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Abstract:
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Why do donor countries give foreign aid? The answers found in the literature are:
(i) because donor countries care for recipient countries (e.g. altruism), and/or (ii)
because there exist distortions that make the indirect gains from foreign aid (e.g.
terms of trade effects) to be larger than the direct losses. This paper proposes a
third answer to the above question, namely that aid is determined through the
domestic political process of the donor country. The paper demonstrates how
foreign aid affects the donor country’s income distribution and how, in a direct
democracy, the majority of voters might benefit from foreign aid giving even
though the country’s social welfare is reduced.
JEL Classification: F35
Keywords: foreign aid, politics, majority voting. |
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