The Impact of Aid on Bureaucratic Quality: Does the Mode of Delivery Matter?

Abstract

We show that the impact of foreign aid on bureaucratic quality in recipient countries varies with the mode of delivery. Specifically, grants are found to impair the functioning of the bureaucracy, whereas loans are not. The negative impact of grants is larger when they are given as budget support rather than as assistance for specific projects or for programmes in general. Our results thus suggest that the probability of adverse effects rises with the degree of discretion recipients have over the incoming resources, which is in conflict with donors’ recent emphasis on strengthening local ownership by limiting the conditions attached to foreign aid.

Keywords: Foreign aid, bureaucratic quality, budget support, project aid, programme aid, grants, loans

JEL Classification: F35