Aiding and Abetting the Looting of Nations: The impact of Aid on growth in Autocracies

We examine the link between international aid, political instability and economic growth in autocratic countries. First, we discuss the manner in which externally provided liquidity can affect looting and instability in an autocratic country, through the generation of outside options for a dictator who has property rights over the resource wealth of the country. We then use a treatment-effects approach to analyze empirically the role of natural resource wealth and aid on instability and, in turn, on growth. We find that the interaction of natural resources with most forms of international aid results in increased political instability and reduced growth. Interestingly, some forms of government aid (principally humanitarian aid) do not have this effect. We explore the reasons behind the interaction between resources and specific flows of aid, and find that both flows of aid and the structure of those flows depend upon the presence of resource wealth. Specifically, we find that aid flows toward poor countries (in terms of resources, income and indebtedness), but that aid structured as loans is more likely to flow toward resource-rich countries. We conclude that aid can generally have the effect of inducing instability in resource-rich autocratic countries, and that this instability is the instrument through which growth is reduced.