Geopolitics, Aid and Growth

50 Pages Posted: 9 Jul 2013  

Axel Dreher

University of Heidelberg

Vera Z. Eichenauer

University of Heidelberg

Kai Gehring

University of Zurich - Chair of Political Economy; University of Heidelberg

Multiple version iconThere are 2 versions of this paper

Date Written: June 30, 2013

Abstract

We investigate the effects of short-term political motivations on the effectiveness of foreign aid. Donor countries’ political motives might reduce the effectiveness of conditionality, channel aid to inferior projects or affect the way aid is spent in other ways, reduce the aid bureaucracy’s effort, and might impact the power structure in the recipient country. We investigate whether geopolitical motives matter by testing whether the effect of aid on economic growth is reduced by the share of years a country has served on the United Nations Security Council (UNSC) in the period the aid has been committed, which provides quasi-random variation in commitments. Our results show that the effect of aid on growth is significantly lower when aid has been granted for political reasons. We derive two conclusions from this. First, short-term political favoritism reduces growth. Second, political interest variables are invalid instruments for aid, raising doubts about a large number of results in the aid effectiveness literature.

Keywords: aid effectiveness, economic growth, politics and aid, United Nations Security Council membership, political instruments

JEL Classification: O190, O110, F350, F530

Suggested Citation

Dreher, Axel and Eichenauer, Vera Z. and Gehring, Kai, Geopolitics, Aid and Growth (June 30, 2013). CESifo Working Paper Series No. 4299. Available at SSRN: https://ssrn.com/abstract=2290915

Axel Dreher (Contact Author)

University of Heidelberg ( email )

Grabengasse 1
Heidelberg, 69117
Germany

HOME PAGE: http://www.axel-dreher.de

Vera Z. Eichenauer

University of Heidelberg ( email )

Bergheimerstrasse 58
Heidelberg, 69117
Germany

Kai Gehring

University of Zurich - Chair of Political Economy ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland
+4917620916056 (Phone)

HOME PAGE: http://www.kai-gehring.net

University of Heidelberg ( email )

Grabengasse 1
Heidelberg, 69117
Germany

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