Evidence of ‘foreign aid Keynesianism’

Abstract

Recent literature on the determinants of the US foreign aid budget has raised the hypothesis of a relationship between the latter and the extent of domestic poverty. This is particularly relevant at times of economic crisis and has led to talk of ‘foreign aid Keynesianism’. The present study is based on the experience of members of the Development Assistance Committee of the Organisation for Economic Co-operation and Development (OECD-DAC). It supports previous findings related to the United States and shows that the influence of domestic poverty on donor decision-making regarding the foreign aid budget is shared by other countries, strengthening support for the poverty–aid relationship. However, this positive result refers to only half of the sample considered and an opposite relationship can be detected in a few other cases.

Keywords:

• foreign aid
• poverty
• Keynesianism
• donor decision-making

JEL Classification:

• F35
• I30

Notes

¹ While according to Griffin et al. (1982), military Keynesianism posits elite manipulation of defense spending as a countercyclical tool, Henderson (1998) finds that only focused spending on military personnel may decrease poverty, suggesting its potential as a countercyclical instrument.

² This supports the argument that aid is not pro-cyclical from the donor's perspective (Pallage and Robe, 2001).

³ Hugie estimates that a 1% increase in the US poverty rate relates to a USD 672 million increase in foreign economic assistance and a USD 118 million increase in foreign food assistance.

⁴ Despite this important distinction, supply-side models of foreign assistance often use data on disbursements. This is understandable when it is necessary to take the recipient absorption capacity into account.

⁵ Data from different sources have been combined only with regard to 60% poverty rates, while all other cases make use of data from OECD.

⁶ Interpolation has been applied only in the presence of a clear trend, and the gaps filled are never longer than five years.

⁷ This is also the case in New Zealand, but only in terms of disbursements, which is less relevant for the purposes of this study.

⁸This supports the claim that there is substantial heterogeneity among donors (Jones, 2011).