Do Donors Allocate Infrastructure Aid in Response to Recipient Needs?

Abstract

This study examines whether infrastructure aid responds to needs specific to the infrastructure sector. Since both supply and demand of infrastructure are related with growth, this study identifies needs in supply and demand. These include infrastructure quantity and quality, geographical concerns, and ethnic fractionalization at the supply side

and governance and macroeconomic stability at the demand side. Controlling for donor interests, infrastructure aid, by sector and donor, is regressed on the needs using the Tobit model.

The findings of this study show that while infrastructure aid, in general, was responsive to infrastructure quantity, ethnic fractionalization, and macroeconomic stability, it was less so in infrastructure quality, geographical considerations, and governance. When divided into specific sectors, the need responsiveness becomes substantially weaker, and aid is responsive to either none or the wrong side of needs. Analyzing differences in donors, this study supports previous research on disaggregate aid allocation that multilateral aid was not any more responsive to need, but in fact less so. Good performers with respect to need include Japan, Germany, Ireland, Korea, Luxembourg, Spain, Sweden, and the U.K., while France, Netherlands, Norway, Denmark, Greece, Italy, and Switzerland performed poorly.