Politics and the effectiveness of foreign aid

Abstract

Critics of foreign aid programs have long argued that poverty reflects government failure. In this paper I analyze the effectiveness of foreign aid programs to gain insights into political regimes in aid recipient countries. My analytical framework shows how three stylized political/economic regimes labeled egalitarian, elitist and laissez-faire would use foreign aid. I then test reduced form equations using data on nonmilitary aid flows to 96 countries. I find that models of elitist political regimes best predict the impact of foreign aid. Aid does not significantly increase investment and growth, nor benefit the poor as measured by improvements in human development indicators, but it does increase the size of government. I also find that the impact of aid does not vary according to whether recipient governments are liberal democratic or highly repressive. But liberal political regimes and democracies, ceteris paribus, have on average 30% lower infant mortality than the least free regimes. This may be due to greater empowerment of the poor under liberal regimes even though the political elite continues to receive the benefits of aid programs. An implication is that short term aid targeted to support new liberal regimes may be a more successful means of reducing poverty than current programs.

Aid, Taxation and Development in Sub‐Saharan Africa

“…Ogaki et al, 1996). This suggests, consistent with the evidence cited above, that taxes are unlikely to have exerted ®rst-order eects on African growth via aggregate capital accumulation, the channel emphasized by Boone (1996) and McGuire and Olson (1996). More fundamentally, the African political economy literature has for at least two decades ± certainly since Bates (1981) and the infamous``Berg Report'' of the World Bank (1981) ± grappled with the reality of policy regimes that impose highly dierentiated tax rates on investment, variously favoring public investment over private, urban over rural, foreign (capital¯ight) over domestic, non-traded over traded, or informal over formal (e.g.…”

An Empirical Analysis of the Effect of Aid on Growth

“…Likewise, Pillai [1982] found that 60% of foreign aid in Jordan was used to finance investment while the remaining 40% was used either to reduce taxes or slacken revenue collection. Boone [1996] overturned the positive results of Dowling and Hiemenz [1982] and Levy [1988] by using instrument techniques and panel data. He finds that foreign aid has no impact on investment and economic growth.…”

“…The coefficient of aid as a percent of GDP is negative but not significant at the conventional level. The effect of aid on growth may not be linear as suggested by Boone [1996]. There are several reasons for expecting a non-linear relation between aid and growth.…”

Foreign Aid and Development

“…Moreover, aid could have the effect of worsening investment incentives as it could signal the need for aid in the future (arguably, a situation of moral hazard). In either case, aid would finance consumption rather than investment (Boone, 1996). Similarly, Burnside and Dollar's finding that aid increases growth under good policy environments shows that aid will not necessarily lead to investment.…”