Chapter 2 Poverty, Utilization of Foreign Aid and Corruption: The Role of Redistributive Politics

This paper looks at the role of redistributive politics and corruption in the utilization of foreign aid. We find that the governments in relatively poor countries have incentive to adopt ‘bad policies’ which do not improve the growth rate of the economy. On the other hand, the governments in relatively rich countries have more incentive to misappropriate the money increasing the corruption level of the economy, although they may pursue growth-enhancing policies. Therefore, it hints towards the existence of a positive correlation between the ‘good policies’ adopted in utilization of the aid money and the level of corruption in the recipient countries. The paper also finds that more aid-flow to the poorer (richer) countries increase (decrease) their levels of corruption.