Foreign Aid Dynamics in Democratic Transitions

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This study analyzes the dynamic impact of democratization on receipt of foreign aid. Since the 1990s, this relationship has been increasingly important, given the end of the Cold War and the related turn to good governance, increased pressure from donor publics for political conditionality, and the evolving belief in a synergetic relationship between economic development and political reform among scholars and policy-makers. In this context, bilateral donors are expected to reward democratic recipients and particularly countries undergoing democratization with higher aid. Is this empirically the case? Specifically, are there any significant patterns in the temporal changes of foreign aid flows or across different types of aid? To address these questions, this study conceives democratization as a two-phase process of 'early transition' and 'democratic consolidation' and deduces that most aid decreases in the short run while increasing thereafter. It empirically assesses this hypothesis through two methodological approaches. First, using panel estimations for 143 aid recipients from OECD donors from 1995 to 2009, the study lends support to the anticipated pattern of short-run declines and more substantial subsequent increases in response to democratization for most types of aid. In particular, economic aid drops by 30 percent for the average recipient at the peak of transition, while robustly increasing by up to 50 percent thereafter. Democratization makes budget support more likely in the immediate term. This suggests that donors indeed reward democratization, while strategically choosing among the various instruments of aid. Second, flexible regressions for the 24 democratization episodes contained in the sample highlight the dynamic patterns of aid response, essentially confirming the anticipated patterns. Yet, the dynamic analysis reveals that the positive aid shock fades out rather quickly, thereby possibly endangering the hard-won polity progress in recipient countries.