Is Foreign Aid Conditioned upon Institutional Reform?

26 Pages Posted: 19 Jul 2007 Last revised: 10 Dec 2007

See all articles by Wairimu R. Mugo

Wairimu R. Mugo

University of Texas at Arlington

Michael R. Ward

University of Texas at Arlington - College of Business Administration - Department of Economics; ZEW, Mannheim

Date Written: December 2007

Abstract

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

Mugo, Wairimu R. and Ward, Michael Robert, Is Foreign Aid Conditioned upon Institutional Reform? (December 2007). Available at SSRN: https://ssrn.com/abstract=1001388 or http://dx.doi.org/10.2139/ssrn.1001388

Wairimu R. Mugo

University of Texas at Arlington ( email )

415 S West St Apt no 205
Arlington, TX 76019
United States

Michael Robert Ward (Contact Author)

University of Texas at Arlington - College of Business Administration - Department of Economics ( email )

330 Business Building
Box 19479
Arlington, TX 76019
United States
817-272-3090 (Phone)
817-272-3145 (Fax)

ZEW, Mannheim ( email )

D-68034 Mannheim
Germany

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