Foreign Aid and Capital Flight: A Comparative Study of Capital Displacement Effects of U.S. and Chinese Foreign Assistance
Jamal, Ahmad Shuja
This paper is a comparative study of the capital displacement effects of Chinese and U.S. foreign aid to developing countries. Using panel data from the Bank of International Settlements and overseas development assistance data for the U.S. and China, the paper tests two hypotheses: (1) Large amounts of aid delivered to developing countries are associated with aid leakage in the form of capital flight. (2) Chinese foreign aid produces more capital flight to offshore financial centers and to Chinese destinations, whereas U.S. foreign aid displaces capital to the U.S. or destinations in the developed West. Findings indicate that from 2010 onwards, U.S. foreign aid is positively correlated with capital flight back to the United States itself, whereas Chinese foreign aid is correlated with capital flight to offshore financial centers. These findings have policy implications for aid conditionality, corruption safeguards, and how both countries disburse aid.
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