Sometimes in discussions of foreign aid or charity I see people raise the point that aid might do good directly, such as by providing a health service, but that it might cause harm indirectly, for example by allowing an incompetent or corrupt state to continue existing without being forced to become better by harsh economic realities. These arguments come up in conversation, and also in books by the likes of Angus Deaton or Larry Temkin. Recently, Martha Nussbaum brought up these concerns. They're worth taking seriously. Thankfully, political scientists and economists have in fact looked at them (somewhat) seriously.
In this post I'm going to tell you a tiny bit about me, explain the institutional criticism of aid in a bit more detail, and then explain the results of two papers testing this relationship. I'll also explain a tiny bit about the limitations of this kind of work. The upshot of all this is that we have very little strong evidence that aid systematically harms political institutions. My best personal guess is that while aid can sometimes have medium-sized positive or negative effects on politics in recipient countries in specific cases, on average right now and in the recent past it has very small effects in either direction.
All About Me
I'm a political scientist by training and most of my teaching is in a development studies department. When I was considering grad school, I was really interested in political accountability and the ways that "easy money" like oil can distort political relationships. My reading of recent history suggested to me that getting oil before having representative institutions meant locking in autocratic rule. I thought about studying oil states but then somewhat unrelatedly I tried living in Cairo for about half a year and found it quite challenging culturally—so I figured studying oil states was probably not going to work for me. My next idea was thinking about aid. In a lot of ways it seemed similar to oil: it was "easy money" for governments that let them provide goods or services to their citizens without taxing them. In many very poor countries it was also a large flow in terms of government expenditure or GDP. I wrote my big undergrad paper on this. While doing so I read the work of Deborah Brautigam on this topic and then I went to do my PhD with her.
Aid and institutions in theory
The "aid harms institutions" story isn't dumb. It makes internal sense, and the early (cross-sectional) evidence that we had on it sometimes suggested harm. There are so many ways that aid could harm institutions or governance in recipient countries. It could do so by acting like oil. This primarily means allowing governments to exist absent taxation. If citizens aren't taxed, so the theory goes, then maybe they won't demand representation or results from government in the same way. And if governments don't have to collect tax, then maybe they won't do state building things like building up good ways of gathering information on everybody. If we look at European states, you can easily tell a story where states felt the acute need for more money (often for fighting wars) and this set off a chain of events that built strong states and created demands for state accountability to at least some segment of the population.
Aid could also harm institutions in more mundane ways. For example, donors might want to hire local staff and might pay well by local standards. This seems like a clear positive, but if enough donors do this they might poach all of the best people from government bureaucracies. Donors might also want lots of reporting to make sure money is well spent. Again this seems good, but with so many donors all wanting this kind of reporting it can be a large drain on the time and attention of a limited number of already overworked bureaucrats in aid-receiving countries.
However, aid also isn't oil. Donors care about how recipients act in a way that buyers of oil do not. Aid is often explicitly or implicitly tied to recipients doing or not doing certain things. It's easy to tell a story where donors do things that help improve institutions or governance, like donors withholding aid to Kenya in the early 1990s and pushing the country towards democratization.
Testing aid's effect on institutions
Early work testing the effects of aid on institutions tended to find a negative relationship. I read some of this work while doing my undergrad paper. Looking back, however, a lot of that work is not up to answering our question. One common problem is usually that it was cross-sectional: it is statistical work that has data on many counties at one point in time. You can think of this like a scatter plot, where aid is on the x-axis and some measure of good governance is on the y-axis. When you run these regressions you will often see a correlation where places with more aid have worse governance. However, it pretty unclear if we should interpret this as saying that aid causes problems in governance or aid goes to places with worse governance. Fire engines suspiciously appear near houses with fires.
The authors of this work understood that this was a problem and tried to deal with it in various ways (control variables, IV methods), but for reasons I won't get into here these methods are pretty unreliable in this context and have rightly fallen out of favour. It's just very hard to nail down causation in this context.
Some more recent papers come at this question using panel data, which means that they have data on many countries over many years. This lets one follow the trajectory of a country over time, as aid to it rises and falls. This is still far from something like a randomized control trial, but it's usually better than using a cross-section. Two papers that do this are "Aid Is Not Oil: Donor Utility, Heterogeneous Aid, and the Aid-Democratization Relationship" by Sarah Blodgett Bermeo and "Does foreign aid harm political institutions?" (pdf) by Sam Jones and Finn Tarp.
Sarah's paper examines how aid influences democratization in non-democratic states. I like it because she also examines some past research and shows how the authors arrived at results that conflict with hers. The basic takeaway is that she finds that during the Cold War aid did make autocracies less likely to democratize, but that this effect is mostly gone in the post-Cold War period. The only exception is that if a country is strategically really important then maybe it can still use aid in this way. I'm saying maybe because it really hinges on whether or not you think her interaction terms have sufficient power to detect these effects (I'm skeptical). Nevertheless, the basic takeaway is that in the post-Cold War period aid doesn't seem to do anything to institutions.
Sam and Finn's paper looks at the effect of aid on measures of governance. I won't discuss all of their empirical approaches but they do some cross-sectional and some panel analyses examining the effect of aid on measures of democracy, the number of veto players over political decisions, the level of executive constraints, a political terror scale, and a measure of judicial independence. Their data runs from 1983-2010. They tend to find small positive effects of aid on political institutions.
Should you believe either of these results?
The authors did their best and it's an improvement on the work that came before it, but because we have nothing like a clean experiment there is a lot of room for skepticism. However, any skepticism one has of these sort of results should also be applied to the claims of Deaton, which rely on no systematic analysis at all. I've been pretty disheartened to see people like Larry Temkin or Martha Nussbaum defer to Deaton on this when his analysis rests on the kind of loose hunches that I had as an undergrad. The hunches are reasonable, but we also should temper our hunches with at least a passing glance at empirical evidence.
I think the main takeaway here is that while the evidence that we have isn't very good (because the question is so hard to study), what evidence we do have suggests that aid in general likely does not systematically help or hinder governance in recipient countries (or that the effects are too small for us to reliably pick them up, in which case they probably don't matter much).
Yes, I know this isn't some novel insight.
In part, the answer is ridiculous p-hacking.
I've obviously only covered a small amount of the research on this question, but this post is informed by my reading of most of it. If you want a nice recent paper on this question that also provides a good entry point to the recent literature, see "Foreign aid, oil revenues, and political accountability: Evidence from six experiments in Ghana and Uganda."