World Bank Aid and Corruption

Here’s the now infamous paper that the World Bank is alleged to have tried to censor, actions that led its Chief Economist Penny Golberg to resign in protest. The paper finds that increases in World Bank aid is correlated with the siphoning of cash to offshore financial centres.

Do elites capture foreign aid? We document that aid disbursements to highly aid dependent countries coincide with sharp increases in bank deposits in offshore financial centers known for bank secrecy and private wealth management, but not in other financial centers. The estimates are not confounded by contemporaneous shocks such as civil conflicts, natural disasters and financial crises, and are robust to instrumenting with predetermined aid commitments. The implied leakage rate is 7.5% at the sample mean and exhibits a strong correlation with the ratio of aid to GDP. Our findings are consistent with aid capture in the most aid-dependent countries.

….In this paper, we study aid diversion by combining quarterly information on aid disbursements from the World Bank (WB) and foreign deposits from the Bank for International Settlements (BIS). The former dataset covers all disbursements made by the World Bank to finance development projects and provide general budget support in its client countries. The latter dataset covers foreign-owned deposits in all significant financial centers, both havens such as Switzerland, Luxembourg, Cayman Islands and Singapore whose legal framework emphasizes secrecy and asset protection and non-havens such as Germany, France and Sweden.Screen Shot 2020-02-18 at 9.22.48 AM

Equipped with this dataset, we study whether aid disbursements trigger money flows to foreign bank accounts. In our main sample comprising the 22 most aid-dependent countries in the world (in terms of WB aid), we document that disbursements of aid coincide, in the same quarter, with significant increases in the value of bank deposits in havens. Specifically, in a quarter where a country receives aid equivalent to 1% of GDP, its deposits in havens increase by 3.4% relative to a country receiving no aid; by contrast, there is no increase in deposits held in non-havens. While other interpretations are possible, these findings are suggestive of aid diversion to private accounts in havens.

The paper finds that project financing (which is arguably easier for the Bank to monitor) is associated with more leakage than general policy financing. The poorest countries see the most leakage.

Our estimates suggest a leakage rate of around 7.5% for the average highly aid-dependent country.

Read the whole thing here.

UPDATE: The World Bank has since agreed to publish the working paper. 

h/t Matt Collin

A Look at Contract Foreign Soldiers Among Gulf States

A number of stories have recently surfaced on how the UAE is coercing Sudanese recruits to fight as mercenaries in Yemen.

This appears to be part of a wider practice for heavy reliance on foreign contract soldiers in the region. In this post, Zoltan Barany provides an insightful summary of the scale of this practice. I must admit I was surprised by some of the stats:

In 2009, 64 percent of the staff at Bahrain’s National Security Agency were non-Bahrainis. Abdulhadi Khalaf, the eminent Bahraini sociologist in exile, claims that “the rank and file in the Bahraini military, police, and security forces consist almost entirelyof foreign recruits,” but he does not name his source. Pakistani personnel make up 18 percent of the Bahraini air force, and altogether 10,000 Pakistani nationals are employed by Bahrain’s coercive apparatus. Problems of conduct among Pakistanis serving in the Bahrain Defense Force are not unknown: in March 2013, for instance, 180 were sacked and deported for violating disciplinary norms.

In Kuwait the number is anywhere between 25-80% of the regular armed forces. In Qatar contract soldiers add up to about 85%. 70% of enlisted men in the UAE are either from Oman or Yemen.

There’s also this angle to the story:

The UAE has employed U.S. companies such as Reflex Responses (founded and operated by Erik Prince, of Blackwater notoriety), which received a $529 million contract to beef up the Emirati military. The forces fighting for the UAE in Yemen include Chadian, Chilean, Colombian, Libyan, Panamanian, Nigerien (from Niger), Somali, Salvadoran, Sudanese, and Ugandan contract soldiers, among others.

Why are Middle Eastern rulers wary of citizen soldiers? You guessed right:

Contract soldiers and foreign advisers play an indispensable role in Gulf armed forces. They have given few headaches to the rulers of the Gulf states—although they have not been problem free, as the Pakistani contingent in Bahrain has demonstrated—and have made essential contributions to their militaries. For civil-military relations in GCC states, reliance on contract soldiers has been generally advantageous, fostering the buildup and professionalization of local armies, allowing the military leadership to shift tasks to contractors that no citizens would want to perform, and recruiting foreigners to complement the fighting forces in Yemen. The recently introduced conscription in Kuwait, Qatar, and the UAE is only marginally germane to the practice of hiring foreign contract soldiers: this policy was implemented primarily for socioeconomic and political, not military, reasons.