Foreign Aid

Bruce B. Mesquita paper

There is general agreement that foreign aid has been relatively ineffective in promoting economic growth, improved education or health care [..]. Debate rages between those who think the problem is that too little money is spent on aiding the world’s poor (Sachs 2005) and those who think the money is incorrectly targeted at recipient governments that too often divert it for corrupt purposes (Easterly 2002; 2006).

There is a third view, which follows from a political economy approach to aid. [It] suggests that donor governments are not so naive as to fail to understand that much of their government-to-government aid will be diverted to the private uses of recipient elites. This view indicates that foreign aid is used effectively to promote its purpose, with that purpose being to trade money for policy concessions from recipient governments [..]. In the view that sees aid-for-policy deals, we can understand why, for example, the United States gives so much aid to illiberal regimes. Leaders of such regimes rely on small coalitions [this is BBMs selectorate theory], who remain loyal to the incumbent in exchange for private rewards.

Foreign aid provides money for private rewards. It is given by rich democracies whose incumbents are more likely to be maintained in power at the margin by obtaining policy concessions from foreign powers. Autocrats can grant those concessions more easily than can democrats, making autocrats attractive foreign aid recipients. It turns out that even the Scandinavian countries disproportionately give aid to small coalition, petty dictatorships and seemingly acquire trade concessions in return. Thus, American foreign aid turns out to look much like foreign aid giving by other well-to-do governments. In each case, policy concessions are obtained at the lowest price possible (this may be why foreign aid represents so little money). Poor autocracies with valuable policy concessions to offer are most likely to receive aid and, conditional on receiving aid, the more valuable the policy concession, the richer the recipient, and the larger the coalition on which the recipient relies, the more total aid it receives. Thus, countries like Egypt that have granted a major policy concession – peace with Israel – get a lot of aid while countries with less valuable policy concessions to offer, as is true for most of Africa today, receive relatively little aid whether from the United States, Japan, Scandinavia, or other donors.

While many bemoan America’s foreign aid approach, it is important to recognize that it represents an equilibrium strategy [a game theoretic term]. That means that American foreign policy decision makers do not have an incentive to shift to some other basis for giving aid and neither do the governments that accept aid from the United States (or other democratic countries). Four constituencies are affected by foreign aid policies and three of the four benefit from it. Donor country constituents – democratic voters – benefit because they gain policy concessions that they like from recipient regimes (Milner and Tingley 2006). Leaders in donor countries likewise benefit because the policy concessions they extract in exchange for aid – whether these concessions are related to national security, to trade, or to other policy arenas – make their constituents somewhat more likely to vote for them. Recipient leaders benefit because they gain money with which to keep their coalition members loyal, thereby improving their own political survival prospects.

The big losers generally are the people who reside in the recipient countries. They lose in two ways from foreign aid. First, their leaders give up policies that their own people favor. That is why they can sell the policy concessions. If the people naturally wanted the policies being conceded then there would be no need for donors to pay for them. And the people in the recipient countries are saddled with improved survival prospects for the very leaders who have sold them out.

Evidence based on an examination of all bilateral foreign aid deals between prospective (and actual) recipient governments and all donors who belong to the [OECD] (that is, the world’s wealthy countries) bears out the contention that aid is better understood as money in exchange for policy concessions than as money to advance economic, social, or political development. Indeed, to the extent that foreign aid can be said to have an impact on political change, it is to strengthen the hand of dictators and to make regimes likely to become even more autocratic than would have been true if they did not receive economic assistance.

The same pattern of reinforcing petty dictators is found following military interventions by democracies either to shore up an existing regime or to impose regime change. In either case, democratic interveners tend to retard the prospects of democratic change, just as is true with foreign aid giving [..] As a statistical matter, this is true whether the intervener is the French government, [..], some other democracy, or the United States, after controlling for selection effects regarding how difficult the target of intervention is. As with foreign aid receipts, democratization is retarded, not advanced, by the foreign policy choices of democracies and the principles governing that retardation of democratization apply across democracies rather than being peculiar to the United States.