Aid allocation, selectivity, and the quality of governance
Keywords:Foreign aid, Aid allocation, Governance, Aid selectivity
The introduction of good governance in the economic growth and development agenda in the last two decades, along with the failure of aid conditionality to produce positive growth results, motivated expost selectivity instead of the ex-ante conditionality as a new approach to aid allocation. This paper aims to explore whether aid selectivity on the basis of the quality of governance is employed as a criterion in foreign aid allocation. The paper uses different instrumental variables as estimators to analyze the determinants of aid allocation over the period 2001–2010. The results produced strong evidence that countries with good governance are given preferential treatment by donors. Among the six governance indicators, it seems that voice and accountability and control of corruption are critical in the aid allocation decision.
Ades, A., & Di Tella, R. (1997). National champions and corruption: Some unpleasant interventionist arithmetic. The Economic Journal, 107, 1023–1042.
Ahrens, J., & Meurers, M.(2002). How governance affects the quality of policy reform and economic performance: New evidence for economies in transition. Journal for Institutional Innovation, Development and Transition, 6, 35–56.
Alesina, A., & Dollar, D. (2000). Who gives foreign aid to whom and why? Journal of Economic Growth, 5, 33–63.
Alesina, A., & Weder, B. (2002). Do corrupt governments receive less foreign aid? American Economic Review, 92, 1126–1137.
Arndt, C. (2010). The politics of governance ratings. International Public Management Journal, 11, 275–297.
Arndt, C., & Oman, C. (2006). Uses and abuses of governance indicators. OECD, Development Center Study. Baltagi, B. H. (1981). Simultaneous equations with error components. Journal of Econometrics, 17, 189–200.
Berthelemy, J., & Tichit, A. (2004). Bilateral donors aid allocation decisions—A three dimensional panel analysis. International Review of Economics and Finance, 13, 253–274.
Bandyopadhyay, S., & Wall, H. (2006). The determinants of aid in the post-Cold War era Federal Reserve Bank of St. Louis. Working Paper Series 2006-021B.
Burnside, C., & Dollar, D. (2000). Aid, policy and growth. American Economic Review, 90(4), 847–868.
Burnside, C., & Dollar, D. (2004). Aid, policies, and growth: Revisiting the evidence. World Bank Policy Research Working Paper 3251.
Cassen, R. (1994). Does aid work? Report to an Intergovernmental Task Force (2nd ed.). Oxford: Clarendon Press.
Chenery, H., & Strout, A. (1966). Foreign assistance and economic development. American Economic Review, 66, 679–733.
Chhotray, V., & Hulme, D. (2009). Contrasting visions for aid and governance in the 21st century: The white house millennium challenge account and DFID’s drivers of change. World Development, 37, 36–49.
Collier, P. (1997). The Failure of Conditionality. In C. Gwin, & J. Nelson (Eds.), Perspectives on aid and development. Washington, DC: Overseas Development Council.
Collier, P. (2000). In C. L. Gilbert, & D. Vines (Eds.), Conditionality, dependence and coordination: Three current debates in aid policy (pp. 299–324). Cambridge, UK: The World Bank – Structure and policies, Cambridge University Press.
Collier, P., & Dollar, D.(2001). Development effectiveness: What have we learnt? Washington, DC: World Bank.
Doornbos, M. (2001). Good governance: The rise and decline of a policy metaphor? Journal of Development Studies, 37, 93–108.
Frey, S., & Schneider, F. (1986). Competing models of international lending activity. Journal of Development Economics, 20, 225–245.
Furuoka, F. (2005). Human rights conditionality and aid allocation: Case study of Japanese foreign aid policy. Perspectives on Global Development and Technology, 4, 125–146.
Harms, P., & Lutz, M. (2003). Aid, governance, and private foreign investment: Some puzzling findings and a possible explanation. Study Center Gerzensee Working Paper No. 03.04.
Hermes, N., & Lensink, R. (2001). Changing the conditions for development aid: A new paradigm. Journal of Development Studies, 37, 1–16.
Hoy, P. (1998). Players and issues in international aid. Connecticut: Kumarian Press, Inc.
Isham,J.,Kaufman, D., & Pritchett, L.(1997). Civil liberties, democracy and the performance of government projects. The World Bank Economic Review, 11, 219–242.
Kaufmann, D., Kraay, A., & Zoido-Lobaton, P. (1999a). Aggregating governance indicators. World Bank Policy Research Working Paper No. 2195.
Kaufmann, D., Kraay, A., & Zoido-Lobaton, P. (1999b). Governance matters. Washington: The World Bank, Policy Research Working Paper 2196.
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2004). Governance matters III: Governance indicators for 1996, 1998, 2002 and 2004. Economic Review, 24, 253–287.
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2005). Governance matters IV: Aggregate and individual governance indicators 1996–2004. World Bank Policy Research Working Paper No. 3630.
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2006a). Governance matters V: Governance indicators for 1996–2005. World Bank Policy Research Working Paper No. 4012.
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2006b). Governance matters V: Aggregate and individual governance indicators for 1996–2006. World Bank Policy Research Working Paper No. 4280.
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2008). Governance matters VII: Aggregate and individual governance indicators 1996–2007. World Bank Policy Research Working Paper No. 4654.
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2013). World governance indicators project. World Bank.
Kjaer, M. (1996). Making it tangible. In Paper presented at the “Good Governance” Working Group at the EADI Conference Vienna, September 11–14.
Knack, S. (2001). Aid dependence and the quality of governance: A cross-country empirical analysis. Washington, DC: The World Bank.
Lahiri, S., & Raimondos-Moller, P. (2000). Lobbying by ethnic groups and aid allocation. Economic Journal, 110, 62–79.
Lockwood, M.(2005). The state they’re in: An agenda for international action on poverty in Africa. London: ITDG Publishing Bourton-on-Dunsmore.
Maizels, A., & Nissanke, K. (1984). Motivations for aid to developing countries. World Development, 12, 879–900.
McKinlay, D., & Little, R. (1979). The US Aid relationship: A test of the recipient need and donor interest models. Political Studies, 27, 236–250.
Neumayer, E. (2003). The Determinants of aid allocation by regional multilateral development banks and United Nations agencies. International Studies Quarterly, 47, 101–122.
Santiso, C. (2001). Good Governance and aid effectiveness: The World Bank and conditionality. The Georgetown Public Policy Review, 7, 1–22.
Simon, J. L. (1997). Introduction. In J. L. Simon (Ed.), Economics of population: key modern writings, Vol. 1 (pp. 13–22). Lyme, NH: Edward Elgar Publishing, Limited.
Sophal, E.(2002). Has more aid worsened governance since 1995? Department of Political Science & Department of Agricultural and Resource Economics University of California at Berkeley, May 6.
Svensson, J. (2000). Foreign aid and rent-seeking. Journal of International Economics, 51, 437–461.
Svensson, J. (2002). Why conditional aid does not work and what can be done about it? Journal of Development Economics, 70, 381–402.
Thornton, M. (2002). Corruption and foreign aid. On-line Publications on Ludwig von Mises Institute.
Trumbull, W. N., & Howard, W. (1994). Estimating aid-allocation criteria with panel data. Economic Journal, 104, 876–882.
Van de Walle, N. (2005). Overcoming stagnation in aid-dependent countries. Washington, DC: Center for Global Development.
Weder, B. (2000). Foreign aid, institutions and development: Lessons from four decades of international development cooperation. Aussenwirtschaft, (Swiss
Review of International Economic Relations), 55, 291–303.
World Bank (1989). Sub-Saharan Africa: From crisis to sustainable growth. Washington, DC: World Bank.
World Bank (1998). Assessing aid: What works, what doesn’t, and why. Washington, DC: World Bank.
World Bank (1992). Governance and development. Washington, DC: World Bank. (2006). World Bank Institute Global monitoring report 2006: Strengthening mutual accountability: Aid, trade, and governance.
World Bank (2013). Worldwide governance indicators. Washington, DC: World Bank
How to Cite
Copyright (c) 2021 Journal of Economics, Finance and Administrative Science
This work is licensed under a Creative Commons Attribution 4.0 International License.