Do Aid Donors Reward Institutional Reforms?: A Panel Study On Aid-receiving Countries

Abstract

Foreign aid is an important component of financial flows to many developing countries. This study seeks to investigate how foreign aid flows are influenced by two factors: the gross domestic products (GDP) per capita of the recipient countries, and changes in institutional and economic factors. For example, do increases in the GDP per capita of recipient countries attract more foreign aid in support of the on going economic and institutional reforms, or does this send a signal to the donors that these countries are doing well, and do not need as much aid? The question is whether aid donors reward reforms in recipient countries with increased foreign aid. This study finds that the recipients' GDP per capita have no significant influence on aid flows, and that institutional and economic reforms do not attract more aid. In fact, institutional and economic reforms lead to decreases in foreign aid to recipient countries.