Aid Effectiveness: Politics Matters
Peer Reviewed
Date issued
Jan 2007
Subject
Public Utility
JEL code
C23 - Panel Data Models • Spatio-temporal Models;
O1 - Economic Development;
O10 - Economic Development: General;
O11 - Macroeconomic Analyses of Economic Development;
O12 - Microeconomic Analyses of Economic Development;
O13 - Agriculture • Natural Resources • Energy • Environment • Other Primary Products;
O14 - Industrialization • Manufacturing and Service Industries • Choice of Technology;
O15 - Human Resources • Human Development • Income Distribution • Migration;
O16 - Financial Markets • Saving and Capital Investment • Corporate Finance and Governance;
O17 - Formal and Informal Sectors • Shadow Economy • Institutional Arrangements;
O18 - Urban, Rural, Regional, and Transportation Analysis • Housing • Infrastructure;
O19 - International Linkages to Development • Role of International Organizations;
O2 - Development Planning and Policy;
O20 - Development Planning and Policy: General;
O21 - Planning Models • Planning Policy;
O22 - Project Analysis;
O23 - Fiscal and Monetary Policy in Development;
O24 - Trade Policy • Factor Movement Policy • Foreign Exchange Policy;
O25 - Industrial Policy;
O29 - Development Planning and Policy: Other;
O4 - Economic Growth and Aggregate Productivity;
O40 - Economic Growth and Aggregate Productivity: General;
O41 - One, Two, and Multisector Growth Models;
O42 - Monetary Growth Models;
O43 - Institutions and Growth;
O44 - Environment and Growth;
O47 - Empirical Studies of Economic Growth • Aggregate Productivity • Cross-Country Output Convergence;
O49 - Economic Growth and Aggregate Productivity: Other
Category
Working Papers
The literature on aid effectiveness has focused more on recipient policies than the determinants of aid allocation yet a consistent result is that political allies obtain more aid from donors than non-allies. This paper shows that aid allocated to political allies is ineffective for growth, whereas aid extended to countries that are not allies is highly effective. The result appears to be robust across different specifications and estimation techniques. In particular, new methods are employed to control for endogeneity. The paper suggests that aid allocation should be scrutinized carefully to make aid as effective as possible.
