Working Paper BETA #2012-19

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Title : Why foreign aid does (not) improve democracy?

Author(s) : Audrey Menard

Abstract : Foreign aid has become closely connected to the development of democracy since the nineties. This paper analyses the democracy effects of aid accounting for this change in donors’ criteria. This approach contributes to the literature by analysing how the kind of donor allocating aid flows influences the effect of aid on democ- racy. I estimate a dynamic panel data model using data from 52 African countries between 1997 and 2008. I find that aid favours democracy. However when consider- ing the kind of donor, I observe that while bilateral aid does not foster democracy, multilateral aid favours democracy. Robustness tests confirm these findings.

Key-words : Democracy; Bilateral aid; Panel data; Endogeneity.

JEL Classification : F35, O11, D70, C23.