Can Money Buy Friendship? Evidence from International Aid and Political Relations

Abstract

Using donor-recipient aid data from 1973 to 2013, we find that while donors reward good relationship with more foreign aid, recipients sweeten their political relations with donors only after aid cuts. The negative impact of aid on political relations is more pronounced after the Cold War, in politically stable regions, and in countries where China and U.S are both donors. We provide evidence that the competition for influence among donors with distinct political pursuits and the conflicts in aid implementation are driving the results.