The Politics of Foreign Aid Allocation

My day job is to teach courses on international relations at the College of William and Mary.  I'm currently teaching a course called International Relations in Disciplinary Perspective.  The idea is to look at similar issues (war, terrorism, trade, human rights, development, etc...) from multiple disciplinary perspectives.  This allows students to make their own (informed) judgments about which discipline helps them answer the questions that most interest them.  More importantly, it encourages students, and their professors, to think about how, if at all, insights from different disciplines might be synthesized for a fuller understanding of various empirical questions in IR.  I love this class because I get to read the research of my colleagues in Economics, Government, and History.  And, while humbling, I also get to see them teach!

This week we are talking about foreign aid allocation, aid effectiveness, and aid transparency.  As I prepared my part of the lecture I intended to illustrate the ways in which political scientists study these topics and compare these approaches to those taken by economists.  What I found in this issue area was convergence (and co-authorship) among economists and political scientists.  Some of the best contributions by political scientists focus upon the domestic political factors within donor countries (Examples here here and here) or recipient countries (here, and here).  But I found as many or more of these papers written by economists and they often used similar research strategies. 

However, a surprising number of political scientists (and a growing number of economists) analyze aid allocation from a geo-strategic perspective where states make aid commitments or allocations in pursuit of other foreign policy goals, rather than just domestic political goals.

David Baldwin and Hans Morgenthau provide the classic treatments of this subject in political science, but recently I have seen a surge of new interest in this approach.  Many economists and political scientists argue that bilateral aid flows from the United States are related to a recipient's position and/or voting record on the UN Security Council.  But while the U.S. is notorious for such practices, middle powers and even small countries may use aid for strategic purposes...and we should keep this in mind as we attempt to explain their allocation behavior. 

Last week my colleague Maurits Van Der Veen suggested that resource poor countries make promises to rich countries that are experiencing natural disasters in the hopes of increasing their aid receipts from those same rich countries in the future.  This strikes me as both interesting and testable.

More convincingly, Jim Vreeland just published a paper in the Review of International Organizations showing that even countries not normally considered geo-strategic donors (Switzerland!!) do allocate their bilateral aid in an attempt to secure positions on the Executive Boards of the IMF and the World Bank.  Vreeland argues that while some coalitions of countries that elect representatives to Bank and IMF Executive Boards make sense from a geographic, cultural, or historical point of view, Switzerland has assembled an odd coalition (by franc) that includes Uzbekistan, Serbia, Poland, Azerbaijan, and a collection of other countries that have little in common... except that they receive a disproportionate amount of aid from Switzerland.  See figure 1 below.
 


Vreeland puts the cost of a seat on the Executive Board in context by asking: "What is the price of the Swiss Executive Directorships at the World Bank and the IMF?"  After much data analysis we learn:

 

"This produces an estimate of around US $71.4 million annual aid due to their membership in the Swiss-bloc, which amounts to less than 0.015% of Switzerland’s nominal GDP (which was about 492 billion in 2008).  In per capita terms, Directorships at the World Bank and the IMF cost Switzerland’s 7.6 million people about US$9.40 each in 2008. To put this in perspective, this is less than half of the hourly wage of a supermarket cashier in Zurich."

I have no idea if that is worth it for Swiss taxpayers, but I love the fact that we now know the price.

My favorite recent example of foreign aid geopolitics comes from a paper written not by a political scientist, but by economist Christian Dippel.  He shows that Japan uses foreign aid to reward developing countries that join the International Whaling Commission and vote (with Japan) to loosen restrictions on whaling.  As compelling, he shows the the United Kingdom will threaten to cut aid (and will actually cut allocations) to developing countries who side with Japan against the UK. 

It has become common place (even among economists) to control for domestic political variables within donor and recipient countries when explaining aid allocation and aid effectiveness.  These recent studies suggest we should not forget what Morgenthau explained almost 50 years ago...

"A policy of foreign aid is no different from diplomatic or military policy or propaganda. They are all weapons in the political armory of the nation. As military policy is too important a matter to be left ultimately to the generals, so is foreign aid too important a matter to be left in the end to the economists."

Increasingly, researchers seem to have taken that message to heart...even the economists.

 

 

Comments

The Dippel paper notes that aid reduction is correlated to provision of loans but UK aid is not provided as loans. Moreover there has been a general strategic shift in UK aid towards low income countries in Africa away from middle income countries that has also seen reduction in aid to the Pacific and Caribbean. Is it really credible that aid levels to individual countries would be determined by votes in the IWC. Such a policy applied across all international organisations would result in an unworkably complex allocation process. More reliance might be placed on the bilateral aid reviews published by the UK since the International Development Act, which makes allocation of aid for primarily foreign policy reasons illegal.