Governance and foreign aid allocation

This dissertation addresses foreign aid allocation and development effectiveness. This is an important issue as each year donors transfer tens of billions of dollars in foreign aid to developing countries. Moreover, based on new pledges and greater commitments to development assistance from donor nations, there is possibility of scaling up of foreign development assistance far beyond the current levels. From donors' perspective, the commitment to increase aid flows to developing countries is only the starting point. This in turn raises issues regarding the role of the donors' aid allocation policies in ensuring aid effectiveness. This dissertation examines some important propositions relating governance to foreign aid allocation and effectiveness. The study contributes to the debate on foreign aid through unraveling the critical heterogeneous impacts of governance and different aid categories on development outcomes. One striking finding suggests that aid to the production sector can be effective in promoting growth in countries with low quality of governance. On the other side, aid allocated to economic infrastructure is efficient in countries with medium and high quality of governance.