Tuesday, June 5, 2012
Simeon Djankov, Jose G. Montalvo, Marta Reynal-Querol
Using data for 108 recipient countries in the period 1960 to 1999, we find that foreign aid has a negative impact on democracy. In particular, if the foreign aid over GDP that a country receives over a period of five years reaches the 75th percentile in the sample, then a 10-point index of democracy is reduced between 0.6 and one point, a large effect. For comparison, we also measure the effect of oil rents on political institutions. The fall in democracy if oil revenues reach the 75th percentile is smaller, (0.02). Aid is a bigger curse than oil.
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The curse of aid
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http://www.econ.upf.edu/docs/papers/downloads/870.pdf
Many studies have shown a negative correlation between economic growth and natural resources, a finding often dubbed “the curse of natural resources.” However, oil and other minerals may not be the biggest curse in developing countries. In many of them, the amount of foreign aid is a far larger share of government revenues. In Burkina Faso, for example, aid accounted for two-thirds of the government budget and 8% of GDP over the period 1985-89. In Mauritania, it accounted for 60% and 22%, respectively, for the period 1980-84. In Rwanda, Vanuatu, Gambia, Niger, Tonga and Mali, foreign donors provided over a third of the government budget during some 5-year periods between 1960 and 1999. Some countries are chronically dependent on aid. Aid accounted for 40% of the government budget and 6.2% of GDP in Burkina Faso during 1960-1999. In Mauritania, for 37% and 12%, respectively.
ReplyDeleteForeign aid damages the political institutions of the country by reducing democratic rules. The magnitudes are striking. If the average share of foreign aid over GDP in a country were 1.9% over the period 1960-1999, then the recipient country would have gone from the average level of democracy in recipient countries in the initial year to a total absence of democratic institutions. Since most foreign aid is not contingent on the democratic level of the recipient countries, there is no incentive for governments to keep a good level of checks and balances in place. The effect of oil in the long-run is less important: if the average amount of oil revenues over GDP is 12.2% over the period, then the recipient country will go from the average level of democracy in recipient countries in the initial year to a total absence of democracy.
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