Rents and the Political Economy of Development Aid

Empirical studies suggest little impact of foreign aid on growth on average. As aid can be viewed as a sovereign rent akin to natural resource rents, it is likely that rent seeking plays a role in explaining this disappointing outcome. The analytic starting point of this paper is the long chain of agents connecting donors in rich countries with beneficiaries in poor countries, making aid a contestable rent for recipients at both the international and the domestic levels. Thus, rent seeking can distract attention and divert resources from more important sources of long-term progress. Moreover, there are serious incentive problems on the donor side of the relationship. Empirically, the effects seem quite heterogeneous and hence more research is needed to further our understanding of this complex system.