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The Costs of Favoritism: Is Politically Driven Aid Less Effective?

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  • Axel Dreher
  • Stephan Klasen
  • James Raymond Vreeland
  • Eric Werker

Abstract

Governments provide foreign aid for both political and economic reasons, as is now well documented. Conventional wisdom holds that political motivations lower the effectiveness of aid in promoting developmental objectives. We test this claim by focusing on a setting in which we observe "effectiveness" with some precision, using the ex post performance ratings of World Bank projects. Our measures of "political importance" are plausibly exogenous: temporary membership on the UN Security Council or the World Bank Executive Board. We find that political motivations have a detrimental effect for Security Council members only when the country already faces excessive short-term debt or debt service. This finding suggests that political influence in aid allocation may impair aid's effectiveness only when the recipient country faces a weak macroeconomic position.

Suggested Citation

  • Axel Dreher & Stephan Klasen & James Raymond Vreeland & Eric Werker, 2013. "The Costs of Favoritism: Is Politically Driven Aid Less Effective?," Economic Development and Cultural Change, University of Chicago Press, vol. 62(1), pages 157-191.
  • Handle: RePEc:ucp:ecdecc:doi:10.1086/671711
    DOI: 10.1086/671711
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    3. Marchesi, Silvia, 2018. "Communication and performance in Bank–Fund joint participation," Research in Economics, Elsevier, vol. 72(2), pages 263-276.
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    5. Kilby, Christopher, 2013. "The political economy of project preparation: An empirical analysis of World Bank projects," Journal of Development Economics, Elsevier, vol. 105(C), pages 211-225.
    6. Kilby, Christopher, 2015. "Assessing the impact of World Bank preparation on project outcomes," Journal of Development Economics, Elsevier, vol. 115(C), pages 111-123.
    7. Dreher, Axel & Fuchs, Andreas & Hodler, Roland & Parks, Bradley C. & Raschky, Paul A. & Tierney, Michael J., 2021. "Is Favoritism a Threat to Chinese Aid Effectiveness? A Subnational Analysis of Chinese Development Projects," World Development, Elsevier, vol. 139(C).
    8. Marchesi, Silvia & Masi, Tania & Paul, Saumik, 2021. "Project Aid and Firm Performance," IZA Discussion Papers 14705, Institute of Labor Economics (IZA).
    9. Silvia Marchesi & Tania Masi, 2019. "Allocation of Implementing Power: Evidence from World Bank Projects," Development Working Papers 447, Centro Studi Luca d'Agliano, University of Milano.
    10. Axel Dreher & Vera Eichenauer & Kai Gehring, 2013. "Geopolitics, Aid and Growth," CESifo Working Paper Series 4299, CESifo.
    11. Minasyan, Anna & Nunnenkamp, Peter & Richert, Katharina, 2017. "Does Aid Effectiveness Depend on the Quality of Donors?," World Development, Elsevier, vol. 100(C), pages 16-30.
    12. Humphrey, Chris & Michaelowa, Katharina, 2013. "Shopping for Development: Multilateral Lending, Shareholder Composition and Borrower Preferences," World Development, Elsevier, vol. 44(C), pages 142-155.
    13. Christina L. Davis & Tyler Pratt, 2021. "The forces of attraction: How security interests shape membership in economic institutions," The Review of International Organizations, Springer, vol. 16(4), pages 903-929, October.
    14. Ugo Panizza, 2013. "Guest Workers: Financial Development and Economic Growth: Known Knowns, Known Unknowns, and Unknown Unknowns," IHEID Working Papers 13-2013, Economics Section, The Graduate Institute of International Studies.
    15. Sivlai Marchesi & Emanuela Sirtori, 2010. "Is two better than one? Effects on growth of Bank-Fund interaction," Working Papers 189, University of Milano-Bicocca, Department of Economics, revised Jun 2010.
    16. 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 20, Villanova School of Business Department of Economics and Statistics.
    17. James Vreeland, 2011. "Foreign aid and global governance: Buying Bretton Woods – the Swiss-bloc case," The Review of International Organizations, Springer, vol. 6(3), pages 369-391, September.
    18. Kersting, Erasmus K. & Kilby, Christopher, 2016. "With a little help from my friends: Global electioneering and World Bank lending," Journal of Development Economics, Elsevier, vol. 121(C), pages 153-165.
    19. World Bank, 2020. "Violence without Borders," World Bank Publications - Books, The World Bank Group, number 33330, December.
    20. Mattos, Enlinson & Politi, Ricardo & Morata, Rodrigo, 2021. "Birthplace favoritism and the distribution of budget amendments in Brazil: Evidence from nondistrict elections," European Journal of Political Economy, Elsevier, vol. 68(C).

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    JEL classification:

    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • F35 - International Economics - - International Finance - - - Foreign Aid

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