Aid and State Capacity: A Multi-Dimensional Quantitative Approach to the Effects of Foreign Aid on State Capacity

Abstract Prior scholarly literature has presented a multitude of varying results and perspectives on the relationship between foreign aid and its effects on the state capacity of aid recipient countries. Showing little consensus between various sorts of empirical research designs and studies, the foreign aid and state capacity scholarly landscape is still relatively uncertain. This study adds to existing research by approaching the measurement of the effects of foreign aid on the concept of state capacity from multiple dimensions, being fiscal, legal and bureaucratic-administrative. In past research, scholars tend to define and measure state capacity according to one or two of the range of dimensions through which state capacity can be studied. This research also adds to the present scholarly gap by including relatively under-studied non-DAC and Chinese aid donor data alongside the frequently studied DAC donor group. Using a quantitative large-N cross-sectional research design, this research aimed to answer the research question, ‘What are the effects of foreign aid on recipient countries’ different dimensions of state capacity?’. Data on three theoretically informed indicators were collected to measure change in state capacity between 2008 and 2018 along fiscal, legal and bureaucratic-administrative dimensions. Tax revenue, rule of law and government effectiveness were chosen as indicators for each dimension respectively. Data on aid commitments made between 2004 and 2014 by DAC, non-DAC and Chinese donors given to 135 (N=135) lower, lower-middle and upper-middle income recipient countries were collected to test for potential effects on state capacity. This research employed three multiple linear regression analyses as the main quantitative testing methodologies, alongside three quadratic regressions as additional checks for presence of a quadratic or diminishing relationship. The control variables employed within this research were average GDP growth, level of institutionalized democracy, presence of conflict and the initial value of each of the respective dependent variable measures. The findings of this research presented mixed results showing that foreign aid did not act as a significant predictor for change in tax revenue and change in rule of law as part of the fiscal and legal dimension regression models. On the other hand, foreign aid did have a significant negative effect on government effectiveness as a measure of state capacity within the bureaucratic-administrative model. While the government effectiveness measure was significant and matched expectations, the negative effect was small and many controls proved insignificant across all three regressions. Additionally, the results of the three quadratic regressions were insignificant, meaning no evidence of a quadratic or diminishing relationship could be found. With two of the three models proving insignificant, a concrete negative relationship between foreign aid and state capacity can neither be confirmed nor denied. Further research that may prove beneficial would be to implement more varied indicators and control variables, as well as to explore other research designs that may better establish causality within the relationship such as time series or a mixed methods approach.