Need, Merit, or Self-Interest : What Determines the Allocation of Aid?

Previous studies of aid allocation have concluded that foreign aid is allocated not only according to development needs but also according to donor self-interest. We revisit this topic and allow for donor- as well as recipient-specific effects in our analysis. In addition to comments on the statistical significance of our results we assess the relative economic importance of recipient need, merit, and donor self-interest. Our results indicate that all bilateral donors allocate aid according to their self-interest and recipient need. However, most bilateral donors seem to place little importance on recipient merit. Less than 1% of the variance of aid is accounted for by merit, ceteris paribus. The UK and Japan are exceptions: they allocate more aid to countries with higher growth, higher democracy scores, and fewer human rights abuses