Eve is here. This is a sophisticated and compelling analysis of how foreign aid donations reflect the self-interest of donor countries. While it would be nice to know how U.S. aid correlates with U.S. military presence in various recipient countries, there’s a lot more we’d like to know. Only Israel tends to prove that assumption, but it would be useful to see to what extent that relationship holds up elsewhere.
Written by Rava Aresky, Senior Fellow, Foundation for International Development Research (FERDI). Director of Research at the French National Center for Scientific Research (CNRS). Senior Fellow at Harvard Kennedy School. Yusuf Kamara. Frederic van der Ploeg, Professor of Economics, University of Oxford. and Grégoire Rota-Graziosi. It was first published in VoxEU
Critics of foreign aid are often quick to point out the shortcomings of the recipient countries. This column examines donor countries’ own motivations. Examining foreign aid flows after large-scale discoveries of natural resources, the authors found that aid flows tend to increase after discoveries, even though recipient countries become wealthier. . The findings suggest that donor countries are not completely altruistic and prioritize access to valuable natural resources and their own strategic interests over the needs of beneficiaries.
Critics of foreign aid often focus on the shortcomings of recipient countries. This column explores whether foreign aid from donor countries is self-interested. We provide empirical evidence that recipient countries that experience large-scale natural resource discoveries receive more, if not more, bilateral aid (all else being equal). This is contradictory given that the main findings relate to the effective relaxation of international borrowing constraints. Given the critical role of minerals in the energy transition, foreign aid is likely to continue to be used to advance the interests of great powers at the expense of poorer countries.
Critics of foreign aid often focus on deficiencies in recipient countries and related aid ineffectiveness (Bauer 1972, Easterly 2003, Edwards 2014, Frot et al. 2012, Fuchs et al. 2012, Galiani et al. al. 2016, Lohmann et al. 2015). This criticism is particularly salient in the case of bilateral aid, as donors stand to benefit from the possibility of reciprocation with recipients. This return may center around access to markets, but perhaps more importantly, access to natural resources in developing countries as well. In fact, developing countries are less industrialized and tend to consume fewer natural resources than they produce. This situation is suitable for influencing these resources by foreign economic power given (known) reserves. However, there has been little systematic analysis or empirical investigation of whether foreign aid providers pursue their own self-interest when giving aid (Fuchs et al. 2012).
Throughout the 19th century, the great powers of Western Europe competed to secure access to natural resources such as cotton, copper, iron, and rubber that were essential to their industries. These colonial projects were carried out through coercion and military force. In modern times, there is new competition among major economic powers to secure vital resources for their industries. The competition between these economic powers is particularly acute today, given that two major technological transformations are occurring today: decarbonization and digitalization. To dominate the new industries emerging from these changes, it is essential for major powers to secure access to critical minerals such as lithium, cobalt and rare earths.
The Democratic Republic of Congo (DRC) is rich in mineral resources. It has the world’s largest reserves of cobalt, a key component in electric vehicle batteries, accounting for 68% of global production. No wonder the DRC has become the darling of major economic powers such as China, the United States, and the European Union. The latter has simultaneously committed to foreign aid and signed major mineral contracts. Other anecdotal evidence of the concomitance of foreign aid and abundant natural resources has been developed in Guyana, Mozambique, Mongolia, Namibia, and Papua New Guinea. Rather than using coercion, as was the case in the 19th century, bilateral foreign aid “oils the wheels” for exploration, extraction, and ultimately the conclusion of lucrative mining contracts for trade flows. It can be considered as “pouring”. In other words, traditional donors and non-traditional donors such as China compete to secure natural resources in developing countries through grant aid.
Identifying donor self-interest
A recent paper (Arezki et al. 2024) more systematically investigates whether foreign aid is self-serving. To identify the element of self-interest motives in donor decisions regarding the allocation of foreign aid, we take advantage of the timing and magnitude of key findings that can be argued to be likely exogenous (see Figure 1) . The discovery of a major mineral brings a remarkable impact. The median finding is 29.81% of GDP. Such discoveries have also been frequent and widespread, and over the past several decades hundreds of mineral (and hydrocarbon) resources have been discovered around the world, including countries in South Asia, Latin America, and especially sub-Saharan Africa. has been discovered.
Figure 1 Mineral discoveries are becoming more prominent in developing countries.
sauce: Minex
The result of a great discovery is an immediate increase in (known) wealth. This finding thus increases the value of collateral that countries can use to borrow internationally, reducing potential external borrowing constraints even before resources are effectively extracted. Masu. Considering the above, countries that have experienced great discoveries should reduce rather than increase foreign aid.
Consider an experiment in your head in which a donor is given the option of providing aid to two countries that differ only in one dimension, namely the occurrence of a discovery, but are otherwise identical. If the donor is exclusively ‘altruistic’ (i.e. poverty reduction in the recipient country is the main objective), aid allocation choices should be directed towards that country without being discovered. However, if donors have sufficient “self-interest” motives, aid may be directed to countries that have discovered resources. Indeed, self-interested donors seek to secure access to newly discovered resources. We formalize the intuition from this mental experiment in a simple 2-2 donor-recipient model with a contest success function to analyze the effect of resource discovery on foreign aid.
The new paradox of foreign aid and natural resources
The paradox we explore is that as developing countries become (relatively) richer thanks to major discoveries, they tend to receive more, rather than less, foreign aid. . Foreign aid, as defined by official development assistance recorded by the Development Assistance Commission, was approximately $214.4 billion in 2023, or 0.37% of total gross national income (GNI), making it the lowest for traditional donor countries. is less than a bucket. However, foreign aid remains the main source of funding for most developing countries. Additionally, mineral exporting countries such as the Democratic Republic of the Congo, Mongolia and Zambia remain recipients of aid, with historic peaks of 67%, 17% and 57% of GNI, respectively (see Figure 2). .
Figure 2 Foreign aid accounts for a large portion of developing countries’ incomes.
sauce: OECD (2024)
When we add donor self-interest motives, our empirical estimates are consistent with the predictions of the theoretical model. Our central estimates suggest that after a mineral discovery, recipient countries receive, on average, 36% more aid than countries without such discoveries. The results showed that recipient countries that discovered key resources received more aid more quickly, all else being equal. We verify that after discovery, not only the loan component of aid but also subsidies increases, leading to more bilateral aid flows from the country of the discoverer’s nationality. The results are robust to a variety of checks, including the nature of the findings, accounting for donor and recipient heterogeneity, and the use of different estimators.
Consistent with the predictions of theoretical models, estimates show that after a major mineral discovery, current account balances and savings rates decline in the first five years and then rise sharply in the following year. These results suggest that countries experiencing huge discoveries borrow money from the rest of the world well before mining begins. We document that major mineral discoveries lead to a deterioration in the current account balance, suggesting that the country is borrowing from the rest of the world. Mineral discoveries suggest that the country is richer than previously thought and therefore tends to relax its external borrowing constraints. Therefore, an increase in foreign aid after major mineral discoveries suggests that donors have self-interest.
conclusion
These results have important implications for policy. Foreign aid may continue to play an important role in securing access to critical minerals, although some traditional donors in developed countries have announced limits on the amount of foreign aid. The extraordinary growth in demand for critical minerals is creating upward pressure on prices and stimulating the discovery of new critical minerals around the world. For developing countries, this new bonanza brings opportunities but also important risks (Arezki and van der Ploeg 2024). Without a shift in governance systems, the rush to risk critical minerals could create a “new critical mineral curse.” Given the role of these critical minerals in the energy transition, it is likely that foreign aid will continue to be used to advance the interests of great powers at the expense of poorer countries.
