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Bargaining matters: an analysis of bilateral aid to developing countries

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Abstract

Conceptualising development assistance as the outcome of aid-for-policy transactions between donors and recipients brings the effect of bargaining power on aid allocation immediately to light. This study provides a two-tiered stochastic frontier analysis that is able to integrate the enquiry into bargaining power with the more traditional literature on aid determinants. By examining the bilateral aid commitment of 23 Development Assistance Committee members of the OECD during the period from 1992 to 2011, I find that donor countries have more bargaining power in surplus division than recipient countries. More specifically, donors have, on average, extracted policy concessions from recipients for about 14 per cent less than their baseline value. Rich variations in the distribution of bargaining power across countries and within individual aid determinants are also analysed and discussed.

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Notes

  1. There is, however, a small empirical literature on the effect of bargaining power on the allocation of multilateral aid (for instance, Humphrey and Michaelowa 2013; Bayer et al. 2015).

  2. The IID assumption means bilateral aid flows within one dyad are assumed to have no influence over those in other dyads. The validity and implications of this assumption are further discussed in the concluding section.

  3. There are 23 donors and 101 recipients in this research. Table 5 shows the names of donors.

  4. This is not surprising, for the OLS estimates of betas are still consistent even if the bargaining effects are omitted.

  5. But applying SNA to bilateral aid allocation is also challenging. First, ties within a social network should be stable connections. Thus, if we conceptualise foreign aid as short-term deals, it does not fit the conceptual framework of SNA well. Second, a systematic record of aid flows for the entire international system is not available. This poses a practical difficulty in estimating typical social network models.

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Authors and Affiliations

  1. School of International Studies, University of Nottingham Ningbo China, Room 220, Administration Building, 199 Taikang East Road, Zhejiang, 315100, Ningbo, China

    Yu Wang

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Correspondence to Yu Wang.

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Wang, Y. Bargaining matters: an analysis of bilateral aid to developing countries. J Int Relat Dev 21, 1–21 (2018). https://doi.org/10.1057/jird.2016.8

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