Selectivity on Aid Modality: Determinants of Budget Support from Multilateral Donors

Since the late 1990s a selection on policy approach to aid was advocated such that more aid should be allocated to countries with good policies. A number of donors accepted this recommendation, including the World Bank, but there is little evidence that this has occurred. Donors, including the World Bank, seem no more likely to use policy and governance indicators to determine the amount of aid allocated to particular recipients. This paper argues that donors may exercise selectivity over the aid modality. Specifically, multilateral donors (we consider only EC and WB) will cede more recipient control over aid by granting more budget support to those recipients with better service delivery systems and spending preferences (towards the poor) aligned with the donor. We test this for the EC and WB over 1997-2007 and find some support. The principal determinant of receiving budget support has been having a PRSP process in place, and this can be considered a good indicator of aligned preferences. Furthermore towards the end of the period (2005-07) there was some increase in the share of countries receiving budget support but then government effectiveness was also a determinant of eligibility, and having a PRSP increased the amount of budget support. Multilateral donors have been more likely to give budget support to countries with aligned spending preferences and better quality systems, even if they have not reallocated the total aid envelope in that way.