In an interesting new paper, David de la Croix and Clara Delavallade argue that “the most corrupt countries, since they are also the poorest, receive higher amounts of foreign aid.”
Despite the official claim of multilateral organizations to be conditioning foreign aid on institutional reforms of the recipient country, aid is not negatively correlated with corruption across countries. This correlation is, if anything, positive. In this note we provide a rationale for this fact, which can a priori be viewed as irrational.
The rationality for giving more aid to more corrupt countries arises because corruption is itself endogenous, and negatively related to productivity. Since it is optimal for donors to give more aid to countries with low productivity, it turns out that aid and corruption are positively correlated at equilibrium, at least as long as productivity is the main source of differences across countries.
We have evaluated this prediction by estimating the effect of productivity and quality of institutions on both corruption and foreign aid. The positive correlation between aid and corruption due to differences in productivity levels is significant and stronger than the negative correlation arising from differences in governance quality. This result is highly robust to changes in time period, in the way institution quality is measured and in the use of alternate model specifications. References