Need, Merit, or Self‐Interest—What Determines the Allocation of Aid?

TLDR

Previous research shows foreign aid is allocated based on both development needs and donor self‑interest. This study revisits aid allocation, incorporating donor and recipient‑specific effects. The authors estimate donor‑ and recipient‑specific effects and evaluate the economic importance of need, merit, and donor self‑interest. All bilateral donors allocate aid based on self‑interest and need, but most give little weight to merit; merit explains less than 1% of variance, except the UK and Japan, which favor higher growth, democracy, and fewer human rights abuses.

Abstract

Abstract Previous studies of aid allocation have concluded that foreign aid is allocated not only according to development needs but also according to donor self‐interest. We revisit this topic and allow for donor‐ as well as recipient‐specific effects in our analysis. In addition to comments on the statistical significance of our results we assess the relative economic importance of recipient need, merit, and donor self‐interest. Our results indicate that all bilateral donors allocate aid according to their self‐interest and recipient need. However, most bilateral donors seem to place little importance on recipient merit. Less than 1% of the variance of aid is accounted for by merit, ceteris paribus . The UK and Japan are exceptions: they allocate more aid to countries with higher growth, higher democracy scores, and fewer human rights abuses.