May 1, 2013

The Amplification Effect: Foreign Aid's Impact on Political Institutions

  • Peter Leeson

    Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics
  • Claudia Williamson

    Associate Professor of Economics, Mississippi State University
  • Nabamita Dutta

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Find the paper at Wiley Online Library.

How does foreign aid affect recipient countries' political institutions? Two competing hypotheses offer contradictory predictions. The first sees aid, when delivered correctly, as an important means of making dictatorial recipient countries more democratic. The second sees aid as a corrosive force on recipient countries' political institutions that makes them more dictatorial. This paper offers a third hypothesis about how aid affects recipients' political institutions that we call the “amplification effect.” We argue that foreign aid has neither the power to make dictatorships more democratic nor to make democracies more dictatorial. It only amplifies recipients' existing political institutions. We investigate this hypothesis using panel data for 124 countries between 1960 and 2009. Our findings support the amplification effect. Aid strengthens democracy in already democratic countries and dictatorship in already dictatorial regimes.