Associate Professor of Political Science University of Pittsburgh “Why Foreign Aid May be Less Effective at Promoting Economic Growth in More Democratic Countries.” David H. Bearce Associate Professor of Political Science University of Pittsburgh dhb12@pitt.edu

Research Questions Does foreign aid effectiveness vary in terms of the recipient country’s domestic regime type? Has Western aid been more or less effective at promoting growth in more democratic recipient countries?

The Argument, Part 1 Most arguments about the (in)effectiveness of Western aid assume that foreign aid operates on economic growth through a government spending channel. Aid should be effective when used for public investment, but ineffective when used for government consumption. This logic suggests that aid should be more effective in more democratic recipients, following Bueno de Mesquita et al 2003. Democracies need to provide public goods for their political survival so they would be more likely to invest their foreign aid. Problem: empirical evidence does not support this causal logic. Boone (1996, 322): “democracies and liberal regimes do not allocate aid any differently from other regimes” in that aid is used for consumption in democracies and autocracies alike, increasing the size of government but not the rate of GDP per capita growth.

The Argument, Part 2 Aid could also foster economic growth by incentivizing economic reform. Collier (1997, 56): “Aid might be entirely spent on useless government consumption and yet be remarkably effective if it induces governments to adopt growth-inducing and poverty-reducing policies.” But economic reform inevitably creates a set of “losers.” These potential losers have greater means to delay or block economic reform in a more democratic political system. (Haggard and Kaufman 1992; Haggard and Webb 1994; Oatley 2004) This logic proposes that foreign aid should be less effective in more democratic countries.

Statistical Model Unit of analysis: aid-eligible country/year 1964-2003 (N ≈ 4000). Growthit = β0 + β1*Aidit-5 + β2*Democracyit + β3*(Aid*Democracy) + βX*Controlsit Controls include: lagged growth, national income, population growth, economic development, private consumption, government consumption, investment, exchange rate, 7 regional dummies, year fixed effects. Democracy scaled so that 0=least democratic country/year and measured using Polity and Freedom House (in separate models) Prediction: marginal effect of Aid should decrease with Democracy ∂Growth/ ∂Aid = β1 + β3*Democracy Implies β1 > 0 and β3 < 0

Table 1: Estimates of Growth Polity Freedom House Aid (lagged 5 years) expected sign + 0.00072** (0.00031) 0.00119*** (0.00042) Democracy 0.014 (0.027) 0.11 (0.07) Aid * Democracy expected sign - -0.000040** (0.000019) -0.000141*** (0.000051) R2 0.08 N 3876 3670 OLS coefficients with robust SE clustered on country in parentheses. *** p<0.01, ** p<0.05, * p<0.10

Figure 1: Marginal Effect of Aid using Polity for Democracy

Figure 2: Marginal Effect of Aid using Freedom House for Democracy

How do we know this relationship operates through economic reform? Reformit = β0 + β1*Aidit-5 + β2*Democracyit + β3*(Aid*Democracy) + βX*Controlsit Reform = ΔEconomic Freedom using the Fraser Institute’s Index of Economic Freedom Coded only in five-year intervals from 1975 to 2000 so N ≈ 400. Prediction: marginal effect of Aid should decrease with Democracy ∂Reform / ∂Aid = β1 + β3*Democracy Implies β1 > 0 and β3 < 0

Table 2: Estimates of Reform Polity Freedom House Aid (lagged 5 years) expected sign + 0.00015** (0.00007) 0.00019** (0.00009) Democracy 0.019*** (0.005) 0.038*** (0.011) Aid * Democracy expected sign - -0.000011** (0.000005) -0.000024** (0.000011) R2 0.29 0.25 N 395 403 OLS coefficients with robust SE clustered on country in parentheses. *** p<0.01, ** p<0.05, * p<0.10

Figure 3: Marginal Effect of Aid using Polity for Democracy

Figure 4: Marginal Effect of Aid using Freedom House for Democracy

Policy Implications May need to increase aid to more democratic recipients since the same amount of aid buys less economic reform. 2. Aid for democratic promotion and aid for economic development may work at cross-purposes, at least in the short-term.