Veto Players and Foreign Aid Inflows

Abstract

This paper argues that a larger number of effective veto players within an aid-recipient country tend to reduce its foreign aid inflows. This is because offers of foreign aid often require aid-recipient countries to adopt policy concessions. Since significant policy changes require at least the tacit assent of all effective veto players, countries with more numerous and more diverse veto players are less likely to be able to make aid-for-policy deals with donors. The pattern of aid inflows in 115 aid-recipient countries over the period 1978–2007 is shown to be consistent with this hypothesis. Countries with more effective veto players receive considerably less official development assistance than countries with fewer effective veto players.

Notes

¹ For instance, 21 sub-Saharan countries received foreign aid exceeding 10% of GDP each year for the entire period from 1990 through 1998. By 1999, the inflows of foreign aid in Ghana, Malawi, Mauritania and Zambia had accounted for more than 40% of the government budget for almost two decades (World Bank, 2010).

² For similar findings, see Collier & Dollar (2002) and Collier & Hoeffler (2003).

³ Tsebelis (1995, 1999) defines veto players as individual or group actors whose support is necessary to achieve policy changes.

⁴ See Tsebelis (2002) and Ganghof (2003) for a comprehensive review of the veto player literature.

⁵ This argument assumes that the cost of aid negotiation is significant. When this is true, the indirect effect amplifies the direct impact of veto players on foreign aid. Even when it is not true, however, it does not weaken the direct effect.

⁶ In the Ricardo–Viner context, factors of production are specific to a particular economic sector and thus cannot be mobilized across different sectors.

⁷ In the Heckscher–Ohlin context, factors of production are fully mobile across different economic sectors.

⁸ Table 2 of Henisz (2000) listed every five-year average value of veto players for the 157 countries he studied for the period 1960–1994. Thus, readers can refer to the article for a better understanding of the measure.

⁹ Since a higher ratio of M2 to GDP indicates a higher level of financial development, borrowing and lending on the private market would then be less costly.

¹⁰ Only significant year dummies are included.