The Curse of Aid

33 Pages Posted: 31 Mar 2006

See all articles by Simeon Djankov

Simeon Djankov

London School of Economics & Political Science (LSE); Peter G. Peterson Institute for International Economics

José García Montalvo

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Marta Reynal-Querol

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; World Bank - Development Research Group (DECRG)

Date Written: March 2006

Abstract

Foreign aid provides a windfall of resources to recipient countries and may result in the same rent seeking behavior as documented in the "curse of natural resources" literature. In this paper we discuss this effect and document its magnitude. Using data for 108 recipient countries in the period 1960 to 1999, we find that foreign aid has a negative impact on democracy. In particular, if the foreign aid over GDP that a country receives over a period of five years reaches the 75th percentile in the sample, then a 10-point index of democracy is reduced between 0.6 and one point, a large effect. For comparison, we also measure the effect of oil rents on political institutions. The fall in democracy if oil revenues reach the 75th percentile is smaller, (0.02). Aid is a bigger curse than oil.

Keywords: Aid, democracy

JEL Classification: O10, O19, P50

Suggested Citation

Djankov, Simeon and García Montalvo, José and Reynal-Querol, Marta, The Curse of Aid (March 2006). Available at SSRN: https://ssrn.com/abstract=893558 or http://dx.doi.org/10.2139/ssrn.893558

Simeon Djankov (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

José García Montalvo

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

Marta Reynal-Querol

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
93 5422590 (Phone)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-458-7891 (Phone)

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