The Dynamics of Aid and Political Rights

• DOI: http://doi.org/10.1111/twec.12192
• Published date: 01 September 2014
• Date: 01 September 2014
• Author: David Fielding

The Dynamics of Aid and Political Rights

David Fielding

Department of Economics, University of Otago, Dunedin, New Zealand

1. INTRODUCTION

IN the last decade, donors have paid more attention to the effect of aid on the quality of

governance of recipient countries. For example, the United States’ Millennium Challenge

Account uses aid commitments to try to create an incentive for political development among

recipients,

1

and the OECD’s Human Rights Task Team ‘develops policy guidance on how to

integrate human rights more consistently into donor policies and practice’ (see www.oecd.org/

document/21/0,3746,en_2649_34565_35901653_1_1_1_1,00.html). Political development is

seen as an end in itself and as a potential factor influencing the impact of aid on wider social

and economic development (Collier and Dollar, 2002). Aid is subject to diminishing returns

(Feeny and McGillivray, 2011), but the development of recipient political institutions can mit-

igate this effect and improve absorptive capacity.

This policy focus has stimulated a number of studies of the impact of aid on governance.

The quality of governance has a number of different dimensions, including both public sector

efficiency (embodied in, for example, the control of corruption) and political rights. Some

studies analyse the impact of aid on corruption and standards in public institutions. Examples

of studies finding a negative impact of aid include Ali and Isse (2003), Br€

autigam and Knack

(2004), and Busse and Gr€

oning (2009). Explanations for this effect include the pressure that

the management of aid inflows puts on the institutional resources of recipients with limited

absorptive capacity (Feeny and McGillivray, 2009) and the lack of an incentive to develop

domestic institutions when donors create their own local infrastructure. However, empirical

results typically take the form of a regression coefficient on total aid inflows, which is consis-

tent with several different interpretations of the aid-governance nexus. Moreover, a few stud-

ies, such as Tavares (2003), find a positive aid coefficient using a slightly different sample

and different identifying restrictions in the model.

A separate group of studies explores the impact of aid on democracy and political rights.

Theories of democratisation suggest two ways in which aid might promote democracy (Finkel

et al., 2007). First, to the extent that traditional development assistance promotes economic

development and modernisation and to the extent that modernisation promotes democratic

development, such assistance could be associated with a faster transition to democracy.

2

Second, targeted assistance for democratic reform might be effective in educating voters,

supporting the development of political parties and strengthening human rights groups. Such

assistance is motivated by the ‘transition paradigm’ (Carothers, 2004) in which aid is targeted

at the proximate determinants of democratic development. For example, aid to countries with

an authoritarian government might be focused on strengthening human rights groups and other

1

See Johnson and Zajunc (2006) and

€

Ohler et al. (2010) for analyses of the effectiveness of this policy.

2

There is some disagreement about the strength of the link between economic performance and

democratic transition. Acemoglu et al. (2008) do not find any evidence that higher per capita income

promotes democracy; however, Borooah and Paldam (2007) show that there is a significant effect if a

longer time period is used for the analysis.

©2014 John Wiley & Sons Ltd 1197

The World Economy (2014)

doi: 10.1111/twec.12192

The World Economy

civil society organisations in order to encourage a ‘democratic breakthrough’; if such a

breakthrough takes place, then aid can be focused on strengthening the electoral process.

Overall, there is very limited evidence for a positive effect of total aid on democracy and

political rights. Knack (2004) finds total aid to have a negative impact on both Polity IV and

Freedom House measures of political rights, on average. Similarly, Kalyvitis and Vlachaki

(2012) find that total aid has a negative effect on the probability of observing a democratic

regime. This effect is robust to a wide range of model specifications and is magnified in aid

recipients with initial conditions unfavourable for democracy. Subsequent studies have tried

to uncover the mechanisms that might explain such a relationship. Wright (2009) fits a model

of democratic reform on aid interacted with a number of different indicators of regime type,

finding some interaction terms to be positive and others negative. These differences could be

interpreted as evidence on the interaction of aid inflows with the local polity.

It is also possible that different types of aid have heterogeneous effects on the speed of

democratic transition. Evidence for such heterogeneity is provided by Limpach and Michael-

owa (2010), who measure the effect on democratisation of different types of IMF and World

Bank aid packages. It appears that poverty reduction packages are most likely to promote

political rights, possibly through encouraging wider participation in civil society. Sectoral aid

packages are most likely to diminish political rights, possibly by reinforcing the position of

political and economic elites. Moreover, results from studies of the effect of targeted demo-

cratic assistance are more encouraging. Kalyvitis and Vlachaki (2010) distinguish between the

effect of total aid and the effect of aid designed specifically to promote good governance;

governance aid has a significant positive effect on political rights. Similarly, Finkel et al.

(2007), who use USAID data, distinguish between aid to promote democratic reform and

other types of aid. They find that targeted aid promotes democracy, but other types of aid

do not.

With the exception of Busse and Gr€

oning (2009), who do not deal explicitly with political

rights, these empirical analyses are all based on pooled panel or cross-sectional data sets.

Typically, the within-country variation in the data is a small fraction of the total variation,

3

which is dominated by differences across countries. Approximately, the regression coefficients

are measuring the effect on the difference in the quality of governance between two countries

of a difference in the average level of aid inflows. For example, the Kalyvitis and Vlachaki

(2010) result can be interpreted as the difference in political rights between two countries that

results from a decision by donors to focus their efforts to promote good governance on one

rather than the other. Favouring one particular recipient might entail more than just a larger

flow of funds; it could, for example, reflect more extensive long-term institutional links

between the donor and recipient.

Therefore, the results from pooled panel analyses do not provide direct evidence on the

effect that one can expect from an increase or reduction in aid to a particular country on

political rights over the next few years. To provide such evidence, we fit a dynamic panel

model to a political rights data set. We distinguish between governance aid and total aid, and

between the effects of aid to countries at different initial levels of political development. The

next section discusses the data to be used. This is followed by a description of our model and

a discussion of our results.

3

With the main political rights indicator we will be using (voice, which described in the next section),

the within-country standard deviation is about 20 per cent of the total standard deviation.

©2014 John Wiley & Sons Ltd

1198 D. FIELDING