The Increasing Selectivity of Foreign Aid, 1984–2002

Abstract

We examine the allocation of foreign aid by 41 donor agencies, bilateral and multilateral. Our policy selectivity index measures the extent to which a donor's assistance is targeted to countries with sound institutions and policies, controlling for per capita income and population. The poverty selectivity index analogously looks at how well a donor's assistance is targeted to poor countries, controlling for institutional and policy environment as measured by a World Bank index. Our main finding is that the same group of multilateral and bilateral aid agencies that are very policy focused are also very poverty focused. The donors that appear high up in both rankings are the World Bank's International Development Association (IDA) facility, the International Monetary Fund's Enhanced Structural Adjustment Facility (ESAF), Denmark, the United Kingdom, Norway, Ireland, and the Netherlands. As a robustness check we alternatively use institutional quality measures independent of the World Bank and find the same pattern of selectivity. We also find that policy selectivity is a new phenomenon: in the 1984-89 period, aid overall was allocated indiscriminately without any consideration to the quality of governance, whereas 10 years later there was a clear relationship between aid disbursements and institutions. This increasing selectivity of aid is good news for aid effectiveness. The bad news is that the aid agencies that we survey vary greatly in size. Some donors that are largest in absolute size, such as France and the United States, are not particularly selective. Japan comes in high on the policy selectivity index but far down on the poverty selectivity index, reflecting its pattern of giving large amounts of aid in Asia to countries that are well governed but in many cases not poor.

Competition for Export Markets and the Allocation of Foreign Aid: The Role of Spatial Dependence among Donor Countries

“…Interestingly, however, even in this stringent and conservative research design there is still evidence in Table 4 that like-minded donors pursue a needs-based aid allocation strategy (more aid for economic infrastructure/production sectors goes to poorer countries) and a 21 Consistent with this finding, Dollar and Levin (2006) report negative coefficients on the export variable for three donors among the largest five (Germany, the United Kingdom, and the United States). 22 The reason is that the marginal effects are dependent on the fixed effects which are conditioned out of the estimations.…”

Shopping for Development: Multilateral Lending, Shareholder Composition and Borrower Preferences

“…In the existing literature, such variables reflecting the governments' general political stance as well as their economic policies have frequently been shown to influence MDB lending (Burnside & Dollar, 2000;Dollar & Levin, 2004;Dreher et al, 2009aDreher et al, , 2009bKilby, 2006, Thacker, 1999. We also include IMF lending as an alternative source of funding, and the countries' population as a simple scaling factor.…”

Giving and Receiving Foreign Aid: Does Conflict Count?

“…We do not apply an economic 24 Dollar and Levin (2004) have shown that bilateral and multilateral donors did not target countries with good institutions from 1984-1989. In fact, they can only find support for good institutions targeting occurring after 1995, thus excluding the bulk of our observations.…”