attempting to change this shortcoming of the

Internet. It’s technology searches to increase transparency in payments, whilst still

guaranteeing the privacy of its users.

This paper will focus on how the technology of Blockchain could transform the delivery

of foreign aid by governments, non-governmental organizations (NGOs), foundations and

individual donors. It will begin by giving an explanation in its first chapter on how foreign aid

relates to trade. In Chapter Two, the presence of corruption in foreign trade will be discussed.

The third chapter will give a description of the technology behind Blockchain. It will shed a

light on how this technology aims to improve transparency and will bring about

accountability. Finally, in the last chapter the results will be discussed and conclusion will be

made on if and how Blockchain could bring corruption in foreign aid to a halt.

Motivation

There has always been a nice balance between technological and humanitarian interests

in my family. My brother invested in bitcoins when they first came on the market, whilst I

was focused on working with NGO’S and pursuing a career in humanitarian aid. The topic of

this paper is a collaborative idea between the two of us, merging our interests.

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Social Relevance

Maybe even more than ever before, today foreign aid is highly debated. The fear in

society is that money is wasted due to corruption and organisational greed. Finding a solution

to this legitimate problem will not only increase the effectiveness of foreign financial aid,

transparency would also put the society’s minds at ease.

Academic Relevance

Research on corruption in foreign aid is limited but existing. For obvious reasons,

acquiring statistics on corruption in governments is a difficult task. Most academic articles are

concerned with corruption theory and/or with theoretical approaches to solve this issue. Yet,

there is no research whatsoever on tackling corruption in foreign aid via the use of

Blockchain. This is no surprise as this technology is a relative new phenomenon. Doing a

search on Bitcoin or Blockchain on JSTOR, an academic database for research papers, gives

less than five results. None of these results include the use of virtual currencies in foreign aid.

It is therefore that this research paper could not only possibly contribute to the existing

research, it would also add on to existing research on tackling corruption in foreign aid with a

more practical approach.

Literature Review

World Trade Organization Website

The website of the organization offers information and publications. This will be used

for the purpose of the first chapter of this paper which focuses on the relationship between

trade and foreign aid (World Trade Organization, sd).

Corruption and Bilateral Aid: A Dyadic Approach

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 This article entails an explanation on the implications of corruption of foreign aid.

Furthermore, it has taken a quantitative approach, attempting to express corruption in foreign

aid in statistics. This article will be used in Chapter Two, on the presence of corruption in

foreign aid (Schudel, 2008), complemented by other articles on corruption theory.

Blockchain Revolution. How the Technology behind Bitcoin is Changing Money,

Business and the World.

Written by father and son, Blockchain Revolution offers well-researched insights to the

world of virtual currencies. It serves as a thorough atlas to today’s digital landscape,

highlighting how Blockchain will revolutionize many aspects of our life. The authors are

leading experts in the field of the use of technology in societies. The book will function as a

corner-stone of the second chapter of this paper about the relationship between corruption and

Blockchain (Tapscott & Tapscott, 2016).

National Security Implications of Virtual Currency: Examining the Potential for Non-
state Actor Deployment.

This book provides a clear-cut explanation of virtual currencies. It explains how it came

to existence, how bitcoins are distinguished from other virtual currencies and what the

implications are for political power (Baron, O'Mahony, Manheim, & Dion-Schwarz, 2015).

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Theoretical Framework

We live in a world full of scepticism and conspiracy theories. Tax payers want to know

where their money goes and if it is being spent effective and efficient. This is no different

when it comes to foreign aid. The lack of transparency to some insinuates corruption amongst

donors and receivers.

Problem Statement:

Receiving foreign aid is important for the least developed countries in order to ease

human suffering. However, due to corrupt governments and organizations, such aid is not

always as effective as one would wish.

Objective:

To examine if foreign aid through digital currencies via Blockchain could bring

corruption to a halt.

Research Question:

Would the use of Blockchain eliminate corruption in foreign aid?

Sub Questions:

1. What is the relationship between trade and foreign aid?

2. How is corruption present in foreign aid?

3. How does Blockchain increase accountability?

Definitional Framework

What is Foreign Aid?

When one state transfers funds or resources to another voluntary this is considered as

foreign aid. The objective of foreign aid is to offer relief to stressed states, and foreign

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investment is thus not included in this definition. This paper will focus on foreign aid in the

form of donating funds.

There are three main types of financial foreign aid being: 1) gifts; 2) grants, and; 3)

loans. Though traditionally foreign aid is defined as being between governments, more broad

definitions include aid offered by non-governmental organisations (NGOs) (Agarwal, 2017).

For the purpose of this paper only bilateral and multilateral foreign aid offered by

governmental institutions will be examined.

What is Virtual Currency and what are Bitcoins?

As it name implies, virtual currency is nonphysical money. They are not fiat currencies,

meaning that they have not been adopted by any government as its legal national or regional

currency. Instead, virtual currency is used by an online community that does not necessary

shares geographical characteristics or are unified by a single political unit. This type of

currency is used by the community to make online exchanges of certain value.

Bitcoin, though a virtual currency, distinguishes itself from other virtual currencies in

that it can be exchanged for government issued fiat currencies. Much like gold bars or coins,

the supply of bitcoins in circulation is limited. Unlike other fiat currencies though, the value

of Bitcoins does not depend on the stability and policies of any central authority. One of its

key features is its decentralized authority mechanisms (Baron, O'Mahony, Manheim, & Dion-

Schwarz, 2015).

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Figure 1. Authority Structures of Virtual Currencies. Source: (Baron, O'Mahony, Manheim, & Dion-
Schwarz, 2015, p. 9).

What is Blockchain?

Blockchain is the technology behind Bitcoin’s decentralized authority mechanism. It

functions as a database with three key features. First, ‘distribution’. Transactions made using

bitcoins are recorded in a blockchain of nodes which runs on numerous computers around the

globe. The second key feature of Blockchain is ‘public’. Because Blockchain is resided on a

network that is not based on a single institution, everybody can access the data at any time.

Finally, Blockchain is ‘encrypted’. The technology is highly secured using both public and

private encryption keys (Tapscott & Tapscott, 2016). Blockchain is not limited to only

registering bitcoin transactions. It is also possible to register individuals, agreements and/or

resources in the database. Fun fact is that it is unknown who the creator of bitcoins and

Blockchain is. The person, or people, responsible for the creation go under the pseudo name

Satoshi Nakamoto.

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Conceptual Framework

There are two main concepts in this paper on which the hypotheses are based: 1)

corruption; and; 2) transparency and accountability. These concepts are thought to be

variables that are conceivably counter-dependent. Furthermore, they impact foreign aid and

are addressed by Blockchain.

Concept #1: Corruption

The hypothesis first made in this paper is that there is corruption present in foreign aid.

The term ‘corruption’ has no specific definition but is generally associated with the misuse of

power, funds or assets for personal gain. However, corruption can be a culturally determined

notion. What is considered corruption in one place, is not necessarily considered as such

elsewhere (Hughes, 2010). For the purpose of this paper, corruption will be regarded as the

fraudulent use of funds received through donations made by governmental institutions.

Some scholars argue that corruption is both the result and the cause of institutional

inefficiencies (Kigongo E. Mubazi, 2016). Such inefficiencies are most likely to arise in the

least developed countries (LDCs). Naturally these are also the countries that are in most need

of foreign aid. Chapter one will shed a light on the presence of corruption in foreign aid.

Concept #2: Accountability and Transparency

Accountability implies a set of standards or requirements that actors can hold each other

responsible for. If failing to meet such standards or requirements, the perpetrator can be

subjected to sanctions. Such accountability can only exist when actors can and are obliged to

show data that proves they met the required standards. Transparency is therefore of existential

value to accountability.

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 The second hypothesis formulated in this paper is that using Blockchain increases

transparency of transactions. With transparent transactions of funds, donor governmental

institutions and recipient governments can be held accountable. The idea is that, if there is

more transparency in transactions and governments can be held accountable, corruption can

be reduced and at best eliminated.

Research Design & Methodology

This paper concerns a thematic and qualitative literature-research on the question if

Blockchain could bring corruption in foreign aid to a halt. It attempts to analyse and

understand the different variables at play in foreign aid corruption and to examine Blockchain

as a solution to this matter. A deductive approach will be taken beginning with a number of

hypotheses derived from theory to be found in the theoretical framework. The first chapter

will attempt to briefly clarify the relation between foreign aid and trade. In Chapter Two and

Three the hypotheses will be subjected to further examination based on existing theory. These

tests will be revised and new theories will potentially be generated in the last chapter. Finally,

the last chapter will also offer possible recommendations for further research and a reflection

on the writing process.

Methods of Data Collection

This literature research will build on already existing theory and rely on data previously

collected by scholars. No data has been collected first-hand due to the tight time frame and the

limited access I have to data concerning corruption in governments. I trust that the chosen

scholars and experts are experienced in gathering relevant data and have better access on

statistics relating especially to foreign aid corruption.

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Possible Limitations & Complications

As mentioned before, acquiring statistics on government corruption in foreign aid can

be a difficult task. It is likely that governments do not record corruption, or that the data

available is made look better than reality. As I have explained in the paragraph above, I will

not collect data myself, but rely on data previously collected by scholars and experts.

Not only do I expect to be confronted with this issue of limited access to data, I also

foresee possible issues of time. I have a tendency to work awfully precise, losing precious

time on excessive details such as layout. Anticipating this difficulty, I have created a

timeframe for the process of writing this paper.

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 1. The Relation between Trade and Foreign Aid
It is true that, in line with increasing globalization, trade flows have also become more

globalized. Developing countries however, still have lacking access to global markets and

have limited participation in global trade. In 2014 Director-General of WTO at time, Roberto

Azevedo mentioned that the least developed countries (LDCs) “are less likely to reap the

development benefits that trade and foreign direct investment can bring — and many millions

of lives remain bound, needlessly by poverty”. Adding on to this he stated that these countries

receive less foreign direct investment (FDI). Naturally, there are many measures that could be

taken in order to improve global trade participation of LDC’s, such as FDI or the WTO’s aid-

for-trade program. Foreign aid would merely be one type of measure that could encourage

participation and could potentially complement other measures in place. Mr. Azevedo

reasoned that the least developed countries need aid in order to deal with challenges relating

to trade. He believes that “any development agenda which is people-focused and forward-

looking must have a strong emphasis on the economic aspects of human development. And

therefore trade must also be central” (Azevedo, 2014).

Scholars furthermore argue that foreign aid can contribute to both national, and global

welfare. Increased welfare potentially leads to increase participation in global markets.

Foreign aid has the possibility to increase domestic investment. After a while, increased

domestic investment affects the demand and supply of commodities. From this increased

demand and supply then an effect called the ‘terms-of-trade’ arises. Not only could the

recipient country reap benefits from this effect, also can the donor country (Djajic, Lahiri, &

Raimondos-Moller, 1999).

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 2. Corruption in Foreign Aid
In the conceptual framework corruption was defined as the fraudulent use of funds

received through bilateral or multilateral aid (Hughes, 2010). It was also argued that

corruption is the result and cause of institutional inefficiencies which are most likely to arise

in developing countries (Kigongo E. Mubazi, 2016).

Governmental corruption in developing countries challenges the objective and

effectiveness of foreign aid. Consequently, donating foreign aid becomes less attractive and

the development of recipient countries is hurt. Nearly all donor countries have implemented

“good governance” as a criterion for aid allocation. Nevertheless, today foreign aid allocation

continues not to be limited to solely non-corrupt governments. Corruption however, is not

only to be found in the governments of recipient countries, also donor corruption exists.

Interaction Effect

-24.7
Bilateral Aid Allocation

-24.8 Low donor corruption High donor corruption

-24.9
-25
-25.1
-25.2
-25.3
-25.4
-25.5
-25.6

Low recipient corruption High recipient corruption

Figure 2. Interaction Effect of Bilateral Aid Allocation. Source: (Schudel, 2008)

Research of Carl Jan Willem Schudel shows that there is a statistical interaction effect

of corruption in bilateral aid, which is illustrated in Figure 2 found above. The publication

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suggests that donor countries that are less corrupt distinguish between less corrupted recipient

countries and more corrupted recipient countries. “The responsiveness of donor countries to

corruption in recipient countries with the respect to the allocation of bilateral aid is thus

related to the level of donor corruption” (p. 518).

Figure 2 furthermore shows that, though the response depends on the level of corruption

in the donor country, generally donor countries provide more foreign aid to recipient countries

with lower levels of corruption. Accordingly, government corruption in developing recipient

countries cuts down the amount of bilateral aid they will receive. Schudel also argues that

statistically corrupt governments provide less foreign aid. This brings us to overall conclusion

that government corruption, may it be in the recipient state or the donor state, causes a

reduction in foreign aid (Schudel, 2008).

Responses to Corruption in Foreign Aid

Kigongo E. Mubazi created a formula expressing the causal relation between

institutional inefficiencies and corruption: “Corruption = Monopoly + Discretion –

Accountability (Transparancy)” (Kigongo E. Mubazi, 2016, p. 128). This is confirmed by the

study of Matthew S. Winters which focuses on accountability in foreign aid.

In Figure 3 below, the chain of accountability relationships in foreign aid is illustrated.

Winters identified a number of accountability relationships, of which he reviewed five that

specifically influence the success of foreign aid: 1) implementing agencies to end users; 2)

implementing agencies to governments; 3) governments to end users; 4) governments to

donors, and; 5) donors to governments and end users. Being accountable towards end users is

highly complex. Often this group entails vulnerable people that have no voice to speak on the

matters. Moreover, they have limited or no access to data which proves, or disproves, that the

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accountable actor met the required standards. It is therefore that currently accountability given

to governments and donors is especially able to combat corruption in foreign aid (Winters,

2010).

Figure 3. Accountability Relationships in International Development Aid. Source: Winters, M.S. (2010)

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 3. Blockchain as a Tool for Accountability
As explained in the introduction, Blockchain is a database technology with the three

main features of distribution, public access and encryption. This chapter will explain how

these the features of distribution and public access can contribute to increased accountability.

Distribution

Blockchain is based on a distributed peer-to-peer network. Every first transaction is

time-stamped by the network. From here, network participants settle transactions in a block of

data. This process is repeated every ten minutes. (Tapscott & Tapscott, 2016). Figure 4 below

Figure 4. How Blockchain works. (Ingenious Minds Consultants, 2017).

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 In order to be validated by the network participants, every block must refer to the

preceding block. This makes it impossible to change one block of data, as then it would no

longer correspond with the previous and following blocks. In practice, this would imply that

fraudulent use of received funds cannot be covered up by changing the records and thus that

transparency is guaranteed.

Furthermore, the peer-to-peer network is based on thousands, if not millions, of

participants worldwide. This decentralized server system results in a distribution of power

with no single point of control. If one participant, or a group of participants would be blacked

out, this would not harm the system. This distributed power shields the database from

interference of corrupt governments or institutions (Tapscott & Tapscott, 2016).

Public Access

The second key feature of Blockchain that contributes to accountability is public access.

As we saw in the previous paragraph, all data recorded in Blockchain is transparent.

Additionally, the records kept in the Blockchain database are accessible at all times to

everybody that has access to the internet. This means that everybody, even actors that are not

involved in the process of foreign aid, have to possibility to hold the involved parties

accountable for the transactions made. As we saw in Chapter Two, currently the individuals in

need of foreign aid have no voice in the allocation of this aid. An important implication of

using Blockchain in foreign aid would that for the first time, end users could be included in

holding donor governments, recipient governments and implementing agencies accountable

for their spending. When all records are transparent and publicly accessible, this could make

or break the reputation of donors, recipients and other involved actors such as NGO’s. In the

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second chapter we identified that when a recipient country has a good reputation, it generally

receives more foreign aid (Tapscott & Tapscott, 2016).

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 4. Results & Conclusion
This paper has highlighted the importance of combatting corruption in foreign aid. First,

foreign aid well spend can improve the participation rate of the least development countries

(LDC’s) in the global trade market. As explained in Chapter One, welfare growth can increase

the supply and demand of commodities. As a result, global trade participation increases.

The second chapter focused on how corruption is present in foreign aid. It described the

relation between donor countries, recipient countries and their levels of corruption. A linear

correlation was illustrated were it was shown that the higher the level of corruption of the

recipient country was, the lower the amount of foreign aid would be allocated to it.

Furthermore, Chapter Two also shed a light on the causes of corruption and provided the

reader with information on how to tackle the issue. It reasoned that the lack of accountability

is a major player of corruption in foreign aid. Consequently, by increasing accountability,

corruption can potentially be brought back, or at best even eliminated. To hold any actor

accountable, one needs data to prove or disprove if the required standards are met.

Transparency is thus crucial for accountability. For the end users of foreign aid transactions, it

is highly complex to hold actors accountable because of their limited access to data. As a

result, this group currently plays little to no role in combatting governmental corruption in

foreign aid.

Finally, in Chapter Three the Blockchain technology joined the party. It introduced a

principle called the Trust Protocol in which it is explained how exactly Blockchain can and

will increase accountability.

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Conclusion

If Blockchain was to be used in foreign aid, it could eliminate the middle man who

receives aid before it reaches its destination. In practice, this means that foreign aid

transactions could be made directly to actors implementing aid, instead of going through the

governments of the recipient countries. At the very least, this takes away governmental

corruption in the donor countries.

Moreover, transactions would be transparent meaning that recipient governments and/or

institutions can be held accountable. It would be recorded how much funds a recipient

government receives, and how the funds hereafter is allocated. Furthermore, this transparency

of transactions would beget inclusion of the end users of foreign aid, the population that

actually needs it. Because the Blockchain database can be accessed by anyone at any time,

end users would be given the possibility to hold the involved actors accountable. This makes

that the reputation of donor governments, recipient governments and implementing will be

highly subjected to the correct allocation of foreign aid. The reputation of recipient

governments considering corruption determines the amount of foreign aid they receive.

All this could potentially finally bring governmental corruption in foreign aid to a halt.

Accordingly, the effectiveness of foreign aid would increase, which on its turn would increase

domestic investments in the recipient country, resulting in higher welfare in both the recipient

state and donor state. Demand and supply of commodities rises, and a trade effect will emerge

of which the whole world can reap the benefits.

Discussion

As Bitcoins and Blockchain is a relative new phenomenon, little research has been

done, and no statistics exist about its implications on foreign aid transactions. It is therefore

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that all current studies are based on theories of possibilities, as is mine. In order to achieve

truly well-founded results on the topic, empirical research should be done over a significant

timespan.

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