Monday, December 24, 2007

What You Didn’t Know about Foreign Aid

As the U.S. rethinks its promise of $750 million in civilian aid to Pakistan’s tribal regions, and Australia, Britain and France promise new aid packages to Afghanistan, I was reminded of a highly insightful research paper that analyzes the determinants of foreign aid.

The authors, Bruce Bueno de Mesquita and Alastair Smith, both professors of politics at New York University, approach foreign aid as resources traded for policy concessions. This means they view official giving abroad as aid-for-deals rather than as motivated by humanitarian concern.

According to the authors, donor country governments are willing to purchase policy concessions that are favorable to their country but costly to recipient countries. Such policies are always harmful to the recipient country or they would not have to be paid to pursue them.

Mesquita and Smith analyzed bilateral OECD aid data for all countries during the years 1960-2001 and found some very interesting results. I summarize the thought-provoking ones as follows:

  • Autocracies are more likely to receive aid than democracies.

That autocratic regimes attract more foreign aid from OECD countries reflects the fact that it is cheaper to buy off a dictator who only needs to pacify his small group of loyal cronies. Since it is hard for a democratic government to implement a policy that hurts the country, it is more expensive for a donor government to buy that policy concession. Because democratic leaders require high levels of aid before being willing to provide policy concessions, they are less likely to receive any aid.

  • When democracies receive aid, however, they get larger aid packages than autocracies receive.

Since the aid-recipient democratic government is answerable to its entire electorate rather than a small group of loyal followers, it incurs a higher cost in implementing a policy concession unfavorable to its populace. The size of the aid packages offered to democratic countries reflects this higher cost.

  • Needy countries are not very likely to receive aid.

The authors use the crude death rate, measured as number of deaths per thousand people, as the indicator of a country’s need. “A high death rate is associated with poor health care, poor sanitation and drinking water, too few physicians, immunizations, inadequate education, and so forth.”

Altruistic donors should predictably give more aid to needier countries with worse death rates. The empirical analysis shows that having trade and security interests with a certain country increases the chances that it receives aid from OECD countries while being needy does not.

  • Conditioning on receiving aid, needy countries are likely to receive small aid packages.

Non-U.S. OECD countries are not only less likely to give aid to needy countries but when they give, they are also giving them relatively less.

This supports the aid-for-deals theory. The neediest are not receiving the most aid; rather, those whose policy compliance can be purchased at an affordable price apparently are offered aid and agree to take it.

  • Contrary to popular belief, U.S. does not have a more cynical aid policy than the rest of the OECD.

It is well-known that relative to many European, especially Scandinavian, countries, U.S. gives very little aid as a proportion of its GDP.

The data shows, however, that while non-US OECD members gave less to those with the greatest need, the U.S. was needs blind in the amount of aid it gave. Furthermore, while other OECD countries are less likely to give at all to needy countries, the U.S. is more likely to give to countries with a significantly elevated mortality rate.

These results suggest that the argument that non-U.S. OECD members are more motivated by humanitarian concerns may need some reconsideration.

The on-going discussion about the efficacy of foreign aid as a poverty alleviation tool would be significantly improved if it acknowledged that the reduction of poverty is not aid's primary function either for donors or recipients.

Which of the study's findings stood out to you as surprising, awful, or obvious?