Foreign aid, foreign policy, and strategic development

This dissertation examines foreign aid allocation of OECD countries in the new millennium. During the Cold War, aid was often ineffective at promoting development because it was not given for development purposes. In more recent years, donors have increasingly cited the negative impact of underdevelopment abroad on their own countries. This suggests that the emphasis on development in aid policy should be much stronger. As such, donors are likely to care more about the needs of recipients and their capacity to use aid effectively. To test whether or not this is the case, I examine aid at the sector level. By disaggregating aid for the period 2000-2005, I show that donors condition aid on the quality of governance in recipient countries. The observed sector allocation suggests that donors respond to governance as a signal of recipient capacity to use aid effectively. Poorly governed countries receive significantly less aid for sectors where recipient government involvement is likely to be high. However, donors also recognize the increased need experienced by citizens in countries where the quality of governance is low. When donors are able to work around the recipient government, they may give more aid to poorly governed countries. The conditioning of aid on governance reflects a recent policy shift. There is no evidence of similar conditionality in the 1980s. Furthermore, analysis of aid allocation patterns for France, Japan, the UK, and the US suggests significant changes over time. These donors place much less weight on military considerations in recent years than they did in the 1980s. They are less likely to use aid to project power to distant areas, and more likely to allocate it closer to home. There is a significant correlation between immigrant flows to donor countries and aid allocation. Historical ties, such as status as a former colony, remain important determinants of aid flows. All of this suggests that donors are promoting development, but in a strategic manner. Aid is used for development, but it is given disproportionately to those countries where development will have the greatest benefit for the donor.