Rewarding Democratization? The Dynamics of General Budget Support in the Wake of Democratic Transitions

Abstract

Budget aid has become a popular instrument of official development assistance (ODA) since the 1990s, as it holds a promise of enhanced aid effectiveness due to recipient-country ownership and reduced fragmentation. However, it potentially provides incentives for recipient-country governments to misuse these funds. For this reason, in addition to institutional prerequisites, donors have explicitly introduced political conditions such as respect for human rights and democratic governance for budget aid. Donors should be more inclined to give budget aid to democracies and democratizing countries, since democracy ensures increased accountability of executive leaders and a reallocation of fiscal resources towards public goods in favor of development. With this expectation in mind, significant steps towards democratization should be rewarded with general budget support, at least when the initial period of political instability has waned. Using 143 recipients of ODA in the period from 1995 to 2009, the paper explores the evolution of general budget support in the wake of democratization through various quantitative approaches. It turns out that previous non-recipients of budget aid are significantly more likely to be selected for general budget support in the year after a polity improvement (by about 24 percentage points). Conversely, established recipients enjoy short-term rewards for polity improvements already in the immediate run-up to a polity reform (by about 90 percent). With respect to the long-term effect of stable democratization, results are always insignificant, which may mask considerable heterogeneity in the responses of budget aid to democratization that would need further analysis.