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The Costs of Favoritism: Is Politically Driven Aid Less Effective?

Axel Dreher, Stephan Klasen, James Raymond Vreeland and Eric Werker
Economic Development and Cultural Change
Vol. 62, No. 1 (October 2013), pp. 157-191
DOI: 10.1086/671711
Stable URL: http://www.jstor.org/stable/10.1086/671711
Page Count: 35
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The Costs of Favoritism: Is Politically Driven Aid Less Effective?
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Abstract

AbstractGovernments provide foreign aid for both political and economic reasons, as is now well documented. Conventional wisdom holds that political motivations lower the effectiveness of aid in promoting developmental objectives. We test this claim by focusing on a setting in which we observe “effectiveness” with some precision, using the ex post performance ratings of World Bank projects. Our measures of “political importance” are plausibly exogenous: temporary membership on the UN Security Council or the World Bank Executive Board. We find that political motivations have a detrimental effect for Security Council members only when the country already faces excessive short-term debt or debt service. This finding suggests that political influence in aid allocation may impair aid’s effectiveness only when the recipient country faces a weak macroeconomic position.

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