Foreign Aid, Winning Coalitions, and Economic Growth

Abstract

This paper examines the conditional effectiveness of foreign aid for economic growth. Theoretically, I argue that to maximize the chance to stay in office, the leaders of a large winning coalition will spend the aid money as intended, to provide public goods, which aids economic growth. On the other hand, leaders of a small winning coalition will spend the money on private goods, which is less effective for growth. To test this argument, I construct a panel data set for 28 Asian countries (1990–2010) and apply the generalized method of moments. I find that the interaction between ODA and coalition size significantly affects economic growth. Broadly, for large winning coalitions, growth rate increases with higher ODA, while for small winning coalitions it decreases with higher ODA.