Aid is not oil: The source of non-tax revenue affects its impact on democratization

A new group of leaders has begun deciding United States foreign policy toward developing economies, including the role of foreign aid. There are many considerations that affect aid policy, but one of the most contentious in recent years has been the relationship between foreign aid and democratization. To make informed decisions about aid, it is important that the new team in Washington—and the many academics and policy wonks advising the administration—understand the latest evidence on the links between democratization and aid. 

A short time ago, a consensus appeared to be emerging in economics and political science that economic aid dampens democratic reform in recipient countries that are considered authoritarian. Aid, as a form of non-tax revenue, was seen as having the same “pernicious” effects as oil in impeding democratic change. If true, this creates a dilemma for donors: funding economic development through aid may come at the expense of undermining democratizing forces.

However, that consensus no longer exists. Instead, a growing body of evidence suggests that donors are often successful at avoiding this outcome.

“A bigger curse than oil”

Between 2008 and 2012, articles in scholarly journals claimed that foreign aid, just like revenue from state-owned oil and gas enterprises, was no friend to democratization. Researchers were reporting that aid decreased the likelihood of regime transition and was a “bigger curse than oil.” Authoritarian leaders with access to aid (or oil resources) were found to be best equipped to survive revolutionary threats. Further, in countries run by autocratic regimes, unearned foreign income, including aid, was seen as reducing “the likelihood of government turnover, regime collapse, and outbreaks of major political discontent.”

The theoretical underpinning for these studies was an extension of the political resource curse, a phenomenon often associated with government access to revenue from oil. By this reasoning, authoritarian governments that do not need to rely on taxes are less dependent on the will of the people and less susceptible to democratizing pressures. Money can also be used to appease potential dissenters, or to fund military crackdowns.

Those who view foreign aid as a unearned resource argue that it has the same anti-democratic properties as oil. The longevity of authoritarian rule in some large aid recipients—such as the Mobutu regime in Zaire during the Cold War and strategically important countries in the Middle East today—provided anecdotal support for this hypothesis. Are such regimes exceptions to, or characteristic examples of, the relationship between foreign aid and democratization in the more than 100 aid recipient countries over decades of foreign assistance? Does foreign aid dampen democratic change, or does the relationship depend on factors a donor can control? Recent research has provided answers.

The source matters

A growing body of evidence now suggests that the source of non-tax revenue matters a lot. Aid from democratic donors is different from both oil income and aid from authoritarian donors.

Comparing aid to oil revenue during the post-Cold War period, I have found no evidence, on average, that aid flows from member countries of the Organization for Economic Cooperation and Development have impeded democratic change. Oil revenue, however, is associated with decreased democratic change in developing countries during this time. For aid, this relationship represents a change, as the evidence suggests larger aid flows did thwart democratization during the Cold War. But as the relationship between aid and democratization has changed over time, so has its impact on democratization. The source of aid also matters. Looking at data from 1992 through 2007, I also found that aid from authoritarian donors is associated with less democratization, while the opposite is true for aid from democratic donors.

The explanation for the varying patterns over time and across donors lies in aid intentions and the ability of donors to alter the composition of aid—a refinement not possible with oil revenue. When the Cold War ended, the strategic importance of many developing country autocrats declined sharply, as did their foreign aid. Although donors still aid non-democratic countries, research shows that democratic donors vary the composition of aid and the method of delivery based on characteristics of recipient governments. Through this variation, donors can make aid more or less fungible and influence its impact on democratic change. Now, aid may even possess pro-democratic properties, the magnitude of which varies based on the purpose of the aid flow.

The bottom line for most developing countries is that the relationship between non-tax revenue and the likelihood of democratic change depends on the source of the revenue.

These findings are important for at least three reasons. On the positive side, they show that donors need not shy away from aiding non-democratic recipients for fear of thwarting change. Altering the composition and method of delivery of aid can help avoid anti-democratic outcomes. Second, the new evidence casts doubt on the inevitability of aid fungibility: If donors can influence outcomes, as the evidence suggests, then it cannot be true that all aid is fungible. (The assumption of fungibility that underlies much research on aid should be reexamined.) On the negative side, these findings suggest that increased aid from less traditional donors, such as China and oil-rich authoritarian regimes, could dampen democratic change in recipient states.

In crafting foreign aid policies, governments should pay attention to these findings. Future development depends on a good understanding of their implications.