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Geopolitics, Aid and Growth

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  • Axel Dreher
  • Vera Eichenauer
  • Kai Gehring

Abstract

We investigate the effects of short-term political motivations on the effectiveness of foreign aid. Donor countries’ political motives might reduce the effectiveness of conditionality, channel aid to inferior projects or affect the way aid is spent in other ways, reduce the aid bureaucracy’s effort, and might impact the power structure in the recipient country. We investigate whether geopolitical motives matter by testing whether the effect of aid on economic growth is reduced by the share of years a country has served on the United Nations Security Council (UNSC) in the period the aid has been committed, which provides quasi-random variation in commitments. Our results show that the effect of aid on growth is significantly lower when aid has been granted for political reasons. We derive two conclusions from this. First, short-term political favoritism reduces growth. Second, political interest variables are invalid instruments for aid, raising doubts about a large number of results in the aid effectiveness literature.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4299.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4299

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Keywords: aid effectiveness; economic growth; politics and aid; United Nations Security Council membership; political instruments;

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  1. Bruno S. Frey & Paolo Pamini & Lasse Steiner, 2011. "What determines the World Heritage List? An econometric analysis," ECON - Working Papers, Department of Economics - University of Zurich 001, Department of Economics - University of Zurich.
  2. Axel Dreher & Matthew Gould & Matthew D. Rablen & James Raymond Vreeland, 2012. "The Determinants of Election to the United Nations Security Council," CEDI Discussion Paper Series 12-09, Centre for Economic Development and Institutions(CEDI), Brunel University.
  3. Alberto Alesina & David Dollar, 1998. "Who Gives Foreign Aid to Whom and Why?," NBER Working Papers 6612, National Bureau of Economic Research, Inc.
  4. Matteo Bobba & Andrew Powell, 2007. "Aid Effectiveness: Politics Matters," IDB Publications 6725, Inter-American Development Bank.
  5. Derek Headey, 2008. "Geopolitics and the effect of foreign aid on economic growth: 1970-2001," Journal of International Development, John Wiley & Sons, Ltd., vol. 20(2), pages 161-180.
  6. Omar S. Bashir & Darren J. Lim, 2013. "Misplaced Blame," Journal of Conflict Resolution, Peace Science Society (International), vol. 57(3), pages 509-523, June.
  7. Sanjay G. Reddy & Camelia Minoiu, 2006. "Development Aid and Economic Growth: A Positive Long-Run Relation," Working Papers, United Nations, Department of Economics and Social Affairs 29, United Nations, Department of Economics and Social Affairs.
  8. Christopher Kilby & Axel Dreher, 2009. "The Impact of Aid on Growth Revisited: Do Donor Motives Matter?," Ibero America Institute for Econ. Research (IAI) Discussion Papers 191, Ibero-America Institute for Economic Research.
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  19. repec:wbk:wbpubs:12426 is not listed on IDEAS
  20. Fleck, Robert K. & Kilby, Christopher, 2005. "How Do Political Changes Influence U.S. Bilateral Aid Allocations? Evidence from Panel Data," Vassar College Department of Economics Working Paper Series 67, Vassar College Department of Economics.
  21. Axel Dreher & Nathan Jensen, 2005. "Independent Actor or Agent? An Empirical Analysis of the impact of US interests on IMF Conditions," KOF Working papers 05-118, KOF Swiss Economic Institute, ETH Zurich.
  22. Berthelemy, Jean-Claude & Tichit, Ariane, 2002. "Bilateral Donors' Aid Allocation Decisions: A Three-dimensional Panel Analysis," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  23. Axel Dreher & Jan-Egbert Sturm & James Raymond Vreeland, 2007. "Development Aid and International Politics: Does membership on the UN Security Council influence World Bank decisions?," KOF Working papers 07-171, KOF Swiss Economic Institute, ETH Zurich.
  24. Ilyana Kuziemko & Eric Werker, 2006. "How Much Is a Seat on the Security Council Worth? Foreign Aid and Bribery at the United Nations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 114(5), pages 905-930, October.
  25. Eric Werker & Faisal Z. Ahmed & Charles Cohen, 2009. "How Is Foreign Aid Spent? Evidence from a Natural Experiment," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(2), pages 225-44, July.
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  28. Christopher Kilby, 2012. "Assessing the contribution of donor agencies to aid effectiveness: The impact of World Bank preparation on project outcomes," Villanova School of Business Department of Economics and Statistics Working Paper Series, Villanova School of Business Department of Economics and Statistics 20, Villanova School of Business Department of Economics and Statistics.
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Cited by:
  1. Axel Dreher & Anna Minasyan & Peter Nunnenkamp, 2013. "Government Ideology in Donor and Recipient Countries: Does Political Proximity Matter for the Effectiveness of Aid?," Kiel Working Papers 1870, Kiel Institute for the World Economy.

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