Geopolitics, Aid and Growth

50 Pages Posted: 9 Jul 2013

See all articles by Axel Dreher

Axel Dreher

Heidelberg University

Vera Z. Eichenauer

KOF Swiss Economic Institute at ETH Zurich

Kai Gehring

CESifo; University of Bern - Faculty of Economics and Social Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: June 30, 2013

Abstract

We investigate the effects of short-term political motivations on the effectiveness of foreign aid. Donor countries’ political motives might reduce the effectiveness of conditionality, channel aid to inferior projects or affect the way aid is spent in other ways, reduce the aid bureaucracy’s effort, and might impact the power structure in the recipient country. We investigate whether geopolitical motives matter by testing whether the effect of aid on economic growth is reduced by the share of years a country has served on the United Nations Security Council (UNSC) in the period the aid has been committed, which provides quasi-random variation in commitments. Our results show that the effect of aid on growth is significantly lower when aid has been granted for political reasons. We derive two conclusions from this. First, short-term political favoritism reduces growth. Second, political interest variables are invalid instruments for aid, raising doubts about a large number of results in the aid effectiveness literature.

Keywords: aid effectiveness, economic growth, politics and aid, United Nations Security Council membership, political instruments

JEL Classification: O190, O110, F350, F530

Suggested Citation

Dreher, Axel and Eichenauer, Vera Z. and Gehring, Kai, Geopolitics, Aid and Growth (June 30, 2013). CESifo Working Paper Series No. 4299, Available at SSRN: https://ssrn.com/abstract=2290915 or http://dx.doi.org/10.2139/ssrn.2290915

Axel Dreher (Contact Author)

Heidelberg University ( email )

Grabengasse 1
Heidelberg, 69117
Germany

HOME PAGE: http://www.axel-dreher.de

Vera Z. Eichenauer

KOF Swiss Economic Institute at ETH Zurich ( email )

Leonhardstrasse 21
Zürich, 8092
Switzerland

HOME PAGE: http://https://sites.google.com/view/vera-eichenauer/home

Kai Gehring

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

University of Bern - Faculty of Economics and Social Sciences ( email )

United States

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