Political Economy of Aid

Question 1

Systemic Determinants of Aid - Mesquita

Answer 1

Who gets the most aid?
- Following selectorate theory, states with small winning coalitions rely more on private goods, so when they receive aid they are distributing it to their winning coalition, rather than the population, but they are also more likely to receive aid
- Where as states with larger winning coalitions need to provide public goods to please their winning coalition, and they are less likely to receive aid, but when they do they get more because they have to invest in bigger projects
- Unfortunately the wrong countries are receiving aid, autocratic countries are more likely to receive aid but it helps less people
- It helps autocratic leaders stay in power (satisfying their winning coalition), and it fails to alleviate poverty

• Inefficient allocation might explain the negative effect on growth
• Aid is often allocated for political rather than economic reasons

Criticisms
- Maybe its not whether or not a country receives aid but how much they receive, a state with a small winning coalition would still benefit from public goods, but since the leader only needs to satisfy a small number of people they only ask for a bit of aid, which is not enough to create a public project
- This also explains why small winning coalition countries are more likely to get aid, because donors don’t have to spend as much as they would on large coalition countries

Question 2

Smith & Dietrich

Answer 2

Think of outsourcing aid in terms of market orientated vs state orientated states

• Market-oriented domestic delivery will outsource relatively more aid in poorly governed public sector
• State-centered domestic delivery will outsource relatively less aid in poorly governed public sector

Results
- The amount of aid outsourcing depends on orientation of donor country and the corruption level of the recipient country
- This is not the case when the recipient government is not corrupt, in that case both types of donors will give the aid to the state rather than outsourcing

Criticisms
- How much aid are these countries actually providing?
- Maybe its not just that some countries are chosing to outsource their aid more, rather, the aid that they are giving over and above that to the government is being outsourced
- Perhaps the countries that are considered “State-centered” are just not giving out as much aid so they are just giving it all to the recipient government
- Whereas the countries that are “market-oriented” are just richer countries that are giving more aid overall, so they are giving the same absolute value of aid to the recipient, but the are also giving extra aid to non-government organizations

Question 3

Assumptions of Aid and Growth

Answer 3

1. Linear relation between investment and growth
   - Productivity can change endogenously, like technology, human capital, institutions
   - If economies become more efficient, no need of increasing investment
2. Aid finances investment rather than consumption
   - creating favourable investment conditions should be the priority

Question 4

Determinants of Aid Effectiveness

Answer 4

• Aid fatigue among donor publics in 1990s
• Low public support of aid
• Bad governance (corruption and weak institutions) in recipient country lead to aid capture/waste
• How to improve aid outcomes/results?
• How to manage risk of aid capture?

Question 5

Outsourcing Aid

Answer 5

• If the public sector is badly governed in recipient countries, why not outsourcing foreign aid delivery to non-state actors?
• Bypassing: giving aid to non state actors rather than directly to the recipient government

Question 6

Donor Preferences

Answer 6

• If outsourcing is more effective, why aren’t all donors doing it to the same degree?
• Aid effectiveness means different things to different people
• Short term goal is to get aid to people, like building a school in one community
• Long term goals are to empower states to provide aid to their own people, like a complete overhaul of the education system