Does Foreign Aid Harm Political Rights? Evidence from U.S. Aid

Abstract

The United States is the world's largest bilateral foreign aid donor. For many developing countries, this aid constitutes a nontrivial share of state revenue with the capacity to shape a recipient's governance. Whether such assistance has a causal effect on political liberalization, however, is plagued by concerns with endogeneity bias. To mitigate this concern, I exploit plausibly exogenous variation in the legislative fragmentation of the U.S. House of Representatives to construct a powerful instrumental variable for U.S. bilateral aid disbursements. For a sample of 150 countries from 1972 to 2008, U.S. aid harms political rights, fosters other forms of state repression (measured along multiple dimensions), and strengthens authoritarian governance. U.S. aid does so by weakening government accountability via the taxation channel. These findings counter the publicly stated objectives of the U.S. government to foster political liberalization abroad via bilateral economic assistance.