Wednesday , April 1 2020
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Where does foreign aid go? [HINT: not where it is supposed to]

Summary:
From the Economist: When autocratic, oil-rich nations enjoy a windfall from higher crude prices, where does the money go? One place to look is Swiss bank accounts. Sure enough, an increase in oil prices is followed by a spike in deposits held by these countries in financial havens, ... [Similarly]...infusions of aid from foreign donors ... were followed by a jump in their deposits in foreign financial havens. The leaks averaged about 5% of the Bank’s aid to these countries. ..publication [of this research] was blocked by [World Bank] higher officials. They may have been worried about how it would look if the bank’s own researchers said that a chunk of its aid ended up in Swiss bank accounts and the like. The lessons I take from this:Institutions are primarily concerned with preserving

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From the Economist:
When autocratic, oil-rich nations enjoy a windfall from higher crude prices, where does the money go? One place to look is Swiss bank accounts. Sure enough, an increase in oil prices is followed by a spike in deposits held by these countries in financial havens, ...
[Similarly]...infusions of aid from foreign donors ... were followed by a jump in their deposits in foreign financial havens. The leaks averaged about 5% of the Bank’s aid to these countries.
..publication [of this research] was blocked by [World Bank] higher officials. They may have been worried about how it would look if the bank’s own researchers said that a chunk of its aid ended up in Swiss bank accounts and the like.

The lessons I take from this:

  • Institutions are primarily concerned with preserving themselves as institutions, rather than doing what they are supposed to do. 
  • The cover-up is often worse than the crime:  when the World Bank tried to suppress the research, the Chief Economist resigned, which had the ironic effect of publicizing the research much more widely than if they had not tried to cover it up.  
  • Economics gives institutions a moral compass:  Kudos to Professor Goldberg for resigning.  I suspect her resignation will result in reforms to fix the problem.
  • 5% may be the "cost" of distributing aid:  if this is all they lose, the Bank may be doing a good job.  

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