Nabamita Dutta and I have a new working paper that explores foreign aid's impact on recipient countries' political institutions. The paper is entitled, "The Amplification Effect: Foreign Aid's Impact on Political Institutions." You can download it here.
Here is the abstract:
How does foreign aid effect recipient countries’ political institutions? Two competing hypotheses offer contradictory predictions. The first sees aid, when delivered correctly, as an important means of making politically-centralized recipient countries more democratic. The second sees aid as a corrosive force on recipient-country political institutions that makes them more dictatorial. This paper offers a third hypothesis about how aid affects recipients’ political institutions 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. Instead, aid only amplifies the existing political institutions of recipient countries. We investigate this hypothesis using a panel that covers 73 countries between 1975 and 2003. Our findings support the amplification effect. Aid strengthens democracy in already democratic countries and dictatorship in already dictatorial regimes. It does not, however, alter the trajectory of political institutions in democratic or dictatorial recipient nations.