Aid allocation and targeted development in an increasingly connected world

Abstract

Aid donors pursue a strategy of targeted development with regard to recipient states. The determinants of aid allocation have shifted significantly. Industrialized states are increasingly unable to insulate themselves from spillovers caused by underdevelopment abroad. Donors attempt to use aid to decrease these spillovers, targeting developing countries where the effects on the donor are anticipated to be large. Once a recipient is chosen, concern for recipient government capacity guides the composition of aid. Empirical analysis of aid allocation from 1973 to 2012 demonstrates that, while explanations based on security and economic ties to the donor explain allocation well in the Cold War, the post-2001 period is best understood by incorporating a role for targeted development. This framework helps synthesize various findings in the aid allocation literature and has important implications for studying aid effectiveness.