The World Bank’s financial aid scandal

It is a pity that the World Bank’s Chief Economist Penny Goldberg has resigned after being in a role for only 15 months. Her resignation appears linked to the scandal around the financial aid leakage to private accounts in financial havens. 

The brief story is that when the World Bank provides financial aid to aid dependent countries, some of these funds appear to be transferred into the private accounts of the “elites” in the countries mostly known as “financial havens”. She then left because the research on this issue wouldn’t be published by the World Bank.

At a first glance it looks like the World Bank wasn’t directly involved in the actual corruption of determining where the final aid funds have ended up. But they appear complicit, as the Bank refused to release the data on it, until recently. This came out as a story as if the Bank is supportive of the idea of sponsoring failed development projects and self-interested elites. 

As I have noted, I am very regretful that we have lost a female economist. As a female economist myself, I know there are significant areas where we are underrepresented in the economics field. With the PhD from Stanford University, Prof. Goldberg has contributed significantly to the literature on International Trade. Her theoretical and empirical approach and mindset is something other female economists, like myself, aspire too.

When her name got involved in the scandal, she immediately resigned, although her personal involvement on this scandal (in terms of suppressing the research) is likely to have been minimal given she was so newly appointed to the role.

Giving up such a significant role to stand up for what is right – and the release of research even when it isn’t popular for the client – is something I have a lot of respect for. 

What evidence have we got around the financial aid leakage?

Not long after the resignation, the World Bank released the empirical paper analysing whether aid disbursements trigger money flows to foreign bank accounts.

The paper found that when the country received a financial aid, its bank deposit in financial haven countries increased significantly as opposed to a country which hasn’t received the aid. With caveats, the overall message from the paper is that financial aid to aid dependent countries is partially diverted to private accounts in tax havens rather than spent on the needy – which is corruption. 

Why should we care?

We care because there can be unintended consequences from aid when there are institutional issues, and how important it is to understand whether the aid is going to those in need – or being used to increase the power of the wealth in these jurisdictions. 

If a sizable portion of World Bank aid is used to prop up the wealth of the “strongmen” or “elite” in undemocratic countries, then the aid may be making the lives of many people worse rather than better – not a pleasant thought, but one we have to face if we genuinely care about the poorest people in the world.