Take the Money and Run: The Determinants of Compliance with Aid Agreements

Abstract

AbstractConditions on aid agreements aim to increase aid effectiveness, and are, therefore, an important component of aid agreements. Yet little is known about why aid-recipient governments comply with these conditions. Some scholars have suggested a strategic-importance hypothesis: recipients comply when donors enforce conditions—and donors enforce conditions when recipients are not strategically important. However, there are many cases where strategically important countries comply with conditions and strategically unimportant countries fail to do so. We argue that to explain compliance, we must also understand how the desire to maximize revenue from major income sources, such as FDI and natural resource rents, changes the recipient's incentive to comply. Using data on World Bank records of compliance from 1964 to 2010, we find strong support for our hypotheses even after accounting for different model specifications and potential endogeneity. Paradoxically, donors can secure compliance from recipients for reasons unrelated to the promise of additional aid.