Determinants of aid effectiveness in enhancing governance

Abstract

Along with the long history of aid industry, aid effectiveness has come to mixed conclusions in literature. Using the data from 136 countries between 2002 and 2009, this paper explores external determinants of aid effectiveness in enhancing governance. In order to capture more precise impact of aid on governance, only the aid amount, which has a policy objective on good governance, is considered. This paper provides evidence that aid promotes good governance, conditional on geographical location, legal origin, and religious diversity. Given aid for governance, aid significantly enhances governance in countries located in Sub- Saharan Africa, in countries with civil law tradition, and in countries with less religious tension. Also, among various dimensions of governance, only ‘Political stability and absence of violence’ indicator turns out to be positively influenced by aid in overall countries, while others are limitedly affected. These findings support the need for donors to select development assistance projects with great caution, considering the exogenous factors of each recipient country and target governance quality that needs to be enhanced.