Foreign Aid and Domestic Politics Implications for Aid Selectivity

The links between foreign aid and policies in developing countries have been at the forefront of the policy debate for decades. An emerging consensus touts aid selectivity as the solution to the failures of conditionality. In recent years, many recipients have implemented political reforms resulting in more democratic regimes. I show that donor influence depends on the aid budget being large enough relative to the recipient. I also demonstrate that if aid influences policies, the political equilibrium in democratic recipient countries is likely to change to the disadvantage of the political alternative favoured by the donor. This implies that aid selectivity should be applied cautiously.