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The Journal of Commerce

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WHO DETERMINES THE FOREIGN AID TO DEVELOPING COUNTRIES

A Public Choice Approach

Dr. Mumtaz Anwar*

1. Introduction

A growing amount of recent literature explores the issue of what motivates bilateral and multilateral donors to allocate aid to developing countries, using a political economic framework. Most studies are conducted within the framework of the “donor interest” versus “recipient need” models. Donors’ political decisions are not always in line with the declared objective of foreign aid; that is, to promote economic development in less developed countries, and therefore to provide aid on the basis of recipients’ need. As of yet, no consensus has emerged as to whether considerations of donors’ own interests or recipients' needs dominate the donor’s allocation decisions to less developed countries, but in any case donors’ interests seem to play a relevant role. Anecdotal evidence suggests that in the process of both bilateral and multilateral aid allocation, politicians from donor countries and bureaucracies of international financial institutions (IFIs) and different interest groups appear to play a role. In this light, we attempt to see which actors within the donor countries and institutions play a role in aid allocation, and what motives they might have. This will provide the relevant micro-foundations to explain the utility maximising role of different actors in aid allocation based on general behavioural assumptions from the general Public Choice literature.

This paper is divided into three sections. Section 2 discusses studies on actors who use their influence on donors and IFIs to maximise their utility through aid allocation decisions. The last section presents conclusions.

2. A Political Economic Approach to Aid Allocation

According to Public Choice theory, all political decision making processes reflect the interaction of different utility maximising actors: politicians, voters, bureaucrats and interest groups. In order to examine donors’ decisions on development aid, we need to consider their utility maximising behaviour within

* Assistant Professor, Department of Economics, Punjab University, Lahore.

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the different donor countries (bilateral aid) and within international organisations (multilateral aid). We will discuss general assumptions on the special interests and objectives followed by the different groups of political actors, and illustrate the meaning of these assumptions in the context of development assistance.

2.1 Politicians’ Interests in Aid Related Decision Making

Politicians of donor countries are assumed to make decisions on the allocation of aid to developing countries in ways that help them to serve their own motives. Public Choice theory suggests that the major political motive of politicians is to become re-elected and thus to stay in power.

Staying in power involves winning and strengthening voter support (Landau 1990). This support can be gained in different ways and by different means. Giving aid to poor and developing countries is normally justified by politicians on the basis of wanting to appease poverty and hunger in developing countries. This can be called the “moral appeal” of foreign aid (Michaelowa 2003). Allocating aid would be perceived by the voters in donor countries as giving help to humankind and thus seen as a generous act on behalf of politicians. If there are certain non-governmental organisations (NGOs) in donor countries working to alleviate poverty in developing countries, these organisations would spread the information about the good act of the politicians among the public in general, and their members in particular. This would ultimately lead to an increase in the votes and more political support for the politicians.

Along with pleasing the general public and NGOs, politicians might decide to allocate aid in favour of certain domestic interest groups. For example, aid could be tied to donor exports in order to provide benefits for interested domestic firms and their lobbies. In return, interest groups would provide political support and campaign contributions to the politicians. Michaelowa (1996) notes that the phenomenon of tying aid to donor exports can only be explained as a means of increasing the expected number of votes. Since voters themselves generally do not even notice tied aid policies, the net impact on the number of votes depends entirely on the influence exerted by different lobby groups. These lobby groups exert influence on the general public in various ways. In particular, they tend to praise the government intervention related to tied aid as a successful means to create new jobs. Due to this and other types of


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positive propaganda, the politicians in question are considered in the public eye to be wise in their domestic and international decisions. Thus, chances of re-election are increased. According to Mueller (2003), in adopting such a position for certain lobby groups before the election, politicians also stand to gain in the form of campaign contributions, which can be used to help acquire more votes.

Politicians not only focus on interest groups but also on the potential welfare to be gained by their constituents through the aid allocated. For example, if providing tied aid to developing countries indeed leads to an increase in short term employment; this would automatically lead to more votes in the next elections. In an analysis of voting in the US congress in relation to the allocation of USAID contracts across congressional districts, Fleck and Kilby (2001) provide some evidence confirming that in decision making for aid allocation politicians try to please their constituencies in order to win more votes in future elections.

Lahiri and Raimondos-Møller (2000) suggest that ethnic groups may also be relevant within these constituencies. Given their ethnic, family and cultural ties, they value aid policies focusing on their countries of origin.

At the international level, providing foreign aid has become to some extent less of an individualistic and more of a social process (Lagae 1990). There is a sort of “bandwagon” effect, which means that the aid policy of one donor country affects aid allocation of other donors. Recently, huge criticism arose when the US allocated very little aid per capita relative to most other donors for the tsunami victims in Asia. Gaining political prestige and/or losing prestige within the donor community are also very important for politicians’ future careers. Political support can be gained domestically by behaving in a socially responsible manner relative to other donors, since voters also judge politicians in the international context. The same applies when politicians are deciding on their country’s share of participation in international organisations. For example, at the time of new replenishments at the IMF and IDA, politicians who can successfully keep their country’s share high and advertise this as help to the international community might earn a good reputation domestically and, as a result, more votes.

Politicians in donor countries also attempt to control multilateral lending based on their own motives. Frey and Gygi (1990) point out that within international financial institutions, it is not the nations themselves, but rather the country representatives or delegates that are the actors. According to them,


national politicians who need to be re-elected in order to stay in power make an effort to force their delegates to act in a way that the politicians conceive as popular with the voters. For example, in international crises management, such as in the Latin American debt crises, providing debt relief to poor countries through multilateral institutions may affect voters due to the high moral appeal of such actions.

Vaubel (1986, 1991) puts forth the “dirty work” hypothesis, arguing that national politicians use international financial institutions, like the World Bank, to raise voters’ information costs and thus more easily cover up inevitable scandals and avoid domestic pressure. Politicians in donor countries provide aid to unpopular projects through multilateral institutions in order to collude with foreign politicians. These collusions can be useful for politicians at home in several respects, such as avoiding criticism from competing politicians.

It is widely discussed in the literature on aid allocation that aid is motivated by foreign policy concerns of the donor countries. These bilateral and multilateral aid allocation studies use voting in the UN general assembly to measure bilateral interests, and most studies find it to be significant. This indicates that decision makers in the donor country expect recipient countries to behave more favourably towards their country after aid allocation, lending their support to the donor’s national interests. In this way, the politicians in a donor country receive some kind of seal of approval for their foreign policy, and hence appear as a better government which can more successfully look after national interests; in turn, politicians earn more votes.

We can conclude that politicians of donor countries make aid allocation decisions in a way that can maximise their chances of re-election and staying in power. To ensure re-election, they try to get more political support and campaign contributions. In order to fulfil this objective, they try to please the general public at home by elevating their public image. They allocate aid to developing countries so that they will be considered as the well-wishers of the poor; this moral appeal of aid is hoped to increase their votes. At the same time, politicians attempt to please the interest groups within their country when allocating aid to developing countries. In return, they can get campaign contributions from the business interest groups and a higher number of votes from organised ethnic communities which have a special interest in aid allocation to a particular country.


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2.2 The Voters’ Utility Maximising Role in Aid Allocation

It is often argued that people usually give because they expect to get something in return. As Dudley and Montmarquette (1976) observe, even though there may well be exceptions to this generalisation, casual empiricism leads us to believe that these are likely the minority. Thus, the voters of a donor country can be assumed as only willing to support the allocation of aid to developing countries when such aid maximises their utility as well.

At the same time, Michaelowa (1996) argues that although a typical voter’s utility may be mainly determined by his income and the public utilities provided to him, it is also - at least to some extent – determined by the well being of others around him. Thus, altruism and utility maximisation are not necessarily exclusive. On the basis of British electors, Mosley (1985) observes that public demand for aid is mainly altruistic, and in cases where a good is seen largely as a service to others, it is a mistake to suppose that consumers will want less of that good even if its price rises. This explains why foreign aid, which implies a transfer from the tax payers in donor countries to the recipient country, is generally acceptable for the voters. Aid is considered as charity for the poor, and thus maximises voter utility on compassion grounds.

However, it may be the case that most voters are not well aware of the level of aid given by their countries. Voters are generally more concerned with and give more weight to domestic issues, such as unemployment and the provision of public utilities, instead of paying much attention to relatively minor expenditures overseas. For this reason, public judgment is generally most significant as a determinant of governmental action in areas where the majority of the people are significantly affected (Lagae 1990).

A more detailed discussion is presented by Mayer and Raimondos-Møller (2003), who assert that two types of influences drive political support for foreign aid. First, there is the direct benefit and the cost from the act of giving aid, as each person has to pay higher taxes to finance the payment. Second, there might be an indirect influence that arises whenever there are terms-of-trade changes. This later effect works through changing both donor country’s average income and its distribution of income.


Moreover, if voters of donor countries feel threatened in some way, they might support more aid - e.g. aid for countries involved in a war on terrorism or aid to limit migration - accepting higher taxes and aid flows for the sake of security.

As far as multilateral aid allocation is concerned, we know that voters generally have little influence on the way international financial institutions are run. Nevertheless, individuals may also, to a limited degree, influence aid allocation decisions through voice, in particular via the press and public opinion surveys. Frey and Gygi (1990) observe that voices will only be raised when an international organisation is obviously not serving citizens’ interests. It may also be possible that due to better access to information about IFIs’ aid allocation policies, voters of a major shareholder country, e.g. the one hosting the institution, influence institutions’ decision making in favour of their own utility maximisation. In sum, although voters of donor countries may not be well aware of the aid given by their country, they influence decisions when they are aware of the direct benefit and cost from the act of giving aid. In certain cases, when voters feel that giving aid could either indirectly increase their income (e.g. via benefits through trade) or reduce an existing security threat, they are willing to accept and advocate more aid to developing countries in order to maximise their own utility.

2.3 Role of Interest Groups in Aid Allocation

The distribution of bilateral and multilateral aid is influenced by interest groups in addition to politicians and voters. There are two types of interest groups. The first type consists primarily of non-governmental organisations (NGOs), which support foreign aid for altruistic reasons, such as poverty and illiteracy in developing countries. The main concern of these interest groups would be the provision of financial assistance to less developed countries with severe needs (Lagae 1990).

On the other hand, there is the second category of interest groups, which are generally better organised than altruistic groups. In this context, the existing literature discusses business lobbies and ethnic lobbies in donor countries. Both of these groups will be considered in more detail below.

2.3.1 Business lobbies

The major interest of business lobbies in aiding developing countries lies in either increasing their exports or in improving the foreign direct investment


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opportunities in those countries. Most studies on cross country, bilateral and multilateral aid allocation (e.g. Morrissey 1996, Cooray and Shahiduzzaman 2004, Berthélemy and Tichit 2004, Barro and Lee 2005, Fleck and Kilby 2006, and Berthélemy 2006) recognise that almost all donors have trade interests in recipient countries. The results of an empirical study on aid and trade by Wagner (2003) suggest that aid is associated with an increase in exports of goods amounting to 133% of the aid. Thus, a donor country’s foreign aid policy based on business lobbies’ self-interest would typically be biased towards countries with which trade is already well-established, or towards countries with which they would like to establish more trade in the future. Berthélemy (2006) notes that export benefits are the clearest motive of tied aid, a phenomenon which persists despite continuous efforts by the OECD/DAC to reduce it.

The example of tied aid has been explained in more detail by Michaelowa (1996). She finds that tying aid is a measure to provide national firms with additional orders from developing countries, partly or fully financed by development assistance, and to further potential follow-up orders. Tied aid frequently enables firms to charge a higher than competitive price, assuring a higher profit margin. All donor countries’ business lobbies, especially those representing major exporters, have thus advocated tied aid to developing countries to some extent, and correspondingly exerted lobbying pressure on the government (Morrissey 1996).

Highlighting further benefits that firms and their lobbies receive from tied aid, Michaelowa argues that business lobbies will lobby more intensively for aid to developing countries if firms enjoy a monopoly position in the home market. This is because if there is no national bidding, but rather direct allocation of contracts to a particular firm, the firm is able to charge a particularly high monopoly price. A second group of firms with potentially high benefits from tied aid are those national firms which are not able to compete at world market prices. Their survival depends on subsidies or subsidised financing conditions provided by tied aid.

Export lobbies may also support aid to developing countries in order to increase the purchasing power of the latter. This can again lead to higher exports from the donor countries and more orders for the donor country firms, although the link to any particular donor country’s exports is obviously weaker than when aid is directly tied to exports of goods and services (Tsoutsoplides 1991).


Mosley (1987) points out that many governments have realised that merely tying aid is insufficient to satisfy donor country firms, and have thus turned to the practice known as mixed credits. Mixed credits are credits extended to national exporters at low interest rates by mixing market funds with development finance. According to Morrissey (1993), the motivation behind mixed credits is to favour the donor firm and help it win an order against the competition from firms from other countries; in this way, they are equivalent to export subsidies. Thus, aid allocated to developing countries is supported by business lobbies wanting to obtain subsidies.

Studies by McKinley and Little (1979) and Maizels and Nissanke (1984) note that not only exports, but also imports can be affected by foreign aid commitments. Aid can secure the import supply line for donor countries’ firms, ensuring inputs at cheap prices from developing countries, and hence higher profits. Tsoutsoplides (1991) analyses the determinants of the geographical allocation of European Community (EC) aid to developing countries, and agrees that the import factor is particularly relevant for Europe. For a number of strategic commodities, Europe is entirely or significantly dependent on external sources. Hence, foreign aid allocation to developing countries both serves the purpose of generating goodwill in recipient countries for exports of the donor countries’ firms, and assures low-cost raw material for these firms.

Foreign aid may also promote a friendly climate for foreign direct investment (FDI) from the donor countries’ enterprises (Lagae 1990). For business interest groups, investment outlets are as important as export markets. In order to have a better environment for their enterprises and to gain higher profits, these groups prefer more aid to be granted to those economies in which they invest their money. Better physical, social and educational infrastructure with the help of aid contributes to the profitability of their investment. According to Maizels and Nissanke (1984), aid to developing countries can, in fact, be interpreted as an external subsidy to ensure continuing profitability of the foreign investments of donor country enterprises. Aid may thus act as a catalyst for private capital flows (Harms and Lutz 2005). Moreover, in order to protect already existing foreign direct investments in developing countries from political risks and competitors from other countries, business lobbies will attempt to convince their government to allocate more aid to countries where their enterprises have operations (Tsoutsoplides 1991).


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Business lobbies can also influence lending from IFIs. We have already seen that individual states, and particularly powerful states, have driven IFIs’ lending policies (Barro and Lee 2005, Fleck and Kilby 2006 and Kilby 2006). In this case, it is assumed that governments press IFIs to lend to countries which are indebted to them or their banks; IFIs then lend to those countries in order to avoid outright default and losses to the shareholders (Dreher 2004). Gould (2001) more precisely argues that it is not the states themselves, but the private actors within the states, such as private banks and providers of state financing, which attempt to influence IFIs in their favour. On the one hand, private investors and banks lend their money to IFIs through states, because IFIs ensure the payback of their money and the profitability of their investment. On the other hand, at times of crises, in which IFIs particularly depend on private investors’ money, private banks and investors enforce conditions in the IFIs’ programs in their own interest. According to Oatley and Yackee (2000), the principle beneficiaries of IMF lending are not developing countries, but rather investors from the developed world. Thus, lending through multilateral institutions may also be in the interest of certain business lobbies.

Vaubel (1991) concludes that these business lobbies indirectly influence multilateral aid. Most probably, they try to influence multilateral institutions’ policies by lobbying to their national finance minister, who represents their country at the board of governors of international financial institution. In sum, we observe that business lobbies interested in exports, foreign direct investment and cheap raw material for their firms from abroad, lobby both national governments and IFIs through different channels for their own purposes. They put pressure on the decision makers to allocate aid to those developing countries which are of highest relevance for their business. The aid allocation from their home country serves to create goodwill in developing countries for their products and also provides them with direct or indirect subsidies. This pattern of aid allocation will ultimately maximise their utility through higher profits.

Summarising all the aspects discussed regarding business lobbies’ influence on aid allocation, we can conclude that utility maximising business lobbies try to influence decision making in donor countries and at IFIs to allocate aid to those developing countries where their business interests lie. Most of the studies examined above support this thesis: Trade and foreign direct investment interests of donor countries’ firms significantly influence pattern of aid allocation


to developing countries. Aid not only creates goodwill for donor countries’ firms, but it also provides them with a kind of subsidy by creating better social and physical infrastructure in the developing country, which raises the profitability of the firm. Moreover, business lobbies also influence IFIs’ decision making both directly and indirectly. They exert pressure on national representatives at IFIs and provide state financing for IFIs in order to manoeuvre aid policies in their own favour. Thus, as a whole, the utility maximising role of business lobbies plays a significant role in aid allocation decisions.

2.3.2 Ethnic lobbies and former colonial relations

Most empirical bilateral and multilateral aid allocation studies, while discussing international political factors for aid allocation, find significant correlations between aid and former colonies. For example, Alesina and Dollar (2000) report that 53.7% of Belgian, 55.5% of Australian, 57% of French, 78% of UK and 99.6% of Portuguese bilateral aid from 1970-1994 flow to their former colonies. Alesina and Dollar find “colonial past” to be much more important than many other factors in bilateral aid allocation for both aggregate regression results and in the analysis of individual donor countries. The same kind of results are also found by Maizels and Nissanke (1984), Berthélemy and Tichit (2004), and Berthélemy (2006).

Even for multilateral aid flows, Neumayer (2003a) finds that countries with a longer history of colonisation by an OECD country receive more aid than others. Tsoutsoplides (1991), who analyses EC aid to developing countries, and Stone (2004), who examines IMF lending to Africa, find empirical support for this hypothesis as well. Stone (2004) notes that France played an active role in promoting its former colonies’ interests when their cases came before the IMF. However, this pattern of aid allocation from donors is not any different from their own self-interest behaviour, to give benefits to the interest groups in donor countries. Lagae (1990) points out that in many cases, the colonial era had produced medical and technical expertise oriented towards the ex-colonies’ problems. Hence, civil servants and businessmen gained interests in providing aid to the former colonies.

Moreover, analysing the role of domestic politics in aid allocation, Lahiri and Raimondos-Møller (2000) argue that there is usually a positive correlation between the ethnic composition of a country and its colonial experience. Therefore, the ethnic composition of a donor country and its corresponding


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domestic politics can explain the high aid allocation to former colonies. This suggests an interesting micro-foundation for the strong relationship between aid and colonial ties. Lahiri and Raimondos-Møller propose a theoretical model in which they assume that ethnic groups lobby donor countries’ governments for aid to their countries of origin. According to Lahiri and Raimondos-Møller, these lobby groups are usually very successful: For example, a large proportion of US aid goes to Israel, UK aid to India, German aid to Turkey and French aid to Cameroon. This pattern of aid allocation suggests that the corresponding ethnic population in donor countries indeed influences the aid policy of donor countries in their favour. The model, based on a political contribution approach, assumes that there are two ethnic groups in a donor country corresponding to two recipient countries, and there are natives. While the natives are impartial, the ethnic groups make political contributions, and the amount they contribute is contingent upon the policy that the government adopts. An increase in the wealth and/or proportion of the ethnic group within donor country population means that the politicians of the donor country may receive more political contributions from that group and that they would hence naturally care more intensively about the welfare of that group. In sum, ethnic group lobbying in the donor countries has important implications for the allocation of aid.

In addition to ethnic lobbies in donor countries, aid allocation may also be influenced by professional lobby groups working on the behalf of recipient country governments. They influence the decision making process in donor countries in different ways, for example, by providing campaign contributions and information to decision makers of aid policy. This is common in countries like the US, where lobbying activity through agents is allowed under the Foreign Agent Registration Act (FARA) for certain policy decisions. Gawande, Krishna and Robbins (2004) investigate the lobbying activity by foreigners in the context of US trade policy. They find that the influence of foreign lobbying is as important as that of domestic lobbying. This leads to a further conclusion that foreign aid policy of a donor country may also be influenced by an organised foreign lobby of a recipient country.

We can summarise that due to cultural ties to their home country, family relations, and economic interests, ethnic lobbies influence aid related decision making in donor countries. Although there is not much empirical work available on the role of ethnic lobbies in aid allocation, most studies on bilateral aid


allocation show that donors tend to allocate a particularly high share of aid to their former colonies. Furthermore, it has been observed that there is a positive correlation between the ethnic composition of a donor country and its past colonial experience. The theoretical model developed by Lahiri and Raimondos-Møller (2000) provides an excellent analytical framework to test the effect of this ethnic composition on domestic politics in donor countries and their consequences for aid allocation decision making processes. Finally, professional lobbies hired by developing countries also seem to play a relevant role in influencing aid allocation decisions in at least some donor countries. With this in mind, in a later section we will test ethnic lobbies’ role in aid allocation in more empirical setting.

2.3.3 NGOs utility maximising behaviour

The role of NGOs in the foreign aid process has grown over the last decade. Generally, NGO development activities are perceived as poverty oriented, i.e. aimed at helping the poor in developing countries. Only very few studies interpret NGOs in analogy to other political players, discussing their utility maximising role in aid allocation. One example is Michaelowa (2003), who points out that by campaigning on issues that appeal to the general public, such as poverty and debt relief, NGOs can easily gain publicity, which in turn helps them to raise funds for their further activities.

In an earlier study, Michaelowa (1996) also points out that NGOs resemble bureaucracies in many respects. To secure the existence and promote the growth of their organisations, NGOs have to acquire private grants as well as public transfers. To acquire a maximum amount of official and private grants, NGOs try to prove that their own approach is more efficient than official development cooperation.

In a theoretical model, Epstein and Gang (2006) assume that NGOs also compete with each other in order to obtain higher funding. The size of the individual NGO thereby influences its probability to receive aid and to allocate it further to different groups of recipients. NGOs which are larger in size can influence decision makers more easily by pretending that they are the “real representatives” of the poor, and thus that they would make a greater difference on election day. Bigger NGOs can afford more lobbying and in return, they obtain higher funding. Epstein and Gang note that in order to continue to receive transfers based on poverty, an NGO may deliberately allocate funds away from


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the poorest, so as not to improve their position. Although the role of NGOs in the aid allocation process is not always seen as purely altruistic, more empirical work is still needed in order to establish a consensus about the utility function of NGOs.

2.4 Bureaucratic Interests in Aid Allocation

The utility of civil servants (bureaucrats) both in the donor countries and international agencies is generally assumed to depend on their pay, power, prestige, pleasant working conditions and the room for discretionary decisions (Wintrobe 1997). To achieve these objectives, they try to maximise their budget, their staff and their independence (Vaubel 1996). In his earlier work, Vaubel (1991) argues that as far as aid bureaucracies are concerned, all these objectives are positively related to their operating budget, which in turn depends on how much of donors’ resources are spent on official bilateral and multilateral aid.

In a specific study on the Enhanced Heavily Indebted Poor Country Initiative (HIPC-II), Michaelowa (2003) points out how under certain conditions, debt relief programs can be a welcome chance for bureaucracies to improve their public image, replenish funds and enhance lending activities.

Generally, bureaucrats are assumed to disburse money in order to justify the available budget and to be able to argue for even more funds in the future. Moreover, it has been observed that some development banks directly link salaries to the volume of aid disbursed so that there is even a direct financial incentive for each individual bureaucrat to spend more money or to extend higher loans. According to Hefeker and Michaleowa (2005), international financial institutions tend to have a preference for high aid disbursement, since this justifies a high budget, which in turn is regarded as a sign of bureaucrats’ own relevance and power. Vaubel (1991 and 1996) provides evidence of “hurry-up lending” by the IMF and the World Bank, which occurs when the dates for quota reviews are imminent. It has often been observed that bureaucracies of both institutions frequently lend money, even when they are aware of non-compliance with conditions for previous loans or conditionalities by the recipients. The apparent reason for this is that they do not want to retain money, because less disbursement will lead to the consideration that bureaucrats working in these institutions are inefficient and also would imply the risk of reduced funding in subsequent years (Dreher 2004).


Studies like Easterly (2002) and Wintrobe (1997) specify that bureaucracies should be expected to maximise their discretionary budget (which is the total budget minus the cost of producing the services), rather than total budget, because this will give them more room to manoeuvre and exercise their power while allocating aid to developing countries. Easterly (2002) further argues that since there is no effective mechanism for competition among aid agencies, aid bureaucracies may collude and behave collectively like a budget-maximising monopolistic bureaucracy.

In addition, Frey (1997) emphasises that international bureaucrats pursue those policies that give them the highest prestige and influence within the reference groups with which they are connected. In the aid business, bureaucrats’ utility is thus influenced by the prestige enjoyed within the aid community. Taking the example of the World Bank, Frey and Schneider (1986) explain that prestige can be gained within the banking community by performance excellence, i.e. by showing that the organisation’s tasks are competently handled. Further, they state that prestige in the international banking community can also be gained by keeping to the commonly observed conservative standards for lending. Apart from being an objective in its own right, this prestige and power within the reference groups would help bureaucrats to reach a higher reputation within their own institutions and thus become a source for future career advancements.

In his survey on the early theories of bureaucracies, Moe (1997) discusses Gordon Tullock’s statement that bureaucrats are motivated more by career advancements than anything else. Tirole (1994) also suggests that bureaucrats are concerned not so much about their monetary reward, but rather about their reputation in view of future promotions and job prospects. Thus, the incentive of future promotions and career advancements could also influence bureaucrats working in national aid agencies and IFIs in their aid allocation decisions to developing countries. Vaubel (1991) and Easterly (2002) suggest that the promotion of bureaucrats working in aid agencies is mainly dependent on the size and the number of large projects they handle; therefore they are mainly interested in disbursing as much money as possible. This may explain why the staff at IFIs sometimes appears to lend without taking much care about future repayments. The reputation of the current staff can improve regardless of


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whether their successors have great difficulties dealing with creditors in the future (Dreher 2004).

As bureaucrats at IFIs are judged for promotion according to their ability to lend money, it is also crucial for them to retain their clients. In particular, the career advancement of IFI staff may be put at risk if they lose access to high level national officials in the recipient countries (Willett 2001). As discussed above, Barro and Lee (2005) empirically test IMF lending behaviour for the influence of the bureaucratic incentive structure and find a significant relation between the share of a country’s nationals among the IMF professional staff of economists and the amount of IMF lending to that country. Sharing the same nationality eases networking and often facilitates access to high-level national politicians.

All in all, it appears that aid allocation decisions can be well explained by utility maximisation of bureaucrats in national aid agencies and in international organisations. They devise different instruments of lending to disburse money in order to justify their present budget and to demand an even higher budget in the future. A higher budget provides them with more discretionary power and higher prestige. Since even their pay is also sometimes directly linked to the money they disburse, bureaucrats have a high incentive to maximise lending to developing countries. In addition to pay, power and prestige, bureaucrats also care about their future careers, and thus they behave in a way that allows them to retain their clients. Moreover, they try to allocate aid to developing countries, in a way to be perceived as efficient officers within their organisation, and thus in turn receive promotions.

3.5 Conclusions

In this study, we have looked at the literature discussing the determinants of aid allocation in a political economic setting. We have discussed possible micro-foundations for cross-country analysis. In this context, we identified the actors involved in aid allocation decision making in donor countries and IFIs and discussed the relevant arguments in their respective utility functions.

Thus, it is not only the state, but also the actors within the state which play a major role in aid policy making of donors, influencing donors for their own purposes. In an in-depth review of the aid allocation literature, we find that politicians, voters, interest groups and bureaucracies of donor countries and


institutions alike exert an influence in their respective ways on the final allocation decision, with each group attempting to maximise its own utility and pursue its self-interests. Politicians of donor countries and representatives of donor countries at IFIs allocate aid in a way that they can maximise their political support for future re-election. While making aid allocation decisions to developing countries, they try not only to please the voters at home, but also the interest groups in their country. Among these interest groups, the most relevant are the business lobbies and the ethnic lobbies. Each of these attempts to influence decisions in favour of their preferred developing countries in order to gain higher profits or to raise the welfare of their relatives and friends at home. Moreover, the international civil servants working in IFIs disburse money in order to eventually receive higher pay, power and prestige. Bureaucrats also have in mind their promotions and future careers when making aid allocation decisions to developing countries.


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