Abstract

While foreign aid has many determinants, an important factor influencing aid allocation is the political risk prevailing in the aid receiving country. This paper uses panel approach to investigate empirically how different political instabilities in the aid receiving country influence aid allocation by donors. The paper specifies and estimates models using fixed effect and random effect approach that explain the allocation of net per capita ODA among 50 developing countries over the period 1990-2012. Out of the total eight risk indices used, five exerts a significant impact on aid allocation of which four are indicators of governance while the fifth is an indicator of internal conflict. Based on the models, there is a negative relationship between corruption and aid flow indicating donors’ intolerance for malfeasance. However, the significantly positive association between aid flow and other three governance indicators- government stability, law and order and bureaucratic quality is questionable. While addressing the concept of governance in the development agenda reflects donors’ increasing concern for aid effectiveness, the rise in aid inflow with the worsening of government stability, law and order and bureaucratic quality leads to one critical question- Are donors aiding bad governance? Based on the positive significance of poor governance and the insignificance of the socioeconomic condition on aid flow, the paper argues that donors are motivated by self-interest rather than altruistic nature.

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