Aid and democracy redux

- We estimate long-run and short-run effects of aid on democratization.
- We use interval regression which is uniquely suitable to deal with the structure of the data generating process for Freedom House ratings.
- Aid has a significant but small effect on democratization in the long run.
- In the short run aid responds to democracy - but less so if the country is otherwise of strategic importance.
- Recipient countries respond to this incentive structure and democratize in response to incentive effects.

This paper uses Freedom House ratings to assess the impact of foreign aid on democracy. We employ an interval regression to account for Freedom House׳s method of rating countries. A cross-sectional analysis examining the long run effect of aid on democracy in 122 countries between 1972 and 2011 finds a significant positive relationship that survives various tests for endogeneity. A short run annual panel analysis of 156 countries between 1985 and 2011 explores whether aid operates through leverage and conditionality. We present evidence that (i) donors allocate aid in response to democratization and (ii) recipient countries respond to this incentive for democratic reform. Our identification strategy relies on the reduced importance of democratization in the allocation of aid to geopolitically important countries.