THE POLITICS OF FOREIGN AID

Why do donor countries give foreign aid? The answers found in the literature are: <p> (i) because donor countries care for recipient countries (e.g. altruism), and/or (ii) <p> because there exist distortions that make the indirect gains from foreign aid (e.g. <p> terms of trade effects) to be larger than the direct losses. This paper proposes a <p> third answer to the above question, namely that aid is determined through the <p> domestic political process of the donor country. The paper demonstrates how <p> foreign aid affects the donor country’s income distribution and how, in a direct <p> democracy, the majority of voters might benefit from foreign aid giving even <p> though the country’s social welfare is reduced.