IS FOREIGN AID A CARROT OR STICK?

It has been argued that donor countries use foreign aid — by providing and potentially terminating it — as a “carrot” and stick” approach to shape a recipient country’s behaviour.

Research from the Lee Kuan Yew School of Public Policy has found new evidence that foreign aid can be used as a “stick” by donor countries, but not necessarily a “carrot”.

In fact, the study finds that increasing foreign aid often negatively impacts bilateral relations, something that has become more pronounced since the end of the Cold War, in politically stable regions, and in countries where both the United States and China are donors.

In the paper, Can Money Buy Friendship? Evidence from International Aid and Political Relations, Assistant Professor Zheng Huanhuan utilises data of bilateral aid from 47 donors to 194 recipient countries between 1973 and 2013, and shows that cutting foreign aid actually strengthens bilateral relations, but no evidence to indicate that increasing foreign aid improves relations further. This outcome provides evidence, therefore, that foreign aid is often used by donor countries as a “stick” to urge the recipient country to improve bilateral relations, but that strong relations between the two countries cannot necessarily be “bought”.

The study finds that increasing foreign aid often negatively impacts bilateral relations, something that has become more pronounced since the end of the Cold War, in politically stable regions, and in countries where both the United States and China are donors.

WHY CAN’T MONEY BUY FRIENDSHIP?

“Foreign aid as a ‘stick’ works for countries that receive aid from heterogeneous donors that compete for influence in their markets,” said Dr Zheng. “The competition for influence among donors with distinct political pursuits in the international arena gives the recipient country an incentive to switch their support for donors.”

In addition, while donors reward countries that they have a good relationship with by providing more aid, recipient countries do not necessarily respond to increased ODA by improving relations with the donor, but instead are motivated to strengthen relationships with countries that have cut aid.

The study also found that donor countries often compete with each other to “woo” recipient countries into a closer relationship by giving more aid, a dynamic that can result in recipient countries switching between competing donors to “optimise foreign aid”.

For example, a recipient country could change from being pro-US to pro-China after receiving aid from the former, in order to receive more funds in the future from the latter.

“Donors may compete with each other to win friendship from the recipient countries, especially when they have distinct political pursuits in the international area,” said Dr Zheng. “This gives recipient countries the incentive to switch among competitive donors to optimise the amount of aid received.”

THE INFLUENCE OF CHINA

An important component of the study was the dynamic brought about by China’s rise from being a major recipient country to one of the leading donor nations since the 2000s.

The study tested the “competition channel” hypothesis, and found that countries that tend to stand closer to China, the only socialist country among the major donors, typically leads to colder relations with capitalist countries that are major donors, such as the US.

China Aid project Nurek

China Aid project in Nurek, Tajikistan. (Photo credit: Prince Roy

For example, recipient countries receiving aid from both China and other major donors, could switch its friendship back and forth between China and the US, leading to a negative association between aid and political relations.

However, for countries that China has never donated to, the recipient government has no incentive to switch among major donors who share a common political stance, as this could weaken their relationship with another major donor, such as Great Britain.

If the competition channel holds true, we would observe a negative relationship of aid and political relationships between countries that have received aid from both China and other major donors who are competing for influence. In contrast, such a negative relationship should be absent from countries who have never received aid from China, as these countries witness limited competition between donors.

Breaking the recipient countries into two groups, according to whether not they have received ODA from China, the study supported the competition channel hypothesis, finding that more aid results in weaker political relations for countries who receive aid from China and other major donors.

“Countries with troubled political climates or poor policies are not particularly more sensitive to aid cuts than other countries,” Dr Zheng said. “The necessary condition is the presence of competitive donors.”

The study also analyses the “conflict channel”, which poses the hypothesis that increased aid can lead to deteriorating relationships if aid provision is out of sync with the expectation, or actual needs of the recipient country, or if there are disagreements in how the aid is implemented.

The study found that these conflicts are less likely to occur if the two countries share political ideologies, legal systems, languages, or if there has been a colonial relationship between the two countries in the past. The study found that this relationship exists.

“Donors often expect to sweeten the relationship with the recipient countries, but this study shows that they often do not get what they expect,” Dr Zheng said.(Authored by Global-is-Asian)