Does Foreign Aid Volatility Hinder Institutional Development in Aid Recipients?

• In Event: Foreign Aid and Domestic Politics in Recipient Countries

Abstract

Scholars and practitioners agree that effective political institutions play an important role in development, and large amounts of foreign aid are given with the goal of establishing and strengthening such institutions in recipient countries. However, the volatility of aid flows can hurt the very same institutional development they are meant to promote. Both unpredictability and variability in aid flows are harmful to institutions because they hinder long-term planning, bring about undesirable dynamics such as within-institution boom-and-bust cycles, and undermine the creation, survival, and development of stable, future-oriented institutions. I analyze aid unpredictability and variability in terms of fluctuations in total dollar amounts; difference between committed and disbursed amounts; but also in terms of source, sector, and type. Through a time-series approach I show that, over the course of decades, foreign aid volatility has increased; and that uncertainty and variability in aid flows is followed by stagnation or worsening of quality of governance and institutions in recipient countries.

Author

• Alice Iannantuoni, University of Illinois at Urbana-Champaign