WORKING PAPER: Foreign Aid's Amplification Effect on Political Institutions

Does foreign aid encourage democracy in recipient countries, or does it strengthen their dictators instead? These have long been the contradictory predictions of two competing hypotheses in the aid debate, but a new DRI working paper by Nabamita Dutta, Peter T. Leeson and DRI Postdoctoral Fellow Claudia Williamson suggests that in reality neither prediction captures the entire picture:

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. It doesn’t alter the trajectory of recipients’ political institutions.

The amplification effect of aid means, the authors suggest, that both competing hypotheses ascribe too much power to foreign assistance. Aid doesn't alter the institutional trajectory of any country; it makes democracies more democratic, and autocracies more dictatorial. So aid given for the "purposes of democratizing the dictatorial developing world may not only fail,"  they write, "but may actually cause harm."

What could this mean for the real purpose of aid -- economic growth and development?

To the extent that because of their stronger constraints on executive power, democracies tend to pursue better economic policies than dictatorships, when democracies receive foreign aid they become more democratic, leading to the adoption of better policies, which in turn leads to higher economic growth. Conversely, when dictatorships receive aid they become more dictatorial, preventing the adoption of better policies, which in turn prevents increases in economic growth.

Read the paper.

WORKING PAPER: Understanding Transitory Rainfall Shocks, Economic Growth and Civil Conflict

Leaving aside these data and econometric issues, Ciccone’s surprising results do not survive obvious robustness checks.

Edward Miguel and DRI Affiliated Faculty Shankar Satyanath rebut Antonio Ciccone's (2010) assertion  that higher rainfall levels are, in fact, linked to more conflict -- a rejection of the Miguel, Satyanath and Serengeti (2004) conclusion that higher rainfall is associated with less conflict and more economic growth. But Ciccone's methods might have had some very fundamental errors:

Miguel, Satyanath and Sergenti (2004) use rainfall variation as an instrument to show that economic growth is negatively related to civil conflict in sub-Saharan Africa. In the reduced form regression they find that higher rainfall is associated with less conflict. Ciccone (2010) claims that this conclusion is ‘erroneous’ and argues that higher rainfall levels are actually linked to more conflict. In this paper we show that the results in Ciccone’s paper are based on incorrect STATA code, outdated conflict data, a weak first stage regression and a questionable application of the GMM estimator. Leaving aside these data and econometric issues, Ciccone’s surprising results do not survive obvious robustness checks. We therefore conclude that Ciccone’s main claims are largely incorrect and reconfirm the original result by Miguel, Satyanath and Sergenti (2004), finding that adverse economic growth shocks, driven by falling rainfall, increases the likelihood of civil conflict in sub-Saharan Africa.

Read the paper.

WORKING PAPER: Reestablishing the Income-Democracy Nexus

...[T]he bulk of the evidence favors of a statistical relationship between income and democratization.

Fighting words from DRI Affiliated Faculty Jess Benhabib and co-authors Alejandro Corvalan and Mark Spiegel, who use new data to overturn previous studies (Acemoglu, et al (2001), Easterly and Levine (2003), Rodrik et al (2004)) that showed good democratic institutions cause economic growth, not the other way around.

In this paper, we reexamine the robustness of the income-democracy relationship. We extend the research on this topic in two dimensions: first, we make use of newer income data, which allows for the construction of larger samples with more within-country observations. Second, we concentrate on panel estimation methods that explicitly allow for the fact that the primary measures of democracy are censored with substantial mass at the boundaries, or binary censored variables. Our results show that when one uses both the new income data available and a properly non linear estimator, a statistically significant positive income-democracy relationship is robust to the inclusion of country fixed effects.

Read the paper.