Is Foreign Aid Conditioned upon Institutional Reform?
26 Pages Posted: 19 Jul 2007 Last revised: 10 Dec 2007
Date Written: December 2007
Multilateral organizations increasingly claim to be conditioning foreign aid on institutional reform of the recipient country. We test whether increases in aid flows are related to current and future institutional improvements by relating Economic Freedom measures of the quality of countries' institutions to foreign aid flows during the 1973 period through the 2002 period. Consistent with binding conditionality, we find that the amount of aid flowing to a recipient country is positively related to future improvements in its economic institutions. Moreover, these effects appear to be strongest for improvements in monetary policy and the business environment, precisely those institutions most often targeted. These results occur for aid from individual donor countries but not from multilateral organizationslateral organizations and from individual donor countries.
Keywords: Foreign Aid, Economic Freedom, Growth
JEL Classification: F35, O43, P48
Suggested Citation: Suggested Citation