Governance and Foreign Aid Allocation

This dissertation examines whether aid allocation patterns affect the outcomes of foreign aid in promoting economic growth. Specifically, the study explores how different categories of aid affect economic growth, whether the quality of governance is significant in explaining differences in economic growth, and whether the interaction of different levels of governance with different categories of aid flows is significant in promoting growth. The study also explores whether the quality of governance in recipient countries affects the donors' decisions at the aggregate and individual country levels. Chapter 2 provides the background for the dissertation research by discussing the evolution of foreign aid and describing the trends and patterns of foreign aid considering aggregate volumes, sources, and destinations. It also discusses some methodological issues related to the definition of foreign aid, differences between commercial and capital flows, official development assistance, and strategies of aid giving. Chapter 3 provides an overview of existing studies. The analysis suggests that there is a definite gap in existing voluminous literature on aid allocation and effectiveness. This chapter also reviews issues related to governance and its relation to foreign aid. Chapter 4 defines the research methodology for the empirical analysis. It starts by describing the theoretical framework that outlines the basic causal relationship between foreign aid, governance, and development outcomes (economic growth). Then, this chapter derives the econometric equations used to test the effectiveness of aid in promoting development outcomes. Chapter 5 describes the data and the econometric methodology. This research analyzes the aid allocation and aid effectiveness by using panel data. The analyses of empirical results, including the robustness test and their relation to existing research is provided in chapter 6.