Foreign Aid, Human Rights, and Democracy Promotion: Evidence from a Natural Experiment

Abstract

Abstract Does foreign aid improve human rights and democracy? We help arbitrate the debate over this question by leveraging a novel source of exogeneity: the rotating presidency of the Council of the European Union. We find that when a country's former colonizer holds the presidency of the Council of the European Union during the budget‐making process, the country is allocated considerably more foreign aid than are countries whose former colonizer does not hold the presidency. Using instrumental variables estimation, we demonstrate that this aid has positive effects on human rights and democracy, although the effects are short‐lived after the shock to aid dissipates. We adduce the timing of events, qualitative evidence, and theoretical insights to argue that the conditionality associated with an increased aid commitment is responsible for the positive effects in the domains of human rights and democracy.