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Chapter 9: What's the Problem with Foreign Aid?

Study

Summary

According to two prominent views, foreign aid has failed to alleviate aid either because the amounts of aid were not sufficient or because aid was given to corrupt government officials instead of local entrepreneurs. However, these views ignore the possibility that the amounts of aid and the form in which it has been given are part of an equilibrium strategy and that the donors might have other goals in mind, besides alleviation of poverty, when they give aid.

The selectorate theory maintains that foreign aid is successful at doing what it was designed to do, namely buy policy concessions in exchange for money (foreign aid). The voters in the donor states do not value poverty reduction and democratization abroad as much as they value policies that directly benefit them. Therefore, foreign aid is given only if it is directly tied to domestic interests and only if the recipient will not implement the donor's policy without the aid.

The selectorate theory predicts that large-W leaders are more likely to be donors and small-W leaders are more likely to be the recipients of foreign aid. This is because the former value policy concessions and the latter value resources that they can use to stay in office. In addition, foreign aid is not given on the basis of need, and therefore low per capita income countries do not get larger amounts of aid. Instead, larger amounts of aid are given to large-W leaders and governments with high revenues because it is costlier to extract policy concessions from them. In addition, countries that are neutral to the donor (the United States) are likely to get more foreign aid than countries that are already supportive of the donor.

With regard to democratization, the selectorate theory maintains that foreign aid inhibits democracy (similar to the effects of military interventions, discussed in Chapter 8). The effect of foreign aid is equivalent to that of natural resources (oil, diamonds, etc.) because it does not depend on labor productivity and therefore provides "free" resources to leader. When a leader accepts foreign aid in exchange for policy concessions, he agrees to implement policies that are not in the best interest of his citizens (if they were, the donor would not have to pay for it). This may enhance the probability of a popular unrest. There are two ways in which a leader can respond: he can either expand the provision of public goods to make it less attractive for citizens to rebel or he can contract the provision of public goods, including coordination goods, to make the citizens less likely to succeed in their rebellion. After expanding or contracting the provision of public goods, the leader also has to adjust his institutions by increasing the winning coalition or by purging some of its members. Leaders who receive foreign aid are more likely to respond to popular unrests by contracting the provision of public goods and decreasing the size of their winning coalition. This makes such countries less democratic than they were before receiving foreign aid.

Study Questions

1. What are the common explanations of the failure of foreign aid to alleviate poverty?
   



2. What does the selectorate theory argue about the goals of foreign aid?
   



3. According to the selectorate theory, who gives foreign aid? To whom? How much?
   



4. According to the selectorate theory, what effect does foreign aid have on the chances of the recipient to democratize?
   



5. Why is foreign aid comparable to natural resources??
   



6. How can leaders respond to revolutionary threats? How does foreign aid affect the way leaders respond to revolutionary threats?