corruption in Rwanda and the Democratic Republic of Congo often implicate Belgium’s exploitative and misguided colonial policies in these territories between 1901 and 1962. Former colonial powers may also retain, even many years after independence, a stronger sense of responsibility for the development of ex-colonies. Colonial ties are shown to influence aid allocations by donors across recipients in Alesina and Dollar (2000).<sup>13</sup> We hypothesize that the former colonial power will be more willing than other donors to trust country systems. The dummy variable _colonial tie_ is set equal to 1 for all donor-recipient pairs (such as UK-Ghana) where the recipient was once part of the donor’s colonial empire.<sup>14</sup> A colonial tie is present in about 5% of the SMPD observations. Although _colonial tie_ is not explicitly in the model in Section 2, intuitively it can be considered a proxy for the term<sup>_A_</sup> _i_ .

Recipient country characteristics comprise a second set of independent variables. Most of these measure, in one way or another, the trustworthiness of recipient country systems, corresponding to γ in the model. The most direct measures of the quality of country systems are from the World Bank’s “Country Policy and Institutional Assessments” (CPIA). For brevity we re-name the CPIA’s “Quality of Budgetary and Financial Management” as _PFM Quality_ . Higher ratings reflect a comprehensive and credible budget linked to policy priorities, effective financial management systems to ensure that the budget is implemented as intended, and timely and accurate accounting and fiscal reporting. “Transparency, Accountability and Corruption in the Public Sector” is re-named _Transparency_ ; it assesses the extent to which the executive can be held accountable for its use of funds and the results of its actions by the electorate and by the legislature and judiciary, and the extent to which public employees within the executive are required to account for the use of resources, administrative decisions, and results obtained. A third variable we use is _Quality of Macro/Fiscal Policy_ , constructed as the simple average of two CPIA indicators on “Macroeconomic Management” and “Fiscal Policy.”<sup>15</sup> These two indicators assess the quality of the monetary/exchange rate and aggregate demand policy framework, and the short- and medium-term sustainability of fiscal policy, taking into account monetary and exchange rate policy and the sustainability of the public debt **.** Full definitions for all of these CPIA indicators are provided in Appendix 3.

Weaker country systems as measured by lower scores on _PFM Quality_ and _Transparency_ reflect increased risks to donors of corruption scandals, diversion of funds to lower priority uses,

> 13 However, Berthelemy and Tichit (2004) find this pattern has weakened in recent years, and the correlation between _donor aid share_ and a dummy for former colonial ties is only .14 in the SMPD.

> 14 Colonies are assigned only to their last colonial master; e.g. Rwanda and Burundi are assigned only to Belgium, which occupied those parts of German East Africa in 1916.

> 15 These two variables are correlated at .71 for the 54 countries in the SMPD sample.  Results below obtained using _Quality of Macro/Fiscal Policy_ are very similar, but slightly weaker, if either of its two components is used instead.

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