The Effect of Foreign Aid on Corruption in Africa and Asia

Abstract

Foreign aid is often given to less developed countries to transfer resources with the hope to bring benefits and improvements to the receiving society. However, various forms of corruption often hinders aid effectiveness. This study visits the notion of whether foreign aid causes corruption levels to escalate or decrease, using a random effect panel regression model. For the purpose of this research, the world’s most corrupt countries have been divided into two regions: Africa (21 countries) and Asia (14 countries), and data from 1999 to 2016 is collected from World Bank and Transparency International. Other control variables used for this study include GDP per capita, income inequality, political stability, and trade openness. Evidence from panel analysis suggests foreign aid leads to more corruption in both these regions, by increasing the scope of rent seeking behavior. It is expected that results from this research will provide assistance in formulating an effective policy framework to tackle corruption in aid receiving economies.