Foreign Aid and Imports of Oil: the United States as a Strategic Donor.

This paper attempts to answer the following questions: Do states provide more foreign aid to those nations from which they can import oil? What is the relationship between foreign aid and imports/exports of oil? The current literature offers many of foreign aid determinants but little of this literature has explored the effect of oil imports on the amount of foreign aid received by the oil exporter. This paper's working hypothesis is that if state A buys oil from state B, state A will be inclined to give less foreign aid to state B. From the point of view of state A, the logic behind the inverse relationship is that the exporter's oil revenues in a sense finance the exporter's economy, so there is less need for foreign aid from state A to state B. The demand for oil and its byproducts is highly inelastic, and the revenues earned by oil exporters are substantially large. Importers consequently reduce their commitment of foreign aid to oil exporters. On the other hand, following "resource curse" literature, oil exports are related to the level of democracy in an oil-possessing country that may experience higher levels of corruption and lack of transparency and accountability of the government. Democracy is also correlated with foreign aid as donors tend to reward good governance and democratization. For these reasons, democracy is included in the model as an independent variable.To test this hypothesis, a time-series cross-section regression analysis is employed utilizing panel corrected standard errors and country fixed-effects. The analysis includes 81 countries from 1996 to 2004 for a total of about 700 observations. The states in the sample are all the countries of the Middle East, Sub-Saharan Africa, and the former Soviet Union, regardless of their possession of oil and regardless of whether they receive aid from the United States. The dependent variable is the amount of aid per capita received from the United States. The United States is selected as a donor for this study because of its prominence in provision of foreign and importance in the international system. The results of the regression analysis show that the value of oil imports to the United States has an inverse and statistically significant relationship to the amount of foreign aid the United States provides to an oil exporter. Democracy is positively related to the amounts of foreign aid. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]