The Impacts of Donor Financial Crises on the Magnitude of Bilateral and Multilateral Foreign Aid
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The global financial crises that started in 2007 had a significant impact on countries across the world, including countries that contribute to foreign aid. Using a panel of 24 donor countries over the time period 1977-2018, this paper analyzes the impact of systemic banking crises on foreign aid flows through direct bilateral transfers to developing countries and channeled through multilateral institutions. The study finds that multilateral aid experiences statistically significant declines after donor financial crises and these declines are more severe and prolonged than for bilateral aid, which often serves as a tool to pursue the donors’ strategic interests. The share of tied bilateral aid, which often benefits businesses and special interest groups in the donor country, increases in the years following a systemic banking crisis.
Abstract
The global financial crises that started in 2007 had a significant impact on countries across the world, including countries that contribute to foreign aid. Using a panel of 24 donor countries over the time period 1977-2018, this paper analyzes the impact of systemic banking crises on foreign aid flows through direct bilateral transfers to developing countries and channeled through multilateral institutions. The study finds that multilateral aid experiences statistically significant declines after donor financial crises and these declines are more severe and prolonged than for bilateral aid, which often serves as a tool to pursue the donors’ strategic interests. The share of tied bilateral aid, which often benefits businesses and special interest groups in the donor country, increases in the years following a systemic banking crisis.