“Elite Capture of Foreign Aid: Evidence from Offshore Bank Accounts”, 2022-01-05 (; similar):
Do elites capture foreign aid? This paper documents 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 using predetermined aid commitments. The implied leakage rate is around 7.5% at the sample mean and tends to increase with the ratio of aid to GDP. The findings are consistent with aid capture in the most aid-dependent countries.
…A concern often voiced by skeptics is that aid may be captured by economic and political elites. The fact that many of the countries that receive foreign aid have high levels of corruption (2002) invokes fears that aid flows end up in the pockets of the ruling politicians and their cronies. This would be consistent with economic theories of rent-seeking in the presence of aid (2000) and resonate with colorful anecdotal evidence about failed development projects and self-interested elites (1990). Yet there is little systematic evidence on aid capture.
In this paper, we study aid diversion by combining quarterly information on aid disbursements from the World Bank and foreign deposits from the Bank for International Settlements (BIS). The former data set covers all disbursements made by the World Bank to finance development projects and provide general budget support in its client countries. The latter data set covers foreign-owned deposits in all important financial centers—both havens, such as Switzerland, Luxembourg, Cayman Islands, and Singapore, whose legal framework emphasizes secrecy and asset protection, and nonhavens, such as Germany, France, and Sweden.
Equipped with this data set, 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 World Bank aid), we document that disbursements of aid coincide (in the same quarter) with increases in the value of bank deposits in havens. Specifically, aid disbursements equivalent to 1% of GDP are associated with a statistically-significant increase in deposits in havens of 3.4%. By contrast, there is no increase in deposits held in nonhavens
…The leakage rate implied by our baseline estimates is around 7.5%.5 The 22 countries in the sample are highly aid dependent, with annual disbursements from the World Bank exceeding 2% of GDP, but account for a modest share of all disbursements.6 By varying the sample, we document that the leakage rate exhibits a strong gradient in aid dependence. On the one hand, lowering the threshold to 1% of GDP (46 countries), the leakage rate is around 4% and we cannot reject the null hypothesis of no leakage. On the other hand, raising the threshold to 3% of GDP (seven countries), we find a substantially higher leakage rate of around 15%. This pattern suggests that the average leakage rate across all aid-receiving countries is much smaller than in the main sample. Moreover, it is consistent with existing findings that the countries receiving the most aid are not only among the least developed but also among the worst governed (2002) and that very high levels of aid might foster corruption and institutional erosion (2000; Djankov, Montalvo, and Reynal-2008).