Can Foreign Aid Buy Political Relations?

Using donor-recipient data from 1973 to 2013, we find that reducing foreign aid as a fraction of the recipient’s GDP by 10% improves the bilateral political relation by 2% in the long run. Such a negative relationship is robust for aid with different purposes, for sample averaged over 3 to 5 years, for alternative specifications and estimation methods, after the end of the Cold War and in politically stable regions. Donors are found to reward good relationship with more aid. The competition for influence among donors with distinct political pursuits and the conflicts in aid implementation are driving the results.