The Roles of Aid in Politics Putting China in Perspective

This annotated bibliography is a compilation of the conclusions, executive summaries, and excerpts from important contributions concerning the role of aid in foreign policy and politics. References contained in the compilation below refer to references in the publications, for further information please refer to the publication in question. The functions which aid serves varies over time and for different nations depending on the configurations of circumstances (both domestically and abroad), therefore careful attention should be paid to the date of publication of the articles and books below, in order to understand both the context and the changes in the role of aid in foreign policy and politics.

CONTENTS
(Bibliography on Chinese engagement with the developing world on pg. 432)

Alesina, Alberto and Dollar, David (2000), “Who Gives Foreign Aid to Whom and Why?” in Journal of Economic Growth, Vol. 5, No. 1, pp. 33-63.

Most observers agree that foreign aid has been, at best, only partially successful at promoting growth and reducing poverty. One reason is the poor performance of the bureaucracies of the receiving countries. The other reason (documented in this paper) is the pattern of the flows of foreign aid. The allocation of bilateral aid across recipient countries provides evidence as to why it is not more effective at promoting growth and poverty reduction. Factors such as colonial past and voting patterns in the United Nations explain more of the distribution of aid than the political institutions or economic policy of recipients. Most striking here is that a non-democratic former colony gets about twice as much aid as a democratic non-colony. A similar result holds for former colonies that are closed to trade versus open non-colonies.

From the point of view of efficient aid, each of the “big three” donors—U.S., Japan, and France — has a different distortion: the U.S. has targeted about one-third of its total assistance to Egypt and Israel; France has given overwhelmingly to its former colonies; and Japan’s aid is highly correlated with UN voting patterns (countries that vote in tandem with Japan receive more assistance). These countries’ aid allocations may be very effective at promoting strategic interests, but the result is that bilateral aid has only a weak association with poverty, democracy, and good policy.

When we estimate equations for individual donors, we find striking differences in their allocations. After controlling for its special interest in Egypt and Israel, U.S. aid is targeted to poverty, democracy, and openness. The Nordic countries have a similar pattern except that they do not have the same sharp focus on the Middle East. French assistance, on the other hand, has little relationship to poverty or democracy even after controlling for their strategic interests in former colonies and UN friends. The same conclusion holds for Japan, with the caveat that its strategic alliance may be built around investment and trade relationships, more than former colonial ties.

We also looked at the time series relationships between aid, on the one hand, and democracy and openness, on the other. There is a very clear trend for democratizers to get a substantial increase in assistance (50 percent on average), and but no strong tendency for economic liberalizers to be boosted. In terms of the incentives implicit in aid allocations, this time series dimension is what is important: it reveals what a particular country can expect as it reforms political institutions and economic policy.

Finally, we estimated an equation for the flow of direct foreign investment, which provides a useful reference point for aid allocations. We found no mutual dependence of private flows and bilateral aid. Private flows respond to the rule of law and good economic policy, and are largely indifferent to democracy or the strategic considerations that play such an important role in aid allocations. Ceteris paribus, private flows go to higher income developing countries, perhaps because they have larger markets. This last finding is important, because it reveals that low-income countries cannot expect much in the way of private flows even if they have good rule of law and sound economic policies.

Alesina, Alberto and Weder, Beatrice, (2002) “Do Corrupt Governments Receive Less Foreign Aid?”, in American Economic Review, Vol. 92, No. 4, pp. 1126–1137.

The answer to the question posed in the title is “no.” There is no evidence that less corrupt governments receive more foreign aid. Our vast exploration of the data never uncovered any even weak evidence of a negative effect of corruption on received foreign aid. The same result applies to debt relief program, an additional form of aid. We found significant differences across donors. Scandinavian donors (the most generous in per capita terms) do reward less corrupt receivers. On the other hand, the United States appears to favor democracies, but seems to pay no attention to quality of government of receiving countries. Finally, we find indications of a “voracity effect” of foreign aid.

This model has provided a useful framework for examining the nature of coalition formation in the United Nations on an important issue involving a conflict between the interests of the United States and the Soviet Union. The selection of U.S. foreign aid as an independent variable in explaining the voting patterns of U.N. members reveals some significant information about the dynamics of coalition building from 1961 to 1968.

The major findings include support for a minimum winning coalition as a primary goal of the coalition leaders. The nature of foreign aid and its limited supply prevents its distribution on a purely random basis. Instead, nations such as the United States and the Soviet Union have used this resource to their political advantage, and this model provides for an examination of its rational use.

It appears that the United States embarked on an aid program during the early sixties that was initially quite inefficient. Aid was distributed in a capricious manner, with too much aid being distributed in some cases and not enough in others. In subsequent years, aid was decreased and reallocated on a more practical basis, especially as a result of increased information (though not at all perfect) and the demands (or requests) of the newly independent countries that swelled the U.N. membership rolls during this period.

The United States provided most of its coalition with a minimum level of aid, but when it miscalculated the tolerance of a country for this level of aid, it usually had to pay increased side-payments to cajole the country to return to the coalition. Many countries were “free,” since their particularly close ties to either the U.S. or China already provided them with adequate incentives. Some were easily courted by token levels of aid, while others had to be romanced by large doses of aid, and all because of the uncertainty as to the voting intentions of each country for each voting year.

Occasionally the U.S. tried to seek out members of the opposing coalition, partly for information purposes about the receptivity of possible favorable vote changes in response to U.S. aid and also for the opening of communication channels in case extra votes might be needed in the future. Cases were found where aid increases were associated with favorable changes of vote from YES to ABSTAIN or No, but for the most part the United States was more successful in changing votes from ABSTAIN to No.

The United States was least successful in its aid appropriations to countries also receiving Soviet foreign aid. After a series of probings, U.S. aid gradually receded, but it is interesting to try to understand that despite its effectiveness against U.S. foreign aid, the Soviet Union did not overtly attempt to expand its coalition beyond a certain limit. We can either surmise that U.S. aid was an adequate deter-rent to Soviet advances, particularly in Latin America and selected African nations, or that Soviet aid was very limited and could be used only conservatively. Horvath hypothesizes that while the efficiency of Soviet foreign aid per monetary unit tends to be very high, the high leverage of Soviet economic aid seems to, be more effective in the short run and that often the initial good will contacts quickly cool off to the extent of an actual rebound of bad will.²⁶ This notion along with the relative stability of the U.S. coalition indicates that the representation of China and the expulsion of the Nationalists could probably have been prevented for a number of years, except for the Summer 1971 announcement of Nixon's visit to China, making the subsequent U.N. vote on admission essentially moot.

Although we do not provide any statistical evidence of a causal relationship between foreign aid and U.N. voting, the associations revealed by the framework presented here tempt one to make the transition to a cause and effect explanation. However, alternative explanations are still possible and the complexities of the time lags and small numbers of cases in some instances are a few of the arguments against such assertions. Nevertheless, the model does present an interesting way to observe, post hoc, the activities of international bargaining, since there are usually so few opportunities that provide adequate data resources.

The use of foreign aid as side-payments is by no means the only kind that can be traded in this type of coalition formation. Our definition of U.S. foreign aid is a narrow one, not entailing military expenditures, which may really be the decisive factor. Instead of pondering the real value and significance of these expenditures, we chose simply a representative sub-sample of aid transfers. By explaining the fluctuations and levels of aid within the framework of this model, we have been successfully able to explain a significant amount of nations' behavior, indicating that perhaps our choice was a representatively good one.

Theoretically, the approach used here can be used in other international bodies and for other uses, but only after careful examination of the extent to which the conditions of the model can be satisfied. Situations approaching zero-sum games are difficult to find and the growing detente between the United States and Soviet Union signals an era of cooperation, compromise, and non-zero sum games.

U.S. law requires that the government give human rights priority over other foreign policy considerations, such as economic interest or military presence, in the allocation of foreign aid. But human rights are not an absolute criterion for the dispersion of aid. The legislation allows for lawful digression from the human rights requirement in cases of "extraordinary circumstances" or when the aid will directly help needy people. Is there a relationship between the allocation of foreign economic and military aid and human rights performance? Our study is the most comprehensive research to date on the relationship between human rights and foreign aid. Not only did we include more country cases, but we also expanded the time of study to include the Bush and Clinton administrations.

At the gatekeeping stage we established that human rights concerns did impact whether a country received U.S. economic aid or not (with the exception of the Clinton administration). A country's human rights performance significantly determined how much aid the country received. Those countries with bad human rights records received less U.S. bilateral economic aid than those countries with better records. U.S. military presence, measured by the number of military personnel stationed within the country, also determined the sum of economic aid allocated. Rhetoric notwithstanding, we found that, on a worldwide scale, the amount of economic aid allocated was remarkably consistent between administrations. Using the Carter administration as our referent, we found no statistically significant differences in the amount of aid allotted to each country among the administrations.

In sum, we find that human rights do play a role in the decision of who receives U.S. bilateral foreign assistance, and how much aid they are allotted. But other national security interests play a more prominent role. Countries perceived to be of vital importance to U.S. national security, as measured by the presence of a large number of military personnel, along with Latin America, receive aid regardless of their human rights records.

A strong inverse relationship between per capita assistance and population of aid-receiving countries is found in an examination of Canadian bilateral foreign aid to 33 countries over the period 1982–92. However, the middle-income bias present in aid allocation of some other countries is not found in the case of Canada. Instead, there is a bias associated with the recipient’s membership to the Commonwealth. [From abstract]

A strong inverse relationship between per capita assistance and population of aid-receiving countries is found in an examination of German bilateral foreign aid to 85 countries over the period 1973-1995. However, the middle-income bias present in aid allocation of some other countries is not found in the case of Germany. Instead, there is a bias associated with a recipient’s coverage under the Lomé Convention. Results generally appear to be consistent with both donor interest and recipient need models of foreign aid.

Australian Government, AusAid, Feature Stories of AusAID – Tackling Terrorism, retrieved from http://www.indo.ausaid.gov.au/featurestories/tacklingterrorism.html on November 21st, 2010.

Australia's aid program is involved in a number of longterm anti-terrorism projects in the Asia-Pacific region. These projects are helping the region to understand and change the conditions that can foster terrorism. The shocking events of 11 September 2001 and 12 October 2002 forced the issue of international terrorism onto the front page of every newspaper in the Asia-Pacific region. The world is now grappling with the issue of how to defeat global terrorism. The United Nations and other international organisations, such as the Organisation for Economic Cooperation and Development (OECD), are working with their members to develop the capabilities needed to combat terrorism.

Countries are now required by the United Nations and the OECD to strengthen areas such as customs and the banking sector. The region's forums, like the ASEAN Regional Forum and APEC (Asia-Pacific Economic Cooperation), have also agreed on anti-terrorism measures. Australia is working closely with its neighbours to assist them in meeting the commitments they have agreed to implement.

Providing Australian aid in areas such as customs and finance will help the region to restore growth and confidence and develop anti-terrorism measures.

Ball, Richard and Johnson, Christopher (1996), “Political, Economic and Humanitarian Motivations for PL 480 Food Aid: Evidence from Africa,” in Economic Development and Cultural Change, Vol. 44, No. 3, pp. 515-537.

When we consider all titles of PL 480 and all 20 years of our sample, geopolitical interests and surpluses of American agricultural commodities appear to have been the most influential factors in the allocation of U.S. food aid among African recipients. Humanitarian considerations also appear to play a role, but the evidence on this issue is less compelling. The one hypothesized motivation for the PL 480 program that does not appear statistically significant is the market development objective. As we have discussed, however, it is not clear whether this result indicates that the goal of developing commercial markets has in fact not influenced food aid allocations or whether it reflects measurement difficulties.

When we disaggregate the sample, we find that the these various [sic] objectives are given different weights in the different titles. For Title I aid alone, political factors are more important than in the sample as a whole, and there is no evidence that allocations were affected by humanitarian considerations. In sharp contrast, in the regression for Title II the political variables are not statistically significant, and the humanitarian variables have a much stronger influence than in the sample as a whole. These results are broadly consistent with the different stated objectives of these two titles.

The results that we find most striking concern changes in the motivations shaping food aid policy that occurred between the 1970s and 1980s. When we examine the data from the 1970s alone, political factors and surplus disposal are strongly significant in explaining patterns of PL 480 distribution, but the humanitarian indicators have little influence. Particularly notable in the 1970s is that even in the Title II regression, which we expect to be most heavily influenced by humanitarian concerns, food aid receipts are not significantly related to infant mortality. The data for the 1980s, on the other hand, show precisely the opposite pattern: neither the political variables nor U.S. grain surpluses turn out to be statistically significant, but the indicators of humanitarian needs are strongly significant. Remarkably, none of the three political variables are significant in any of the three regressions for the 1980s.³³

This evolution in the motivations behind PL 480 aid is consistent with larger trends in international politics over the period we study, particularly the waning influence of the Cold War. Even before the fall of the Berlin Wall in 1990 or Margaret Thatcher's 1988 declaration that “The Cold War is over,”³⁴ the strategic significance of Africa as an East-West battleground was declining. According to D. Rothchild and J. Ravenhill, “the actions of the Soviet Union in Africa since the mid-1980s as well as the statements of key policymakers have signaled a major Soviet withdrawal from the continent.”³⁵ The view of Africa as “merely another chessboard on which the superpowers were playing out their global struggle,” these authors argue, “has become increasingly irrelevant.”³⁶ The lack of significance of any of the political variables in our regressions for the 1980s indicates that Africa's changing geopolitical significance has been reflected in American food aid policy.

Looking ahead to the next 10 years, we expect that some of the patterns of food aid allocation that we have observed will be maintained, but that others will continue to evolve. The greatest continuity that we expect is in the differential motivations behind the different titles of PL 480. Legislation passed in 1990 puts administration of Title I entirely in the hands of the USDA, with the explicit mandate of promoting U.S. agricultural interests, and puts Title II entirely in the hands of USAID, with the explicit mandate of providing humanitarian relief and development assistance.³⁷ The distinctions between the objectives pursued with the different Titles of PL 480 should therefore be maintained or even sharpened. In addition, we expect that the political uses to which food aid is put will continue to evolve. In particular, the post-Cold War foreign policy of fostering free markets and democratic political systems is already influencing the programming of American food aid. New legislation referred to as “Food for Progress,” first introduced in the 1985 farm bill and amended in 1990, now provides food aid to countries engaged in liberalization of agricultural markets, as well as to “newly emerging democracies.”³⁸ It appears that food aid will continue to serve multiple objectives and that these objectives will continue to evolve in response to changes in the global political and economic environment.

In this paper, we have estimated the responsiveness of total aid in the post-Cold War era to the needs, civil/political rights, and government effectiveness of recipient countries. To do so, we used the approach espoused in Trumbull and Wall (1994): to use fixed effects to control for donor interests. We have found that aid in this era generally responded negatively to per capita GDP and positively to infant mortality, rights, and government effectiveness. This is in contrast with much of the existing literature, which, while tending to find a negative link between aid and per capita income, has been decidedly more mixed in terms of the other variables.

We began with a political-economy approach to the IMF’s lending decisions. Holding fixed a set of standard economic variables, the probability and size of IMF loans were larger when a country had a bigger quota, more nationals working on the professional staff, and more political and economic proximity to the United States and the major Western European countries. We measured political proximity by voting patterns in the U.N. General Assembly and economic proximity by bilateral trading volume. The set of political-economy variables was statistically significant overall for explaining the size of IMF loans, the frequency of participation in IMF lending programs, and the probability of IMF loan approval.

This political-economy analysis of IMF lending practices is of substantial interest for its own sake. More importantly for present purposes, the results allow us to create instrumental variables to use to estimate the effects of IMF loan programs on economic outcomes. If we do not instrument, we find that the IMF loan–GDP ratio has a substantial inverse relation to economic growth in the contemporaneous 5-year period. However, the instrumental estimates indicate that the contemporaneous relation of the IMF loan–GDP ratio to economic growth is statistically insignificant. Thus, the apparent inverse relation likely reflects the endogenous response of IMF lending to weak economic conditions. In contrast, the instrumental estimates still show that the IMF loan-participation rate has a statistically significant negative influence on economic growth. Therefore, greater IMF program participation, rather than larger loans, seems to retard growth. We also analyzed the effects of IMF loan programs on other economic and political variables—investment, inflation, government consumption, international openness, democracy, and the rule of law. The most important result was a negative effect of IMF loan participation on the rule of law. This channel implies a further, negative indirect effect of IMF loan participation on economic growth.

Our results do not explain what the direct negative effects of IMF loan participation on economic growth represent. We know that these effects do not derive from channels involving the explanatory variables that were held constant in the growth regressions shown in Table 7. However, the IMF may matter through channels involving additional variables.

As an example, the moral hazard created by the potential for IMF loans may cause governments to spend excessively on public investment or transfers, which were not included in our government consumption variable. The IMF programs may also encourage inefficient behavior on the part of government bureaucrats. IMF conditionality may harm economies in ways not captured by the inflation rate and the other variables considered. For example, there may be effects on tax structure and regulations.

Finally, IMF loan programs may influence the size and structure of private credit markets. These possibilities constitute promising avenues for future research. Finally, we end with something of a puzzle. Our results suggest that participation in IMF loan programs is bad for the economy, at least bad for economic growth. Why then do host governments choose to participate in IMF loan programs?²⁵ Or, to put it more strongly, why do countries in politically favored positions—because of large quotas, large IMF staffs, and political and economic proximity to the IMF’s main shareholding countries—use their clout to obtain IMF loans when these loans apparently retard economic growth? We have several possible answers. First, IMF lending may be bad for the economy but good for the governments and individual politicians who arrange the lending. Second, the IMF lending may lower real GDP but raise a country’s income, which is augmented by the subsidy element of an IMF program. Third, IMF lending may lower growth in the short run but raise growth in the long run. However, our analysis fails to find the higher long-run growth at least over a 5-year horizon. Finally, there may be a time-consistency issue. A country may be better off if it can commit in advance not to participate in IMF programs (or, possibly, in foreign aid, and so on). However, ex post, the country may be better off accepting the assistance. We plan to address these issues in future research.