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The curse of aid

Simeon Djankov (), José Garcia Montalvo () and Marta Reynal-Querol ()

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: Foreign aid provides a windfall of resources to recipient countries and may result in the same rent seeking behavior as documented in the “curse of natural resources” literature. In this paper we discuss this effect and document its magnitude. Using data for 108 recipient countries in the period 1960 to 1999, we find that foreign aid has a negative impact on democracy. In particular, if the foreign aid over GDP that a country receives over a period of five years reaches the 75th percentile in the sample, then a 10-point index of democracy is reduced between 0.6 and one point, a large effect. For comparison, we also measure the effect of oil rents on political institutions. The fall in democracy if oil revenues reach the 75th percentile is smaller, (0.02). Aid is a bigger curse than oil.

Keywords: Foreign aid; democracy; conditionality (search for similar items in EconPapers)
JEL-codes: O11 O19 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-afr, nep-dev and nep-pol
Date: 2005-04
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Journal Article: The curse of aid (2008) Downloads
Working Paper: The curse of aid (2005) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:870

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