The Uses and Abuses of Foreign Aid: Development Aid and Military Spending

By Kono, Daniel Yuichi; Montinola, Gabriella R. | Political Research Quarterly, September 2013 | Go to article overview

The Uses and Abuses of Foreign Aid: Development Aid and Military Spending


Kono, Daniel Yuichi, Montinola, Gabriella R., Political Research Quarterly


Abstract

Research shows that foreign aid promotes economic development in democracies but not in autocracies. Although explanations for this phenomenon vary, a common theme is that autocracies are more likely to misuse aid. We provide evidence of such misuse, showing that autocracies are more likely than democracies to divert development aid to the military. Theoretically, we build on "selectorate" models in which autocrats respond to aid by contracting civil liberties. Because this strategy requires military capacity, autocracies but not democracies should spend aid on the military. We support this hypothesis empirically, providing further evidence that autocracies misuse foreign aid.

Keywords

development assistance, aid fungibility, political institutions, military spending

(ProQuest: ... denotes formula omitted.)

Between 1960 and 2010, rich countries gave poor ones more than three trillion dollars in development aid.1 The return on this investment has been poor: on average, for- eign aid has failed to promote savings, investment, and growth in recipient countries (Doucouliagos and Paldam 2009). For example, while sub-Saharan Africa received $714 billion in development aid from 1960 to 2006 (Easterly 2008, 14), its per capita income grew by less than 1 percent per year over this period,2 and its poverty rate has scarcely changed (Chen and Ravallion 2004). These grim statistics beg the question: Why has develop- ment aid failed to achieve its goals?

One possible answer is that it is simply not used for its intended purpose. Research shows that aid is fungible (Feyzioglu, Swaroop, and Zhu 1998): that is, aid given for one purpose allows governments to shift resources to other uses. If these other uses do not encourage economic growth or development, neither will aid. A recent New York Times article on Uganda illustrates this point.3 Although Uganda has received considerable foreign aid designated for health care, its hospitals remain starved for resources. This is because foreign aid has allowed the government to cut its own health care spending: specifically, for each additional aid dollar received, Uganda cut its health care spending by 57 cents (IHME 2010). Although it is not clear where the budgetary savings went, a concurrent rise in military spending suggests that Uganda exploited its development aid to reallocate funds from health care to the military. If so, it is no surprise that this aid did little to improve the lives of Uganda's people.

The Uganda example suggests that governments may, more generally, divert aid funds from developmental uses to military spending. This would be disturbing in at least two ways. First, military spending does not promote development: studies show that its impact on growth is nonexistent at best and negative at worst (Dunne and Uye 2009). Second, military resources are often used to repress domestic dissent. For example, in the "Arab Spring" of 2011, governments across the Middle East and North Africa used their armed forces to intimidate pro- democracy protesters. If development aid is generally diverted to military spending, it could thus have perni- cious economic and political effects.

Whether development aid generally boosts military spending is unclear. Although Feyzioglu, Swaroop, and Zhu (1998) conclude that aid is fungible, they find no evi- dence that it spills over into the defense budget. Cashel- Cordo and Craig (1990) reach the same conclusion. However, both Collier and Hoeffler (2007) and Khilji and Zampelli (1994) find that development aid boosts military spending. The evidence on this question is thus inconclusive. This is unfortunate, as aid donors, and the development community more generally, have a strong interest in knowing whether aid has been grossly mis- used. We seek a more definitive answer to this question.

We argue that these inconclusive results reflect the fact that some governments are more likely than others to divert development aid to military spending. …

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