Geopolitics, Aid, and Growth: The Impact of UN Security Council Membership on the Effectiveness of Aid

Abstract

We investigate the effects of short-term political motivations on the effectiveness of foreign aid. Specifically, we test whether the effect of aid on economic growth is reduced by the share of years a country served on the United Nations Security Council (UNSC) in the period the aid is committed, which provides quasi-random variation in aid. Our results show that the effect of aid on growth is significantly lower when aid was committed during a country's tenure on the UNSC. This holds when we restrict the sample to Africa, which follows the strictest norm of rotation on the UNSC and thus where UNSC membership can most reliably be regarded as exogenous. We derive two conclusions from this. First, short-term political favoritism reduces the effectiveness of aid. Second, results of studies using political interest variables as instruments for overall aid arguably estimate the effect of politically motivated aid and thus a lower bound for the effect of all aid.

Remittances and the Effectiveness of Foreign Aid

“…While the endogeneity of foreign aid is generally accepted, the instrumentation strategies of empirical analyses appear to be inappropriate to mitigate endogeneity concerns. Dreher et al (2014) argue that widely used instrumentation strategies relying on the recipient countries' population size or on internal (generalized method of moments' style) instruments typically violate the exclusion restriction. Another strategy relying on bilateral political relations, e.g.…”

“…Berthélemy (2006) concluded from his analysis of selfish and altruistic motives of aid allocation that donors do not behave the same. Concerning donor motives and aid effectiveness, Bearce and Tirone (2010), Kilby and Dreher (2010) and Dreher et al (2014) found that the growth impact is insignificant or even negative for politically or strategically motivated aid that typically provides favors to political allies, while the growth impact tends to be positive if aid is motivated by the need of recipients. 1 However, it remains open to question whether donors could improve the effectiveness of aid by pursuing complementary and coherent policies.…”

The Market-Promoting and Market-Preserving Role of Social Trust in Reforms of Policies and Institutions

“…As with all country studies, one should be aware of such endogeneity concerns. Still, to somewhat alleviate such concerns with regard to an effect of social trust, Dreher, Eichenauer, and Gehring () explain that even in the presence of endogeneity bias, interactions can be interpreted causally as long as one of the interacting variables is approximately exogenous. We therefore suggest that the particular result that social trust is conditionally associated with reforms is causally interpretable.…”

International Development Aid: A Complex System

“…A large body of research demonstrates a general inclination of donors to provide more foreign aid to countries that are of economic, military, geopolitical interest to the donor or to buy votes in international organisations such as United Nations (Alesina and Dollar, 2000;Neumayer, 2003;Stone, 2011;Easterly and Pfutze, 2008;Kilby, 2009;Vreeland, 2011). Aid tends to be less effective when it is provided for strategic purposes (Rajan and Subramanian, 2008;Dreher et al, 2014;Minoiu and Reddy, 2010). Although multilateral aid institutions are generally considered to be less strategic in their foreign aid allocation (Neumayer, 2003;Headey, 2007;Dietrich, 2013), scholars point out that multilateral aid institutions can also exhibit biases due to the influence that powerful member states or coalitions with strategic interests (Vreeland, 2011;Stone, 2011;Cruz and Schneider, 2014).…”