Is foreign aid concentrated increasingly on needy and deserving recipient countries? An analysis of Theil indices, 1995–2015

Abstract

Abstract In the Paris Declaration on Aid Effectiveness of 2005 and related initiatives donor countries promised to render foreign aid more effective, inter alia, by increasingly concentrating aid on particularly needy recipient countries with relatively good governance. In this study, we re-consider the question of whether bilateral and multilateral donors have adjusted their aid allocation accordingly. We track the changes in different margins of Theil indices of aid concentration between 1995–2004 and 2006–2015. We do so for the aggregate aid of the two groups of bilateral DAC donors and multilateral donors as well as for nine major individual DAC donors. According to our findings, the Paris Declaration did not change donors’ aid allocation systematically and consistently. Overall aid concentration has declined for the two donor groups as well as for the majority of individual DAC donors. In contrast to multilateral aid, bilateral aid has become slightly more concentrated on poorer recipient countries. Still most donors have become less selective in granting aid to higher income countries. Furthermore, the Paris Declaration did not help improve the merit-based allocation of aid. Finally, there is no compelling evidence suggesting that donors have become less self-interested in using aid as a means to promote their own exports. These results suggest that commitments to reward better governed recipients and not to misuse aid as an export-promotion tool appear to be particularly hard to enforce. Overall, the gap between donor rhetoric and actual aid allocation persists.