World Bank Enables Foreign Aid Theft Jomo Kwame Sundaram

World Bank aid encourages governments to enable illicit financial outflows to offshore tax havens by reducing capital controls, thus draining precious foreign exchange and government resources.

Aiding elite wealth

Aid disbursements to highly aid-dependent countries coincide with sharp increases in bank deposits in offshore financial centres known for banking secrecy and private wealth management.

Using Bank for International Settlements (BIS) data, Jørgen Juel Andersen, Niels Johannesen and Bob Rijkers found trends suggesting wealth accumulation abroad by national elites coinciding with World Bank aid disbursements.

Capital outflows follow aid inflows apparently captured by ruling politicians, bureaucrats and their cronies. In the 22 most World Bank aid-dependent countries, aid disbursements coincide “with increased deposits in foreign bank accounts in tax havens”.

National elites capture World Bank aid to poor developing countries. Such ‘leakages’ came to 7.5% of inflows, rising with aid-reliance. Earlier, ‘petroleum rent’ leakages to secretive offshore tax havens were estimated at 15%.

A modest share of all aid, World Bank disbursements averaged over 2% of low-income countries’ GDPs yearly. For Bank disbursements of at least 1% of GDP, leakages from 46 countries increased deposits in havens by 3.4%. But at a 3% of GDP threshold, leakages from seven countries rose to 15%!

Elites capture aid

The conventional wisdom is that aid promotes economic development in the poorest countries, while a few disagree. Many believe aid effectiveness depends on institutions and policies in receiving countries, with some warning corrupt elites may capture aid.

Many suspect elites who capture aid, or funds freed up by aid, hide their ill-gotten gains in private accounts in tax havens. Some countries receiving foreign aid are quite corrupt, with aid inflows captured by ruling politicians and their cronies.

There is much evidence that very high aid inflows foster corruption, with development projects failing due to greedy elites. The poorest countries supposedly receive the most aid but are often the worst governed. The study shows World Bank aid has been no better than others, further burdening poor countries and people.

Its data does not allow identification of those involved or the mechanisms used. Nonetheless, it concludes “the beneficiaries … belong to economic elites” with other research showing “offshore bank accounts are overwhelmingly concentrated at the very top of the wealth distribution”.

Illicit outflows enabled

Such aid capture by ruling elites helps explain its diversion abroad, how such funds end up in tax havens, and related surges in illicit outflows. Hence, large increases in offshore haven bank accounts coincided with aid disbursements.

Such abuses get worse when countries are more corrupt and have less effective checks and balances. Unsurprisingly, there are larger outflows to havens when projects fail, suggesting elite responsibility for such failures.

Conversely, there are less outflows to havens when procurement is from local contractors. When taxes can easily be evaded without using offshore accounts, and such abuses are unlikely to be penalised, outflows to havens become unnecessary and decline.

Foreign aid has also been used to get governments to reduce capital controls. Although assured by the International Monetary Fund’s Articles, the Bretton Woods institutions have eroded them since the 1990s. They claim doing so will ensure net inflows when all evidence suggests the contrary.

Reducing capital controls enables and boosts illicit capital outflows by reducing exit barriers. Such outflows have greatly exceeded World Bank aid inflows, draining precious government foreign exchange resources.

Study underestimates outflows

The study tries to minimise other factors influencing aid inflows and financial outflows. It excludes observations when wars, natural disasters, financial crises, oil price hikes and exchange rate volatility triggered such flows.

The study only covers World Bank aid leakages diverted to offshore tax havens. Spending on real estate, luxury goods, pet projects, and outflows using offshore intermediaries who help “hide and launder assets” are also not counted. Besides ignoring such outflows, it also rules out other possible causes.

International Consortium of Investigative Journalists’ leaked data on offshore corporations, especially the Panama Papers, showing many secretive offshore havens used to hide illicit outflows, especially in Switzerland and Luxembourg.

Financial transparency has improved significantly, with more information on offshore financial centres from 2009. But more transparency has not stopped illicit outflows, including aid-derived wealth accumulation in havens.

Unsurprisingly, more corrupt countries, less local procurement and more failed projects have generated more outflows. But the study suggests more donor monitoring and control may have lowered leakage rates for aid compared to natural resource extraction.

Adding insult to injury

It is bad enough for the World Bank to enable the theft of scarce financial resources by influential elites. Worse, such enabling reforms have been required or advised by the Bank despite prior knowledge of their likely consequences.

To add insult to injury, the poor countries themselves are blamed for such abuses and their consequences. Unsurprisingly, the beneficiary elites are the political and economic allies of those who control the Bank and its policies.

These same elites have incurred much debt in the names of their countries and people. But much market-based debt dried up as the US Fed, European Central Bank and others sharply raised interest rates from 2022.

Thus, most poor countries face punishing market credit terms in the face of massive international economic contractions due to policies pursued by the US and its European allies.

(This article was originally published in Inter Press service (IPS) news on January 17, 2024)