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The (small) blessing of foreign aid: further evidence on aid’s impact on democracy

2014; Taylor & Francis; Volume: 46; Issue: 32 Linguagem: Inglês

10.1080/00036846.2014.946186

1466-4283

Yener Altunbaş, John Thornton,

Poverty, Education, and Child Welfare

AbstractIn an empirical contribution to the literature of foreign aid, we estimate the impact of foreign aid on democracy in a panel of 93 developing economies during 1971–2010. We find that foreign aid promotes democracy, with the result robust to different estimation methodologies and control variables and to instrumenting for foreign aid.Keywords: foreign aiddemocracyinstrumental variablesJEL Classification: D70F35C25 Notes1 The foreign aid data refer to official international development assistance in 2010 prices and are from the OECD's Geographical Distribution of Financial Flows to Aid Recipients database.2 Easterly (Citation2003) reviews the debate on the effects of foreign aid on economic growth. Other areas of in the aid controversy include whether uncertainties over the timing of aid disbursements lead to greater GDP growth volatility (Kharas, Citation2008) and pro-cyclical fiscal policy (Bulíř and Hamann, Citation2001; Thornton, Citation2007), whether it appreciated the real exchange rate and harms recipient country exports (Rajan and Subramanian, Citation2005), whether it results in a fall in tax revenues because it reduces the need for domestic revenue mobilization (Gupta et al., Citation2004; Thornton, Citation2014) and whether it adversely impacts on the quality of governance by stunting the development of institutions (Knack, Citation2001; Moss et al., Citation2006; Busse and Grönig, Citation2009).3 The correlation coefficient for the Polity IV and Freedom House democracy measures in n our panel was 0.85 for the period 1970 to 2010.4 The countries in the sample are Algeria, Angola, Argentina, Bangladesh, Barbados, Belize, Benin, Bhutan, Bolivia, Botswana, Brazil, Burkina Faso, Burundi, Cameroon, Cape Verde, Central African Republic, Chad, Colombia, Comoros, Congo, Dem. Rep., Congo, Rep., Costa Rica, Cote d'Ivoire, Djibouti, Dominica, Dominican Republic, Ecuador, Egypt, El Salvador, Equatorial New Guinea, Eritrea, Ethiopia, Fiji, Gabon, The Gambia, Ghana, Guatemala, Guinea, Guinea-Bissau, Guyana, Haiti, Honduras, India, Indonesia, Jamaica, Jordan, Kenya, Lebanon, Lesotho, Liberia, Libya, Madagascar, Malaysia, Mali, Mauritania, Mauritius, Mongolia, Morocco, Mozambique, Namibia, Nepal, Nicaragua, Niger, Nigeria, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Rwanda, Saint Lucia, Saint Vincent and the Grenadines, Samoa, Sao Tome and Principe, Senegal, Seychelles, Sierra Leone, South Africa, Sri Lanka, Sudan, Suriname, Swaziland, Syria, Tanzania, Thailand, Togo, Tonga, Trinidad and Tobago, Tunisia, Uganda, Uruguay, Venezuela, Yemen, Zambia and Zimbabwe.5 Data on GDP per capita, infant mortality, GDP growth, openness and natural resource rents are from the World Bank's World Development Indicators database. Data on cultural variables are compiled from the CIA Factbook database. The bilateral distance data are from the CEPPI Ultimate Gravity database available at http://www.cepii.com/anglaisgraph/bdd/gravity.aspvariable, and the remaining series are the authors' calculations based on the information in the Central Intelligence Agency World Factbook available at https://www.cia.gov/library/publications/the-world-factbook/6 For example, each country in the sample will have three exogenous variables that will serve as instruments for the level of foreign aid receipts, defined as:Aid-Distance {(Inverse of bilateral distance i,j)} × Aid outflows jAid-Religion Religion i,j × Aid outflows jAid-Colonial history Colonial history i,j × Aid outflows jWe regress actual foreign aid on the exogenous instruments presented.