Working Knowledge
Business Research for Business Leaders
04 Jan 2013Working Paper Summaries

The Political Economy of Bilateral Foreign Aid

Foreign aid has always been political, a fact long noted by diplomats, journalists, and scholars. But then, political forces are behind why aid was developed in the first place and why it continues to survive, even as much of this aid has as its goal to promote economic development or poverty reduction. From a developmental standpoint the political economy of aid allocation and receipt can interfere with its optimal distribution. Aid policymakers, who want to maximize the developmental impact of foreign assistance, have devised a number of ways to attempt to subvert the political forces at work. This paper, a chapter in a forthcoming book, explores the distortions present in aid allocation and spending, and the development community's efforts to depoliticize such allocation and spending. As it turns out, none of their solutions can shield foreign aid from the heavy hand of politics. Key concepts include:
  • At their worst, fixes to mitigate the political economy distortions of aid receipt and implementation can render impotent the national government in recipient countries, and its role in creating a healthy polity.
  • At their best, such donor fixes may better identify the needs of the recipient populations and better devise and monitor programs in their interest.
  • It is hard to determine the impact of foreign aid flows that are politically motivated yet have no plausible development component. Economic research cannot easily isolate this type of aid.
  • A variety of interventions designed to reduce the distortions of aid ends up with the potential to sideline the national government while creating a self-perpetuating, parallel, and big-spending government-by-donors.
  • It is not clear whether NGO aid disbursement is more correlated with humanitarian and developmental variables than is official foreign aid. This decentralized approach to development assistance, while having some advantages, introduces a new set of problems.

Author Abstract

Despite its developmental justification, aid is deeply political. This paper examines the political economy of aid allocation first from the perspective of the donor country, and then the political economy of aid receipt and implementation from the perspective of the recipient country. When helpful, it draws from studies of multilateral aid. Following those discussions, the paper explores solutions, employed by the development community, to the distortions brought about by the political economy of bilateral aid-distortions that steer aid away from achieving economic development in the recipient country. As it turns out, none of these solutions can shield foreign aid from the heavy hand of politics. Developing countries heavily influenced by foreign aid end up with a different, and novel, governing apparatus.

Paper Information

Find Related Articles

Sign up for our weekly newsletter

Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.