Aid, politics, culture, and growth

Political misalignment and greater ideological distance between donor and recipient governments may render foreign aid less effective by adding to transaction costs and eroding trust. In addition, development aid from the West may lead to adverse growth effects in the global South due to the neglected cultural differences between development aid (paradigm) providers and recipients. Nevertheless, donors could improve the effectiveness of foreign aid by pursuing complementary and coherent non-aid policies for freer movement of human capital, i.e., temporary worker mobility and migration. These three hypotheses are tested empirically in augmented aid-growth models, first, by considering the political ideology of both governments along the left-right spectrum, second, by using donor-recipient genetic distance, i.e., differences in blood type frequencies, to capture the traditional way of cultural transmission and also western education of recipient country leaders to capture resource-based transmission of culture. Third, overall remittances send from the donor countries are used as proxy for worker mobility and migration. Results based on the OLS panel estimation in first differences and lagged aid, a strategy suggested by Clemens et al. (2012), indicate that (a) aid tends to be less effective when political ideology differs between the donor and the recipient, (b) larger cultural distance between donors and recipient reduces the effect of aid on growth to negligible levels, while aid yields positive long-run effect on growth in the presence of western educated leaders in the recipient countries, and, last but not least, (c) larger remittances sent from donor countries strengthen the growth effects of foreign aid in the recipient countries. Overall, the findings of this dissertation suggest that aid effectiveness can be enhanced when development strategies are designed and delivered with an adjustment for political and cultural differences between donors and recipients, and when donors implement complimentary non-aid policies for the freer movement of people, i.e., human capital.