A World Bank working paper produced together with Professor Niels Johannesen of the University of Copenhagen and Bob Rijkers of the World Bank has received much attention after it was reported on by the Economist and Financial Times. The authors find that when poor countries receive development aid, their tax haven deposits grow.
“We see a statistically significant correlation between aid disbursements to a group of highly aid intensive countries – countries that on average receive more than 2 percent of GDP in World Bank aid – and the growth of deposits in tax havens owned by citizens in these countries.", says Juel Andersen.
The Poorer the Country the More May be Diverted
Generally speaking, poorer countries are more dependent on aid. For countries receiving around 1 percent of GDP through aid it isn’t clear how much (if any) of this is diverted and stored in tax havens. Countries depending on World Bank aid for around 2 percent of their GDP may be losing 7.5 cents per dollar to elite capture, while countries relying on World Bank aid for 3 percent or more may be losing as much 15 cents per dollar.
If $1 million were granted to a project in a very poor country, for example, $150 000 could end up in the pockets of local politicians, bureaucrats and their cronies. This is in contrast to its intended use, which is to promote economic development and poverty reduction.
That the pattern is significant only for the most aid intensive countries is not surprising as these often are countries that struggle with the quality of governance, according to a range of governance indicators. In fact, research suggests that very high levels of aid can foster corruption and institutional erosion.
Funders Should Do More
The study is one of few looking systematically at the capture of aid, a controversial area of research. The Economist and the Financial Times report that the World Bank may initially have blocked the working paper from being published, worried about how it would look if the World Bank’s own researchers suggested its aid ended up in Swiss bank accounts.
“We really don’t know much more about the political process connected to our paper within the World Bank than what is reported by The Economist. However, if The Economist really is correct – that our research indeed was blocked – this is, obviously, disturbing”, says Juel Andersen.
It goes without saying that immense damage can be caused by aid capture. The work of Professor Andersen and his colleagues is crucial to minimising this by clearly laying out the problem which must be solved.