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The article explores the relationship between economic growth and foreign aid conditioned on the level of democracy in the potential recipient country. It explains why foreign aid should be less effective in more democratic recipient countries on the basis of the argument that aid primarily improves growth by incentivizing economic reform. The statistical results show that while foreign aid is positively correlated with economic growth, this positive relationship between aid and growth weakens in more democratic recipient countries.

Abstract: This paper explores the puzzle of foreign aid effectiveness in promoting recipient economic growth. It argues that Western bilateral aid can be effective in this regard, but only when the strategic benefits associated with providing aid are small for donor governments. When the strategic benefits are large, donor governments cannot credibly push recipient governments to engage in politically-costly, but growth-enhancing, economic reform. This argument is supported by evidence showing that Western bilateral aid has become more effective in the post-1986 period when the strategic benefits of providing aid were small for Western governments as compared to the pre-1987 Cold War period. The argument is also supported by evidence showing that Western bilateral aid has become less temporally sticky after 1986, consistent with a new willingness on the part of Western donors to curtail their aid when recipient governments failed to engage in economic reform. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]