Aid with Multiple Personalities

Authors: Simeon Djankov, Jose Montalvo and Marta Reynal-Querol
Source: The World Bank, December 2006

The existing research on foreign aid offers inconclusive evidence on the factors that make aid effective. In this paper, we test the hypothesis that the success of foreign aid depends on the fragmentation of donors. We study the supply of aid money in 112 developing countries over the period 1960-1999 and find that the presence of multiple donors in a given country renders aid ineffective. This is in part because donor fragmentation increases corruption in the recipient country’s government. In particular, if a country receiving the average amount of oda (3% of GDP) goes from a single donor to the sample mean of donor fragmentation, corruption increases by 7% to 10%.

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