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Governance and Foreign Aid Allocation

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This dissertation addresses foreign aid allocation and development effectiveness. This is an important issue because each year donors transfer tens of billions of dollars in foreign aid to developing countries. Moreover, based on new pledges and greater commitments to development assistance from donor nations, there is a possibility of scaling up of foreign development assistance far beyond the current levels. From the donors’ perspective, the commitment to increase aid flows to developing countries is only the starting point. This, in turn, raises issues regarding the role of the donors’ aid allocation policies in ensuring aid effectiveness. This dissertation examines some important propositions that relate governance to foreign aid allocation and effectiveness. The author unravels the critical heterogeneous impacts of governance and different aid categories on development outcomes. One striking finding suggests that aid to the production sector can be effective in promoting growth in countries with a low quality of governance. However, aid allocated to economic infrastructure is efficient in countries with medium and high quality of governance.