Foreign Aid, Democracy, and the Credibility of Aid Conditionality

Why might one expect the causal relationship between foreign aid and regime type to diverge in the Cold War and post–Cold War periods? The essence of the difficulty of using aid to promote democracy may lie not so much in an informational asymmetry between donors and aid recipients, as the “moral hazard” argument made by many prominent critics of aid would suggest,⁸

but rather in the lack of credibility of donors' commitment to reform. When two opposing and competing donors (or groups of donors) such as the Soviet Union and the West vie for influence and clients, aid-receiving countries enjoy greater leverage vis-à-vis their foreign patrons. To the extent that donors actually prefer to promote democracy among recipient countries, threats to make aid conditional on the fulfillment of democratic reforms may not be credible, because withholding aid from autocratic countries could mean losing clients to the other Cold War power. In other words, the geostrategic cost of losing clients may override any perceived benefit from successfully promoting democratic reforms among recipient countries. Recognizing the resulting incredibility of any threat to condition foreign aid on the adoption of democratizing reforms, the leaders of recipient countries may be unwilling to make the changes that donors demand. Donors, who trade off the costs of a lack of democratic reform against the benefits of retaining strategic African clients, may nonetheless provide aid to autocratic leaders. One should thus expect no observed association between aid and democracy in this period.

The end of the Cold War could make threats to withhold development assistance to African states more credible, and therefore more effective, in two ways. First, the diminished geostrategic importance of African clients in the post–Cold War period would imply that the loss of such clients would impose a negligible geopolitical cost on powerful donors. Second, the dissolution of the Soviet Union may not only have removed a geopolitical threat to the West but may have vindicated the liberal values of Western donors, lending them a sense of the possibility of democratization all over the world. Thus the perceived benefit of promoting democracy in Sub-Saharan Africa rose even as the cost of losing African clients declined dramatically. African leaders lost significant leverage with which to resist aid conditionality, because only one donor (or group of donors) offered aid to them in the post–Cold War period. No longer able to take refuge in balance-of-power politics, recalcitrant African states could be more effectively pressed to undertake the democratizing reforms that Western donors had de-emphasized during the Cold War. Proponents and opponents of the “perversity thesis” of foreign aid alike provide no reason to expect the influence of the putative “moral hazard” to increase or decrease over time. In contrast, the clear prediction of the credible commitment story is that aid conditionality should become more effective in the post–Cold War period. One should therefore expect a positive relationship between aid and democracy in the post–Cold War period.

This causal mechanism and its empirical prediction are supported by the qualitative evidence offered by previous studies of democratic reform in Sub-Saharan Africa. For example, Claude Ake has described a “legacy of indifference” to democracy among Africa's political leaders, a legacy rooted in both the continent's colonial past and the attitudes of many African politicians after independence.⁹

Faced with challenges to their newfound political power, postindependence elites opted for a unifying developmental ideology that sought to repress internal dissent. Importantly, however, this ideology found obliging complicity from Western countries that were most concerned with the grand strategies of Cold War politics. Rather than press for democratization, Ake argues that Western powers “ignored human rights violations and sought clients wherever they could.”¹⁰ This was as true for the Soviet Union as for the Western powers. At a time when Western donors overlooked their liberal principles and the Soviet Union put priority on the advancement of socialist and revolutionary vanguard parties, there was little external incentive for African states to undertake democratizing reforms.

Consistent with my claim that threats to withhold aid became more credible as the importance of retaining African clients diminished, however, Ake points to the significance of Africa's greatly diminished strategic importance for the adoption of democratic reforms in the post–Cold War period:

The failure to tie aid to democratic reforms during the Cold War period, therefore, stemmed from the geostrategic priorities of donors. On a more fundamental level, however, the greater “latitude” of the West to demand democratic reforms in the post–Cold War period may have its source in the credible commitment issue. Once competition with the Soviet Union for African clients had receded, Western donors could much more credibly threaten to withdraw aid if democratic reforms were not enacted by recipient states.

If the argument advanced above is correct, one should expect to see the relationship of aid to regime type in Sub-Saharan Africa to be characterized by temporal discontinuity. Previous quantitative studies of the relationship between foreign aid and democracy have failed to take this source of heterogeneity into account, instead assuming that parameter coefficients are constant over the two periods. In the following section, I provide empirical evidence in support of the alternate hypothesis that a structural shift in the effect of aid on democracy occurred with the end of the Cold War.

The Empirical Evidence: Effects of the Cold War on Aid and Democracy

In an important recent analysis of the impact of foreign aid on regime type in sub-Saharan Africa, Goldsmith presents statistical evidence that the principled intentions of foreign donors have, on average, been a “minor net plus” for the cause of democracy in sub-Saharan Africa.¹²

Goldsmith regresses Freedom House “Index of Political Freedom” scores on the ratio of ODA¹³ to gross national product (GNP) for forty-eight sub-Saharan African countries between 1975 and 1997 and reports positive and statistically significant estimates for contemporaneous and lagged values of the oda/gnp variable.¹⁴ Accordingly, he concludes that there is “little evidence to support the claim that foreign aid has made governing … worse, as the perversity thesis would have it.”¹⁵ I replicate Goldsmith's results in Table 1.

If the theoretical argument suggested in the previous section is correct, however, the positive effect of ODA on the Freedom House scores should be limited to the post–Cold War period. A look at some descriptive statistics in Table 2 suggests interesting contrasts between the periods from 1975–86 and 1987–97. Because this periodization of the data plays an important role in the multivariate analysis that follows, a few words of explanation of the break between 1986 and 1987 in Table 2 are in order. My goal was to divide the sample into Cold War and post–Cold War periods, so 1986–87 might seem like a less natural dividing point for the data than, say, 1991, the year of the dissolution of the Soviet Union. However, in the context of Cold War battles for clients in Africa, the latter date is misleading. Heavy Soviet engagement in Africa had already waned by the mid-1980s, with the emergence of a “new thinking” in Soviet foreign policy associated with Mikhail Gorbachev, Eduard Shevardnadze, and others, and the Soviet elite had distanced itself from Leonid Brezhnev's foreign policy doctrines. This elite no longer proclaimed, as it once did, the existence of what George Breslauer has termed “an irreconcilable struggle between imperialism and socialism for the allegiance of Third World peoples.”¹⁶

More importantly, by 1986, the period of extensive (and expensive) military support for radical regimes in Angola, Ethiopia, and elsewhere in sub-Saharan Africa during the 1970s had come to an end.¹⁷ Although it is true, as Ake notes, that the United States seemed to have more latitude to shift its foreign policy goals to a vigorously prodemocracy agenda beginning only in the early 1990s,¹⁸ the effective Soviet withdrawal from sub-Saharan Africa certainly affected Western policy priorities in the region.

Table 2 reports mean values of Freedom House scores and the ratio of ODA to GNP for each country case during each of the periods. The general trend does not contradict the assertion of a linear relationship between Freedom House scores and ODA. In the earlier period, Freedom House scores for all cases ranged around an overall mean of 2.4 on a scale of 1 to 7 (the data was recoded from the normal Freedom House index so that higher scores indicate greater political and civil rights), while in the later period the overall mean has increased significantly, from 2.4 to 3.0. As for the relationship of ODA to GNP (which is expressed in Table 2 as a percentage rather than a ratio), between 1975 and 1986, the cases fluctuated around an overall mean of 13.1, while in the later period between 1987 and 1997, the cases varied around the mean of 19.8. This aggregate impression may, however, mask distinct trends among subgroups of cases. In the first period, the countries that received the lowest scores on the Freedom House variable included the socialist-oriented states allied during the Cold War with the Soviet Union, in particular Ethiopia, Mozambique, and Tanzania. In the later period, however, the increase of the ODA/GNP ratio in countries that had received little or no ODA (that is, aid from the rich, largely Western members of the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD) during the earlier period is striking. Note for example the case of Tanzania, where ODA went from zero to 22 percent of GNP, or Mozambique, where it went from 11 to 78 percent.¹⁹

These descriptive statistics, along with the theoretical argument advanced in the previous section, suggest that the positive, statistically significant effect of foreign aid on democratization that Goldsmith finds may be highly period-dependent. In his analysis, Goldsmith notes that since 1989 “eighteen African countries (have) moved up at least one category in the Freedom House ratings.”²⁰

He suggests in passing the possibility that “aid is allocated primarily on geopolitical grounds, and not as a result of rational humanitarian planning.”²¹ He even mentions that while the U.S. Agency for International Development (USAID) has formally limited its assistance to countries that protect human rights and civil liberties since 1975, “during the Cold War national security considerations often overrode this rule.”²² Yet the statistical analysis does not attempt to take these historical and geopolitical factors into account, nor do the regressions control for period-dependent factors.

Aid, therefore, may have a positive impact on democracy only in the later period. To test the argument, in Table 3, I again ran the regression described in Table 1, dividing the sample observations into the two periods presented in Table 2. Moreover, I added to the earlier model a dichotomous dummy variable measuring whether a country was a client state of the Soviet Union during the Cold War.²³

The proxy for this relationship is whether the Soviet Union considered a sub-Saharan African state a “revolutionary democracy” or “socialist-oriented” during the 1970s and 1980s, a category that includes thirteen states.²⁴ The goal of adding the soviet client dummy variable to the model specification is twofold. First, because I am interested in the effect of ODA on democracy, the dummy variable makes the specification a kind of pseudo-fixed effects model in which the soviet client variable picks up group-specific factors that may affect the countries that were socialist during the Cold War and that may be correlated with the included independent variables. Secondly, however, it is important to bear in mind that the source of foreign aid considered here is exclusively Western, because the data come from the Development Assistance Committee of the OECD.²⁵ The group-specific intercept on the soviet client dummy variable can then be interpreted as a kind of proxy for the unmeasured influence of Soviet rather than Western aid, at least during the Cold War period.²⁶

Between 1975 and 1986, no statistically significant effect of ODA on the dependent variable emerges for any of the three models. By contrast, the coefficient on ODA in the 1987–97 period is positive and statistically significant at the .001 level in each of the three models. A Chow test for structural change strongly rejects the null hypothesis that coefficients are equal in the two periods. Furthermore, the results are robust to a variety of departures from ordinary least square (OLS) assumptions about the error term.²⁷

What inferences can one draw from these results? First, they lend support to the hypothesis that the impact of aid on regime type varies between the Cold War and post–Cold War periods. The strong association between the ODA variable and Freedom House scores around the beginning of the 1990s is apparently driving the statistically significant, positive impact of ODA on democracy that was reported in Table 1 for the entire period from 1975–97. For purposes of this article, the most important point is that ODA stemming from Western countries and certain Arab countries fails to have a statistically significant impact on political freedoms in sub-Saharan Africa from 1975 to 1986. The positive and statistically significant association of the same variables between 1987 and 1997 suggests that the time period clearly matters.

Second, the sign of the coefficients on the soviet client dummy variable are notable. In the earlier period, the estimates for this variable are negative and statistically significant in all three of the models, while in the later period they are statistically significant and positively signed. The negative sign in the earlier period may suggest the importance of the unmeasured Soviet aid to such states and certainly is consistent with the theoretical argument I have made above. Just as interesting, however, is the finding that having been a Soviet client state during the Cold War was statistically significantly and positively associated with democratization in the post–Cold War period. This is consistent with the argument that the end of the Cold War precipitated a particularly marked shift among formerly Soviet client states and suggests that previous cross-sectional time-series studies of the impact of aid on democracy in Africa have failed to account for this source of heterogeneity in sample periods.

The evidence in Table 3, therefore, supports the claim that the ability of Western lenders to condition aid on the adoption of reforms increased with the demise of the Soviet Union. Previous studies have also noted that the end of the Cold War provided an incentive for international donors to move more vigorously to sanction antidemocratic practices than they had during the Cold War. As Bratton and Van de Walle explained in their definitive study of regime transitions in contemporary Africa, “In the post–Cold War world, Western diplomacy is generally intolerant of military intervention in new democracies. Thus, the 1993 coup in Burundi was greeted by the suspension of most foreign aid, as was the decision by the Nigerian military to annul the 1993 elections won by Moshood Abiola.”²⁸

It is certainly the case that some threats to apply sanctions have not been followed through in the post–Cold War period and that there have been important inconsistencies of application. A complex mix of “carrots” and “sticks” has been applied, as in the case of Daniel Arap Moi's Kenya,²⁹ and some undemocratic practices have gone unsanctioned, to the chagrin of many critics of international donor organizations. Nonetheless, Goldsmith's assertion that aid may be a “minor net plus”³⁰ for democracy may be right—in the post–Cold War period alone.

The results are also consistent with country-level claims that the demise of the Soviet Union produced a particularly dramatic shift among formerly Marxist-Leninist countries. For example, Bratton and Van de Walle observe that “the greatest gains in political liberalization (between 1988 and 1992) were made by governments that started from a very low base of rights observance and that abandoned an ideological commitment to Marxism-Leninism (e.g., Bénin, Cape Verde, Congo, Ethiopia, Mozambique, and Angola).”³¹

A prototypical case is Bénin, which “may lay claim to the most extensive and impressive peaceful political transformation of any formerly one-party African state in the present period.”³² Nwajiaku writes that although the Marxist-Leninist years had isolated Bénin from Western aid, the collapse of the Soviet Union's external financing for African states and the entry of French donors in the 1980s gave French donors, backed by the Bretton Woods institutions (the World Bank and the International Monetary Fund), significant power to promote reforms in Bénin.³³ For example, “the limited relaxation of repressive authoritarian practices in the later 1980s and early 1990s precipitated by the loan-attached conditionalities of international donors, which required at least the show of greater ‘political transparency,’ liberty, and respect of human rights, also encouraged the growth of opposition groups. Greater political openness thus stemmed from a more pronounced need to attract external assistance in order to ‘manage’ the worsening economic crisis by permitting at least the voicing of discontent … as developments in Eastern Europe indicated that political authoritarianism was out of fashion.”³⁴ By the end of 1989, “given the country's desperate need for an inflow of funds to alleviate the increasingly tense situation, the French Ministry of Co-operation was able to lean heavily on (Benin's) Kérékou, virtually forcing him to introduce changes in order to break the economic and political deadlock.”³⁵

Some skeptics could justifiably argue that the empirical models do not completely specify the covariates of democracy in sub-Saharan Africa. The amount of variance explained (as reflected in the R-squared statistic) is fairly low for a time-series cross-section model and substantially lower during the later period than the earlier, suggesting perhaps an important role for un-modeled factors during the later period. A more complete predictive model might include a measure of dependence on natural resource endowments (which should be negatively associated with democracy according to the “resource curse” literature³⁶

), or a measure of the independent role of domestic democracy movements in a number of countries. However, such un-modeled factors are quite plausibly uncorrelated with the included independent variables, reducing the chances of specification bias.³⁷ In any case, the goal of the empirical testing in this research note has not been to provide a complete predictive model of democracy in sub-Saharan Africa but rather to ask whether the structural impact of aid on regime type varies systematically with time period. Here, the answer of the model is clearly affirmative.