Aid Tying and Donor Fragmentation

Abstract

This study analyzes theoretically and empirically the impact of aid fragmentation on donors' decisions to tie their development aid to purchases from contractors based in their own countries. Building on collective action theory, it argues that a donor with a larger share of the aid market in a country has stronger incentives to maximize the development impact of its aid, by tying less of it. Empirical tests strongly and consistently support the prediction that higher donor aid shares will be associated with less aid tying. This nding is robust to recipient controls, donor xed eects and instrumental variables estimation. Furthermore, it contradicts other studies suggesting that when a small number of donors dominate the aid market in a country, they may exploit their monopoly power by tying more of their aid.

Aid Fragmentation or Aid Pluralism? The Effect of Multiple Donors on Child Survival in Developing Countries, 1990–2010

“…The index has three advantages. AID , 1990-2010 First, it is the most widely used measure of fragmentation in the aid literature, which enhances comparability (Acharya et al, 2006;Djankov et al, 2009;Kimura et al, 2012;Knack & Rahman, 2007;Knack & Smets, 2012). Second, it is "the most common measure of diversity" across the social and natural sciences (Page, 2011, p. 70).…”

“…Third, competition among donors may lead them to disburse funds more quickly and with less supervision, which facilitates the appropriation of funds through corrupt practices (Djankov et al, 2009). Fourth, donors that have a smaller share in the recipient's aid are less interested to maximize the development impact of their aid by tying less of it to purchases from the donor country (Knack & Smets, 2012).…”

“…Cross-national statistical studies on the consequences of aid fragmentation are still scarce, but they tend to support such assessments: higher levels of fragmentation are associated with lower bureaucratic quality, more corruption, more aid-tying and less economic growth in recipient countries (Djankov et al, 2009;Kimura et al, 2012;Knack & Rahman, 2007;Knack & Smets, 2012).…”

“…However, there is some evidence that casts doubt over this alternative explanation. Tying aid is generally considered to be a particularly detrimental aid practice, as it is estimated to increase costs substantially (Knack & Smets, 2012). In so far as donor multiplicity reduces the bargaining power of individual donors, it should be associated with less aid tying.…”

Political Conditionality and Foreign Aid

“…Preference alignment -between donors or between donors and recipients -seems to be a daunting challenge, particularly when the number and heterogeneity of donors increases (Bourguignon & Platteau, 2015;Knack & Smets, 2013). Most case studies therefore show that in Africa, Asia and Latin America, preference alignment, particularly between donors, has not been a success story.…”