Public finance, foreign aid and political incentives

This thesis consists of three studies on foreign aid and its allocation by political leaders within recipient countries. It explores whether this allocation depends on personal motives and political purposes. The first study focuses on the effect of aid on government spending using country-level data, distinguishing between several types of foreign aid that are expected to impact spending in different ways. The impact of institutional quality on aid fungibility is also considered since receiving foreign aid could promote corrupt or illegal activities on behalf of the recipient government by diverting aid into private pockets. The results suggest that aid fungibility depends on institutional quality, especially for off-budget aid. The second study focuses on the effect of aid on tax revenues using country-level data, distinguishing between two types of finance to investigate whether or not aid pays for tax reductions. The results show that aggregate aid, aid in the form of grants or in the form of loans leaves tax revenues unaffected at all levels of institutional quality. These results suggest that aid is not fungible in the context of tax revenues and that aid does not finance tax reductions. The third study focuses on the sub-national allocation of foreign aid flows from China and the World Bank using district-level data. This allocation of aid across regions is up to the discretion of the political leader. This study attempts to identify the strategy leaders use to maximise their vote share, or whether or not leaders favour co-ethnic regions. The results show that in competitive electoral environments, leaders divert aid away from their core voters and towards supporters of the opposition. In contrast, in non-competitive electoral environments without strong political motivations leaders favour their co-ethnic regions.