Home / Investing / A new World Bank data study reveals that the disbursement of aid to countries highly dependent on aid coincides with a sharp increase in bank deposits in offshore financial centers.

A new World Bank data study reveals that the disbursement of aid to countries highly dependent on aid coincides with a sharp increase in bank deposits in offshore financial centers.

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"The World Bank Group believes that corruption is a major challenge to its twin goals of ending extreme poverty by 2030 and boosting shared prosperity for the poorest 40 percent of people in developing countries." On its website, the World Bank recognize that corruption is one of the main obstacles to development. However, according to a new study, World Bank aid actually fuels corruption: it is not surprising, then, that the World Bank supposedly tried to censor that paper


In his last number, The Economist tied the abrupt resignation of the chief economist of the World Bank Pinelopi (Penny) Goldberg with the story told in the newspaper Elite capture of foreign aid: evidence of offshore bank accounts. One of the three authors of that document, Bob Rijkers, is an economist at the World Bank. The other two are academics: Jorgen Juel Andersen (BI Norwegian Business School) and Niels Johannesen (University of Copenhagen).

This paper, The Economist writes,

"He passed a demanding internal review by other researchers in November. But, according to informed sources, the publication was blocked by senior officials."

Today, Johannesen published the most recent draft for your personal website. It is not difficult to understand why the World Bank executives were upset.

Anderssen, Johannesen and Rijkers he found that "aid disbursements to countries highly dependent on aid coincide with strong increases in bank deposits in offshore financial centers known for bank secrecy and private equity management, but not in other financial centers." The most plausible explanation for this result is that local officials steal a significant portion of development aid funds and hide that money in their personal accounts abroad.

The document studies a sample of the 22 countries most dependent on aid, with average disbursements from the World Bank that exceed 2 percent of GDP: in the quarters when a country receives aid equivalent to 1 percent of GDP, its deposits in paradises they increase by 3.4 percent relative to a country that does not receive help, but its deposits in financial centers without shelter remain constant. The implicit average leak is around 7.5 percent:This means that for every $ 100 of development aid, $ 7.50 apparently converts into corruption gains, hidden in offshore financial centers.

The data used by the three authors for their study come from the Bank for International Settlements and the World Bank. Development aid that fuels corruption is actually money disbursed by two major World Bank institutions: the International Development Association and the Bank for Reconstruction and Development.

Countries that depend more on aid, such as Afghanistan or Burkina Faso, are also often the worst managed. According to the results of the document, development aid could improve the lives of ordinary people and respond to their immediate needs, but it can also help local corrupt politicians to accumulate personal wealth that can consolidate their power. If local politicians become richer and more powerful the more help they receive, they will have no incentive to really work to develop their country.

The country most dependent on aid in the world is Afghanistan: it receives 33.5 percent of its GDP in foreign aid, from different sources. The sum of Afghanistan's deposits in the 17 countries that the newspaper classifies as shelters now totals $ 34 million.

Andersen, Johannesen and Rijkers' article raises multiple questions. The most serious thing is about the effectiveness of World Bank development aid projects and its anti-corruption provisions: apparently, they don't work very well.

The second question is about censorship and academic research. Powerful institutions such as the World Bank, the International Monetary Fund or the Federal Reserve have talented economists and virtually unlimited resources for research: their potential contribution to the advancement of economic knowledge cannot be underestimated. But employees clearly lack the independence and freedom that academics are supposed to have.


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