Development Aid - an Object for International Rent Seeking?

For many developing countries, development aid is a major source of funding. Eligibility for aid, in turn, is largely related to poverty, usually measured as the gross domestic product (GDP) per capita. This paper discusses the possibility that aid can be abused by manipulating the GDP figures. The starting point is in the theory of rent seeking, and the interplay between donor and recipient is interpreted according to theories on the principal-agent problem. The working hypothesis is that recipient governments may report an overly low estimate of the GDP in order to convey the message that the economy is in need of assistance. At the same time, an artificially high growth rate can also be displayed. A "predatory" government may then channel the aid proceeds into the pockets of the ruling elite. A simple quantitative analysis, taking into account a number of other variables correlating with the GDP, suggests that countries which are heavily dependent on aid do indeed tend to report a consistently lower GDP than that reported by other countries. While this result corroborates the hypothesis of this study, it is not conclusive proof, since there may be other reasons for the behaviour observed