Darlings and Orphans: Interactions across Donors in International Aid

AuthorStephan Klasen, Ronald B. Davies
DOIhttp://doi.org/10.1111/sjoe.12261
Publication Date01 Jan 2019
Scand. J. of Economics 121(1), 243–277, 2019
DOI: 10.1111/sjoe.12261
Darlings and Orphans: Interactions across
Donors in International Aid*
Ronald B. Davies
University College Dublin, Dublin 4, Ireland
ronbdavies@gmail.com
Stephan Klasen
University of G¨ottingen, DE-37073 G¨ottingen, Germany
sklasen@uni-goettingen.de
Abstract
We examine how the bilateral aid flows from an individual donor to a recipient depend on the
aid flows from all other bilateral and multilateral donors to that recipient. Thereby, we assess
to what extent issues including donor coordination, free-riding, selectivity, specialization, and
common donor interests drive bilateral aid allocations. We find that others’ bilateral flowslead to
a significant increase in aid flows from a particular donor, but primarily within a givenyear. The
effects are particularly pronounced for large donors and so-called “darling” recipients. Overall,
the results suggest that herding is a dominant feature of aid inter-relationships.
Keywords: Aid; aid darlings; aid orphans; donor coordination
JEL classification:F35; F42
I. Introduction
Foreign aid continues to be one of the most important – if not the most
important – forms of capital flows to a large number of poor countries,
particularly in Africa. Foreign aid is given by an increasing pool of donors,
often allowing countries to choose from (or to be forced to deal with)
hundreds of potential donors in order to fund their budgets, programs,
and projects (World Bank, 1998). The number of donors has dramatically
increased in past decades, with new entrants including regional development
banks, new bilateral donors, global funds, philanthropic foundations, and a
myriad of non-governmental organizations (NGOs; Dreher et al., 2013).
With this expansion, there is increasingly less of a “cartel of good
intentions” (Easterly, 2002) and, instead, a highly fragmented aid landscape,
*Wewould like to thank Paul Collier, Axel Dreher, Michael Grimm, Anke Hoeffler,Adrian Wood,
two anonymous referees, and participants at workshops in Oxford, Namur, Marburg, Dublin,
Berlin, and The Hague for helpful comments on earlier versions of this paper.
C
The editors of The Scandinavian Journal of Economics 2017.
244 Darlings and orphans: interactions across donors in international aid
which is increasingly difficult to negotiate for both donors as well as
recipients (Harford et al., 2004). Although it is recognized that this
fragmentation can come with significant consequences, because aid choices
are made in an inter-related but uncoordinated environment, little is known
about the extent of the inter-relation between donor giving. We shed light
on this issue by examining bilateral overseas development assistance (ODA)
payments by 21 Organisation for Economic Co-operation and Development
(OECD) donors to 51 recipients over the period 1988–2013. We find robust
evidence of a net positive interaction in which, if all other donors increase
aid to a recipient by 1 percent in a single year, a given donor increases
theirs by 0.458 percent, with this effect essentially confined to that same
year. In particular, this is driven by aid “darlings”, that is, recipients who
receive higher than anticipated donations. This suggests that there exists
information-driven herding behaviour in aid.
There are a number of ways in which uncoordinated ODA can have
negative effects. First, it can lead to situations where recipients will be
favored by most donors and become so-called aid darlings, while others are
largely deserted by the international community and become aid “orphans”
(Levine and Dollar, 2005; Rogerson and Steenson, 2009; Marysse et al.,
2007; Utz, 2010). The recent focus on selectivity to improve aid
effectiveness could increase this problem, as some findings suggest that for
aid to be effective it should be focused on those countries with particular
characteristics, such as the combination of high poverty and a “good” policy
environment, better institutions, or poor achievement levels for millennium
development goals (Burnside and Dollar, 2000; Collier and Dollar, 2002;
Wood, 2008).1In fact, donors are now being ranked for their policy
selectivity (e.g., Knack et al., 2011), thereby providing explicit incentives
to focus aid on darlings with good policies, and to neglect orphans. If
the quality or need of a recipient is uncertain, then governments can
base their expectations in part on the choices made by other governments,
leading to herding (i.e., one donor’s aid follows that of others because of
the presumed information their donations convey). This then adds to the
selectivity problem.
Second, uncoordinated aid can lead to substantial aid volatility for
recipient countries. This has been found to be growth-reducing in recipient
countries by several studies (e.g., Bulir and Hamman, 2008; Arellano et al.,
1Note that there is a large body of literature suggesting that the findings from Burnside and
Dollar (2000) are not robust, with severalof these papers suggesting waysin which more selective
aid could be more effective.For a discussion, see Easterly et al. (2004), Roodman (2007), Nowak-
Lehmann et al. (2012) and Doucouliagos (2018).
C
The editors of The Scandinavian Journal of Economics 2017.
R. B. Davies and S. Klasen 245
2009; Kathavate and Mallik, 2012).2In addition, Nielsen et al. (2011) find
evidence that negative aid shocks can even induce internal conflict.
Third, as described in detail by the World Bank (1998) among others,
each aid program carries transaction costs for both the donor and the
recipient, as they work to manage the project and fulfil its terms.
Knack and Rahman (2007) show that such fragmentation indeed lowers
bureaucratic quality in recipient countries and Kimura et al. (2012) find
that a proliferation of donors in a country leads to lower growth.3
Naturally, these problems could be reduced if the aid coming from
numerous donors was well coordinated, predictable, and used joint
approaches to reduce the management burden. Recognizing the potential
damage of fragmented and volatile aid flows, the 2005 Paris Declaration
on Aid Effectiveness and the 2008 Accra Plan of Action called on donors
to coordinate their aid better, to make aid flows more predictable, to pool
aid flows in country-led programs, and to use country systems for aid
management. To facilitate this process of alignment and harmonization,
donors were encouraged to specialize by concentrating their aid on fewer
countries, and fewer sectors within those countries, in line with their
comparative advantage. For example, among bilateral donors organized in
the OECD’s Development Assistance Committee (DAC), lead donors have
been appointed for particular sectors in countries that should coordinate
the aid, and it has been proposed that the number of actors in each sector
should be reduced (OECD, 2009).
Unfortunately, most observers find that these goals remain largely
elusive. Aldasoro et al. (2011) find that, at least up until 2006, there was
little progress on donor coordination and specialization (using measures
of proliferation of donors at the country level). Nunnenkamp et al. (2013)
find that also in later years, aid fragmentation and the overlap of donor
engagement at the country and sector levels remain high; country studies
support these results (e.g., Nunnenkamp et al., 2015, 2016). In addition,
Bulir and Hamann (2008) have found that aid became more volatile in
the late 1990s and early 2000s when the first initiatives to improve donor
coordination and to increase its predictability were already underway. Donor
rankings based on 2007 data also suggest that much work remains to be
done here (Knack et al., 2011). At the same time, Angeles et al. (2008) have
2See Chauvet and Guillamont (2009) for a different view, which suggests that some aid volatility
might actually be desirable and that volatile aid is particularly problematic if it is pro-cyclical
with respect to other capital flows. See also Hudson and Mosley (2008) for further analysis on
the volatility–growth nexus, wherethey argue that the effects depend on the type of volatility and
the type of aid.
3See also Dreher et al. (2012) on this issue with related findings.
C
The editors of The Scandinavian Journal of Economics 2017.

To continue reading

Request your trial