A comprehensive analysis of the correlation between foreign aid and energy security in emerging countries: Does institutional quality matter?

This paper provides the first empirical analysis of the nonlinear correlation between foreign aid and four elements of energy security: availability, acceptability, developability, and sustainability. Three key things can be observed from our estimates, derived from econometric methods applied to a sample of 17 emerging countries between 2002 and 2018. First, we confirm that foreign aid and energy security display a nonlinear relationship characterized by an inverted-U shape. If a country becomes highly dependent upon foreign aid at an early stage of its development, this may threaten the sustainability of its energy system. The inflows of foreign aid, however, turn out to have a positive effect on the energy system when they exceed a certain threshold. It should be noted that the “pollution haven” hypothesis for emerging economies only holds true for those countries that receive initial and small amounts of foreign aid. Second, our results provide additional evidence of the “technical obsolescence” effect, based on real-world data. It occurs when a high level of foreign aid is followed by a higher consumption of renewable and non-fossil fuel energy over time. In addition, foreign aid has a positive influence on energy security in terms of its availability, acceptability, developability, and sustainability when institutional quality is taken into account. As a result of this study, policymakers now have a new perspective on how to promote energy system security.