WORKING PAPER: Foreign Aid's Amplification Effect on Political Institutions

Does foreign aid encourage democracy in recipient countries, or does it strengthen their dictators instead? These have long been the contradictory predictions of two competing hypotheses in the aid debate, but a new DRI working paper by Nabamita Dutta, Peter T. Leeson and DRI Postdoctoral Fellow Claudia Williamson suggests that in reality neither prediction captures the entire picture:

This paper offers a third hypothesis about how aid affects recipients’ political institutions that we call the “amplification effect.” We argue that foreign aid has neither the power to make dictatorships more democratic nor to make democracies more dictatorial. It only amplifies recipients’ existing political institutions. We investigate this hypothesis using panel data for 124 countries between 1960 and 2009. Our findings support the amplification effect. Aid strengthens democracy in already democratic countries and dictatorship in already dictatorial regimes. It doesn’t alter the trajectory of recipients’ political institutions.

The amplification effect of aid means, the authors suggest, that both competing hypotheses ascribe too much power to foreign assistance. Aid doesn't alter the institutional trajectory of any country; it makes democracies more democratic, and autocracies more dictatorial. So aid given for the "purposes of democratizing the dictatorial developing world may not only fail,"  they write, "but may actually cause harm."

What could this mean for the real purpose of aid -- economic growth and development?

To the extent that because of their stronger constraints on executive power, democracies tend to pursue better economic policies than dictatorships, when democracies receive foreign aid they become more democratic, leading to the adoption of better policies, which in turn leads to higher economic growth. Conversely, when dictatorships receive aid they become more dictatorial, preventing the adoption of better policies, which in turn prevents increases in economic growth.

Read the paper.

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