Donors and Development Sector Allocation in Foreign Aid ∗

This paper 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. I also introduce new measures of emergency need and immigration, which are shown to have a significant impact on aid allocation. ∗Note: this paper represents a portion of my dissertation; the full document is available upon request. I thank Helen Milner, Robert Keohane, John Londregan, Christina Davis, Joanne Gowa, Jeff Colgan, Kris Johnson, Dustin Tingley, Christopher Achen, David Baldwin, Larry Bartels, Tom Callaghy, Angus Deaton, Jeffry Frieden, Kosuke Imai, Joshua Loud, Andy Moravcsik, Richard Nielsen, Daniel Nielson, Christopher O’Keefe, Brad Parks, Kristopher Ramsay, Anne Sartori, Jeannie Sowers, Randall Stone, and Michael Tierney for useful feedback. I have also benefitted from participation in the International Relations Graduate Student seminar at Princeton and from conversations and presentations at Duke University, Stanford University, the University of Rochester, and the University of California-Irvine. Additionally, I received valuable feedback from panels at the 2006 annual meetings of the International Studies Association, American Political Science Association, International Studies Association Northeast, the 2007 annual meeting of the International Studies Association, and the Oxford University Conference, “New Directions in Development Assistance,” in June 2007. There has been much scholarly debate regarding donor preferences in foreign aid policy. Attention has also been paid to differences in bilateral and multilateral aid strategies. Many studies contrast the relative importance of donor interest and recipient need in determining aid flows, following the influential work of McKinlay and Little (1977, 1978). In recent years, increased attention has been paid to the impact of recipient governance and/or policies on the allocation of aid. Neumayer (2003a) elevates these variables as a third category “good governance” to be tested alongside recipient need and donor interest. This paper engages the debate regarding the importance of recipient need, donor interest, and good governance in determining aid flows. It asks whether or not donors are interested in promoting development abroad. I separately examine bilateral aid (summed across donors) and multilateral aid.1 Although there have been several recent studies of aid allocation, the work presented here adds to the literature in significant ways. Perhaps most importantly, it changes the level of analysis from aggregate aid allocation to allocation by sector. Examining the pattern of sectoral aid allocation can give us insights missed at the aggregate level. This is particularly true with respect to the impact of recipient governance on aid flows. I also add new measures of recipient need and donor interest. Additionally, this is the first study to look at panel data for aid allocation in the new millennium and compare this period to the 1980s. I analyze bilateral aid at the macro level, summing aid from all bilateral OECD donors. The goal is to determine whether donors, taken as a group, show an interest in giving aid to promote development. Examining the role of recipient need and good governance in allocation will help answer this. If donors have an interest in promoting development abroad, then both the need of the recipient and its capacity to use aid effectively (often measured by governance) should influence allocation decisions. If there is a global trend of donors increasingly concerned about problems caused by lack of development, then these effects should be strong enough to be observed at this macro level. Evidence that aid is not significantly conditioned on need and/or capacity would undermine the idea that development is a major goal of aid donors. In what follows I first review the debate regarding aid allocation. I then offer a new interpretation of the role of governance in allocation decisions. Evidence is presented that disaggregating aid is an important step in better understanding donor intent. I then proceed with a panel analysis of bilateral aid at the sector level for 2000-2005. This is compared to multilateral aid as well as to bilateral aid from the 1980s. As part of the In my dissertation, I also examine aid from individual donors.