The Effects of Aid on Rights and Governance: Evidence from a Natural Experiment

Abstract

Does foreign aid promote good governance in recipient countries? We help arbitrate the debate over this question by leveraging a novel source of exogeneity: the rotating presidency of the Council of the European Union. We find that when a country's former colonizer is the president of the Council of the European Union during the budget-making process, the country is allocated considerably more foreign aid than are countries whose former colonizer does not hold the presidency. Using instrumental variables estimation, we demonstrate that this aid has positive effects on multiple measures of human rights and governance, although the effects are short-lived after the shock to aid dissipates. We then disaggregate aid flows, present evidence for the causal mechanism at work, and offer directions for future advances.

Keywords: democracy, European Council, foreign aid, governance, instrumental variables, natural experiment, human rights