Better Policies from Policy-Selective Aid?. (26th June 2020)

• Record Type: Journal Article
• Authors: Annen, Kurt; Knack, Stephen
• Is Part Of: World Bank economic review. Volume 35:Number 4(2021)
• Page Start: 829
• Page End: 844
• Publication Date: 2020-06-26
• Subjects: foreign aid allocations -- policy selectivity -- aid effectiveness -- contests; Economic development -- Periodicals; Developing countries -- Economic conditions -- Periodicals; Developing countries -- Economic policy -- Periodicals; 330.91724
• DOI: 10.1093/wber/lhaa017
• Languages: English
• ISSNs: 0258-6770

Abstract

Abstract: The increased policy selectivity of aid allocations observed in recent years provides aid-recipient countries with an incentive to improve policies. The paper estimates that a change in the World Bank's Country Policy and Institutional Assessment policy index from 1.5 to 2 for a recipient is associated with an increase of about 13 percent in aid. The analysis also finds a modest but statistically significant positive relationship between the global level of policy-selective aid and policy, suggesting that policy-selective aid improves policies in aid-recipient countries. This effect is properly identified, as the level of policy-selective aid in the global aid budget is exogenous to a recipient country's policy choice. Furthermore, the paper provides a game-theoretic model that establishes the link between the policy selectivity of the global budget and better recipient-country policies in equilibrium.