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Paper #870

The curse of aid
Simeon Djankov, José Garcia Montalvo i Marta Reynal-Querol
Abril 2005
Foreign aid provides a windfall of resources to recipient countries and may result in the same rent seeking behavior as documented in the “curse of natural resources” literature. In this paper we discuss this effect and document its magnitude. Using data for 108 recipient countries in the period 1960 to 1999, we find that foreign aid has a negative impact on democracy. In particular, if the foreign aid over GDP that a country receives over a period of five years reaches the 75th percentile in the sample, then a 10-point index of democracy is reduced between 0.6 and one point, a large effect. For comparison, we also measure the effect of oil rents on political institutions. The fall in democracy if oil revenues reach the 75th percentile is smaller, (0.02). Aid is a bigger curse than oil.
Paraules clau:
Foreign aid, democracy, conditionality
Codis JEL:
O11, O19, O16
Àrea de Recerca:
Economia de l'Empresa i Organització Industrial

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