University of Amsterdam Political Science Department The determinants of foreign aid An inquiry into the consequences of welfare state institutions and public opinion August 2007 Robert A. Zimmerman Draft version – Comments welcome Contact: [email protected] About the author: Robert A. Zimmerman was born in the Netherlands in 1978. He worked for the Universities of Nottingham, Leiden and Amsterdam. He studied at Sciences Po in Paris and the University of Amsterdam and holds a Master of Science degree in Political Science with a minor in French studies. He is currently employed as a policy analyst at the OECD Development Centre in Paris. The author of this paper is solely responsible for the views expressed in it. The Determinants of Foreign Aid 2 Table of contents Introduction ......................................................................................................................... 3 Theoretical section .............................................................................................................. 4 Introduction ..................................................................................................................... 4 The influence of ideas and values on foreign policy ...................................................... 7 Welfare states and their influence on foreign aid ........................................................... 7 The influence of welfare state institutions on public perceptions about foreign aid .... 10 The influence of public perceptions on foreign aid levels ............................................ 11 Empirical Analysis ............................................................................................................ 13 Research design ............................................................................................................ 13 Welfare States and Foreign Aid (Model 0) - Cross-Sectional analysis ........................ 14 Welfare States and Foreign Aid (Model 0) - Time-Series analysis .............................. 24 Welfare States and Public Opinion (Model 1) - Time-Series analysis ......................... 36 Public Opinion and Foreign Aid (Model 2) - Time-Series analysis ............................. 42 Final Conclusion ............................................................................................................... 44 Appendix ........................................................................................................................... 49 Inequality, an alternative explanation? ......................................................................... 49 ODA definition ............................................................................................................. 54 Summary Statistics ........................................................................................................ 55 Prais-Winsten regression results for model 0 ............................................................... 56 List of Countries ........................................................................................................... 58 Eurobarometer questions .............................................................................................. 59 Stata ado file for -durbinm- ........................................................................................... 62 References ......................................................................................................................... 63 The Determinants of Foreign Aid 3 What are the determinants of foreign aid? ―The ongoing debate over the foreign aid regime remains trapped in something of an intellectual vacuum given the lack of scholarly understanding of the determinants of foreign aid programs.‖ (Schraeder, Taylor et al. 1998) Introduction This is a study of comparative politics. It looks at the determinants of foreign aid in a cross-national perspective. It covers the second half of the post World War II era, from roughly 1970-1980 to 2005. It joins insights from the study of international relations, socio-economics, democratic theory and the study of public opinion. The main question in this study is this: what determines a country‘s foreign aid level and why do some countries give more aid than others? Knowledge about the determinants of foreign aid levels is important in the light of persisting, deep, global poverty. More than half of the global citizens live on less than 2$ per day or less, purchasing power parity. Many of them do not have access to clean drinking water, good healthcare or schools for their children, let alone gaming consoles and haute couture fashion. Whatever one‘s opinion about the practices and results of foreign aid (insofar they are known), I believe the majority of foreign aid attempts to do good for those living in poverty. Hundreds of thousands of people dedicate their lives to help poor people get better lives. It to those people living in poverty and the people helping them that I dedicate this study. From a scholarly perspective, the main question of this paper is interesting and compelling. In an abundant foreign aid literature, the question of the determinants of foreign aid is only sparsely addressed. To my knowledge, no good answer exists to this question. I endeavour to find one. This study builds further on the existing literature with the revision and elaboration of theory and the analysis of a large dataset with previously unavailable data. In the theoretical section I review literature on this subject and look at existing explanations for The Determinants of Foreign Aid 4 the variation in foreign aid levels. Based on this literature, I formulate two hypotheses about the causes of foreign aid. The first hypothesis is that universalist welfare state institutions create public support for foreign aid. The second hypothesis is that strong support for foreign aid increases foreign aid levels. When hypothesis one and two are true, a third hypothesis can be derived, linking universalist welfare states to higher foreign aid. In the empirical section of this paper, these hypotheses are tested with a large, multi-year dataset for approximately 18 countries. Theoretical section Introduction The literature on foreign aid can be divided into three fields. The first looks at the effects of aid. The second looks at the allocation of aid. The third looks at the determinants of aid. I will first discuss the first two fields literature that only treat the central topic of this paper marginally. I then proceed to the third field that forms the core theory in this paper. The first field in the literature on foreign aid looks at the effects or results of foreign aid. Most research in this field is done by scholars in unilateral and multilateral donor agencies. A vast literature exists (see for example Masud and Yontcheva 2005; Rajan and Subramanian 2005), but a simple answer to the question: ―does aid work?‖ seems hard to give. Part of the reason for this has been a severe lack of focus on development results. Both governments, multilateral institutions and NGOs have failed to account for the results of their aid efforts. Much is known on inputs, but little is known on outcomes. As a result, those responsible for communication in government development agencies face huge problems when asked to communicate the results of aid policy. Recent pressure for a more results oriented policy from aid opponents, civil society, donors and recipients alike has led to a formal process that resulted in the adoption of the Paris Declaration on Aid Effectiveness.1 Implementation of the Paris agenda is forcing both donors and recipients to look better and more systematically at the concrete results of development 1 March 2005, see http://www.oecd.org/dataoecd/11/41/34428351.pdf The Determinants of Foreign Aid 5 efforts. Although a long way has to be gone, the Paris declaration is an important step in the right direction. The second field in the literature on foreign aid looks at the allocation or distribution of foreign aid budgets. Paraphrasing the title of a recent study (Alesina and Dollar 2000), the following question is asked: ―who gives foreign aid to whom and why?‖ The object of inquiry in these studies is how donors distribute their funds. Do former colonies, the poorest countries, strategic allies or others receive the largest piece of the pie? The independent variables in these models are aspects of recipient states. Recent studies assessed whether recipient needs (Trumbull and Wall 1994; Alesina and Dollar 2000; Berthélemy 2006; Nunnenkamp and Thiele 2006) or recipients‘ respect for human rights and democracy (Alesina and Weder 2002; Neumayer 2003; Gates and Hoeffler 2004) are the main determinants for aid allocation. Other studies have compared French (Quinn and Simon 2006), or Japanese aid allocation (Hook and Zhang 1998; Tuman and Ayoub 2004). Most of these studies also seek to answer the question whether foreign aid is motivated by self-interest or humanitarian concerns (see also Hook 1995; Schraeder, Taylor et al. 1998). Pratt (1989) calls this opposition ―international realism‖ versus ―humane internationalism‖. In an international political realist perspective, states are primarily driven by the desire for military and economic power. This theoretical position leaves little room for control over foreign policy by domestic powers. In the neo-realist framework, foreign policy is not the result of internal power struggle and policy formulation, but a reaction to systemic features of