Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 04-1999: THE POLITICS OF FOREIGN AID

Wolfgang Meyer and Pascalis Raimondos-Møller
Additional contact information
Wolfgang Meyer: University of Cincinnati, Postal: Department of Economics, University of Cincinnaty
Pascalis Raimondos-Møller: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark

Abstract: 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.

Keywords: foreign aid; politics; majority voting.

JEL-codes: F35

20 pages, March 2, 1999

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