The Political Economy of Foreign Aid Effectiveness: Should Countries With Higher Levels of Inequality Receive Less?

Abstract This paper answers how resource inequality within an aid recipient country should influence donor's aid allocation given a contest over resources between a powerful local elite vs. masses in the recipient country. It is shown that if the elite is politically powerful, the donor should not give aid as it would decrease the contesting power and welfare of masses. If the elite's political power is sufficiently constrained, a donor should give a positive amount of aid which should be increasing in the level of resource equality between the classes. Despite this, historically countries with more inequality have received relatively more aid. JEL Classification: F35 – D00 – D30 – D72 – D74 – D70 – O10