What Elite Capture means - and why it should enrage you

Netta Korin
Netta Korin

|

5 months ago

blog

When I first heard about blockchain I thought it was going to change the world. I was certain that the ability to transfer an asset with complete transparency was going to leapfrog foreign aid and charitable giving from the archaic systems that are currently in place - into systems that are capable of accounting for every last dollar given.

I joined Orbs as a co-founder for the very reason that I wanted to be a part of something so transformative that would enable those most in need in the world to receive the aid that was aimed at assisting them. Nearly four years down the line I am happy to say - the technology exists to change the world in the way in which I envisioned. I also have insights into the challenges that lay ahead for adoption.

Let us take a closer look at the issues facing foreign aid:

The term ‘Elite Capture’ refers to the use of public funds by an elite minority for their own benefit. A study was done by the World Bank [1] to decipher the percentage of elite capture of foreign aid funds siphoned off into private bank accounts, and discovered a leakage of 7.5% - a conservative number that increases with a higher percentage of aid to GDP.

Allow me to rephrase the above in more common terminology: Leaders of aid-dependent countries receiving billions of dollars in foreign aid steal, embezzle, and cheat in order to take at least 7.5% of that aid (conservatively over a billion dollars between the years of 1999 and 2010) and direct it into their own bank accounts. Leading the list of deposits to haven countries (read - monies that left their intended countries into offshore accounts) are Madagaskar, Rwanda and Tanzania with $193m, $149m and $145m respectively.

Your and my tax dollars are going to buy someone’s villa, their child a nice car or just pad their personal bank account with tens, or even hundreds of millions of dollars. In 2021 I ask - how does this make sense? How is it even acceptable?

By now, aid organizations have heard of Blockchain. Some of their innovation departments have even piloted the technology to track and trace funds in their care. Before we discuss why the adoption is not widespread, let us take a look at the solution:

The solution maximizes blockchain’s transparency and immutability. In a nutshell, it documents each transaction, whether a fund request, wire transfer or new supplier onboarding, in a way that both share relevant metadata with all participants and cannot be changed once it is carried out. The metadata may consist of trivial details like target and destination addresses (i.e. accounts) and others such as signatory rights, related KYC documents, alerts and more. The data is recorded on a shared ledger, however, different participants have varying access levels, depending on their hierarchy. For instance, the funding organization sees all the projects they fund, management units see their project, sub-contractors see their employees and so on.

This solution can integrate with existing banking IT and standard payment platforms making the process seamless to users, while providing invaluable insights and control to aid organizations and auditors. The bottom line is a powerful instrument that provides maximal visibility of financial aid project budgets and allows detecting fund leakage.

Now let us discuss the real reason organizations are not running to adopt blockchain solutions that will provide them visibility on every last dollar. In part, it is because of the bureaucratic and opaque nature of these large structured institutions. It has been argued that some of these institutions require an overhaul and an update in order to adjust to the requirements of a society that demands accountability. This may be so, but this argument is not for the scope of this paper and I believe that one can not entirely put the blame on them. In fact, some of the blame can also be put on the one fatal flaw of blockchain: it demands cooperation.

Blockchain is decentralized by nature, a concept that is puzzling to most of those who try to understand it. It means that while no one owns the platform, at the same time, everybody owns it. As a result, all participants must cooperate in order to have the platform running. Not only in terms of the physical aspect, i.e. migrating to a new platform and operating the network, but mostly in the conceptual aspect of understanding the benefits of collaboration. Whether it is defining the purpose of the new platform, how it is governed, how new members join and many other decisions that have to be made in advance. Therefore, too often politics is the main obstacle to deploying a blockchain-based solution, rather than its technological feasibility.

For our use case above of tracking funds - this means the development bank will need all its suppliers and partners to agree to use the platform. Therefore, the driving force to adopt blockchain may have to be a decision that comes from the top. For example, the countries that fund the development bank could decree that funds will not be distributed or disbursed until and unless all partners agree to cooperate on a transparent system. Otherwise, willful cooperation seems a distant possibility. Imagine the change that a direct mandate to cooperate on a blockchain platform could produce - effectiveness of foreign aid and monies arriving at their intended destination. A better world for millions of needy people.

The world is moving towards understanding the need for transparency in monetary transactions, and my belief is that inevitably societies will demand it. The more technologically advanced a people become, the more the question of ‘where is the money going’ will beg to be answered, and blockchain can provide the answer.

[1] http://documents1.worldbank.org/curated/en/493201582052636710/pdf/Elite-Capture-of-Foreign-Aid-Evidence-from-Offshore-Bank-Accounts.pdf

···

Netta Korin is a cofounder of Orbs.  Prior to Orbs Netta worked for many years on Wall Street as a hedge fund manager.  She later held senior positions in the Israeli government, including Senior Advisor in the Israeli Ministry of Defense to General Yoav (Poly) Mordechai, Head of CoGAT, and Senior Advisor to Deputy Minister Dr. Michael Oren in the Prime Minister’s Office in Israel, focusing on Palestinian issues. Netta has held board positions in several non-profit foundations in both Israel and the United States.  She also founded The Hexa Foundation with the aim of promoting blockchain for social impact and harnessing the mind power of the Orbs ecosystem and network to help solve the region’s and the world’s most pressing humanitarian problems.

For more information please contact Netta Korin (netta@orbs.com)

We use cookies to ensure that we give you the best experience on our website. By continuing to use our site, you accept our cookie policy.