Aid or Hindrance? An Empirical Analysis of Official Development Assistance on Corruption

Abstract

To contribute to the inconclusive literature on whether bilateral development aid promotes corruption, this paper examines the impact of ODA flows from the five major donor countries on recipients’ CPI. The research adopts a more granular examination by considering the impact of donor countries separately, thus taking into account the different donor allocation strategies. Considering a global panel data set covering 121 aid-receiving countries from 2012 to 2021, the research finds that official development assistance does not significantly encourage the recipient’s corruption levels. The study accounts for endogeneity issues based on reverse causality using a Two- Stage Least Squares method that employs instrumental variables based on the donor’s bilateral interest. The impact remains insignificant after controlling for endogeneity, alternative measures of corruption, and multiple subsample analyses. Our findings imply that good governance policies, implemented especially after the 2000s, are essential for aid to lead to sustainable economic growth.