Do Recipient Countries Compete with Each Other for Foreign Aid?

• In Event: The Political Economy of Aid from the Recipient Perspective

Abstract

Do foreign aid recipients compete with each other for foreign aid? Canonical models of cross-national foreign aid allocation tell us that donor states allocate aid in exchange for policy concessions. However, these negotiations are not only visible to the donor and the recipient - all potential recipients are able to see the concessions extracted, and thus know the cost of a given aid package. In this context – where there is a limit to the aid envelope and a limited universe of potential recipients – recipients are not only negotiating with the donor, they are also implicitly bidding against the best offers of other recipient-competitors.
This argument is empirically tested in the context of Taiwanese development assistance programs. Taiwan’s relatively small aid budget compared to other donors provides a clear example of where we might expect to see competition among recipients. The less-substitutable nature of technical assistance - one of Taiwan’s aid specialities - further incentivizes competition. Taiwan is also a valuable example of a single-issue donor, making it relatively easy to observe policy concessions from recipient states.
Recipient competition for limited, non-substitutable aid represents a novel political economic mechanism for policy convergence. While aid darlings might be more free to choose their policies, aid orphans, more dependent on single donors, face pressure both at the bargaining table and via recipient competition to adopt specific policies. This study makes use of data from the OECD and also original data on recipient countries’ China policies to demonstrate the trends in policy convergence among recipients over time.

Author

• Paul Un