Affinity or effectiveness? Donors’ preferences for bypass aid

Western donors have progressively increased the amount of foreign aid allocated through bypass channels, particularly for recipients with weak domestic institutions. Rather than giving money directly to recipient governments, aid is given to non-governmental organizations working on the ground in those countries. Explanations for this shift range from increased donor attention to effectiveness, a desire to deliver assistance directly to those in need, and enhanced legitimacy by working with local civil society partners. Donors, however, face a trade-off when deciding whether or not to allocate aid through bypass channels. Because bypass aid is not given directly to the recipient government, the donor has less leverage to prop up friendly regimes or buy policy concessions. We argue that as donors balance competing motivations, geo-strategic incentives can, at times, trump concerns regarding best practices of poverty alleviation. Using data on bypass aid from 2004 to 2019, we find that donor’s commitment to good governance is ameliorated in strategically important recipient states. Strategic partners who improve their domestic governance are rewarded with less bypass aid (more government-to-government aid) at higher rates than less strategic recipients. These results highlight potential limitations of the good governance movement in foreign aid.