Independent research & practical ideas for global prosperity

Donor Politics and the Channels and Effectiveness of Foreign Aid

Mar 1, 2007

Center for Global Development and The Paul H. Nitze School of Advanced International Studies hosted a Massachusetts Avenue Development Seminar (MADS) on Donor Politics and The Channels and Effectiveness of Foreign Aid, with Matteo Bobba and Andrew Powell of Inter-American Development Bank. Michael Clemens, Research Fellow, Center for Global Development, served as the discussant.

Read Bobba's and Powell's Multilateral Intermediation of Foreign Aid: what is the trade off for donor countries?

PAPER ABSTRACT: 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. In the first of two papers, we show 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, as well as a new method to control for the endogeneity.

In a second paper, we examine why bilateral donors intermediate would aid through a multilateral and not extend aid directly. We suggest a trade-off: multiple bilateral donors for each recipient may imply coordination and strategic problems but intermediating through a multilateral may dilute individual donor objectives. We conduct traditional panel and truly bilateral regressions with bilateral-pair, fixed-effects to model aid allocation decisions. We confirm that politics is important for bilateral donors but also that aid fragmentation and strategic behavior affect aid allocation. Multilaterals solve strategic and coordination problems between donors. Printed copies of the paper will be available at the seminar.