The Fallacy of Aid Ineffectiveness

Much handwringing has ensued from the recent publication of Angus Deaton’s The Great Escape, which posits that international aid for the most part has been ineffective and sometimes even harmful. The argument has been made before (see Dambisa Moyo’s Dead Aid) and will be made again (in a forthcoming book by William Easterly).

What the aid skeptics (and aid supporters) ignore is that, even if every single dollar of aid were spent on well-designed, well-executed programs, the total volume of aid going in pales in comparison to the amounts being siphoned out. Yes, you read that right: the African continent has been a long-term net creditor to the rest of the world.  According to a recent report by the Africa Progress Panel, Africa loses more each year through illicit outflows than it receives in external aid and foreign direct investment combined. A joint report of the African Development Bank and Global Financial Integrity states that, over the period 1980 to 2009, Africa provided up to $1.4 trillion in resources to the rest of the world.

And it’s not just Africa. From 2001 to 2010, developing countries are estimated to have lost $5.86 trillion to illicit outflows, according to a report from Global Financial Integrity. James Henry of the Tax Justice Network states that developing countries lose $120–$160 billion in tax revenues each year on wealth that is hidden offshore.

How is this possible? It’s not aid per se that’s being stolen. Dirty money—the proceeds of crime, corruption, and tax evasion—is being hidden overseas. Whether these proceeds result from plundered natural resources, fraudulent import and export documentation, or grand corruption schemes, they not only deprive countries of domestic capital for investment, but decimate the revenue base for public services and subvert the rule of law, creating a political climate that is inimical to sustainable development.

Fortunately, there is something that can be done—and it doesn’t require more aid. It doesn’t even require developing countries to clean up their laws or enforce them better. It’s something we can do right here at home.

What ties these criminal enterprises together is their need to move large sums of money around the globe and to keep their identities secret. To do this, they create fake corporations, sometimes called “shell companies,” that disguise their true ownership and allow them to open bank accounts, buy property, and launder profits. Global Witness has produced an excellent report on the role of anonymous companies in crimes ranging from gun running to sanctions busting and bribery.

And here’s the rub: anonymous shell companies are perfectly legal. In the United States, you can quickly and easily create a company that protects you from personal liability. You don’t have to say who actually controls or benefits from the company (known as a “beneficial owner”). And all too often, even law enforcement authorities are completely unable to find out.

The United States is not the only enabler of secret companies, although in certain ways it is the worst offender.  If we collected and published basic information about who really owns and controls the corporations, trusts, and foundations that are registered under—and receive the protections of—U.S. laws, criminals would find it much more difficult to enjoy their ill-gotten gains. The United Kingdom and European Union are already considering similar measures.

This week the Open Society Foundations released a paper making the case for open, public registries of beneficial ownership, of which I was the primary author. Ending secret companies won’t stop corruption, but denying them safe haven would be a very good start.

Diana Ohlbaum is a senior adviser with the Project on Prosperity and Development at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2013 by the Center for Strategic and International Studies. All rights reserved.

Diana L. Ohlbaum