Political economy of aid allocation: The case of Arab donors

By exploiting a unique data set on aid allocation by major Arab donors, this paper explores the relationship between aid allocation and the strategic alignment of donors with recipients as well as the developmental need of recipients. To motivate our empirical work, we first develop a new theory of aid allocation, wherein a representative donor country's payoff depends on both the well-being of the representative recipient country as well as its strategic alignment with the donor. Our theoretical model suggests that there exists a positive relationship between donor's aid allocation and the geopolitical and cultural alignment of the recipient country. Our model also predicts that donors allocate more aid to recipient countries with higher levels of country capacity. To test the prediction of our theory empirically, we construct a new measure of geopolitical and cultural alignment for recipient countries by using principal component analysis. We employ this measure and a set of control variables to show that the geopolitical and cultural alignment of a recipient country and its capacity to implement development projects are the key determinants of aid allocation from the Arab donors.