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Can Foreign Aid Create an Incentive for Good Governance? Evidence from the Millennium Challenge Corporation

Author

Listed:
  • Tristan Zajonc
  • Doug Johnson

Abstract

The Millennium Challenge Corporation (MCC) awards aid to countries that perform well on a set of independently compiled governance indicators. Proponents of this new form of aid argue that 1) aid will be more effective when given to well-governed countries and 2) countries will respond to such rewards by pursuing sound policies. This paper is the first systematic attempt to evaluate the second hypothesis. By exploiting discontinuities in the MCC rules and reform patterns before and after the MCC was created, we are able to estimate the MCC incentive effect. Even though the MCC is still in its infancy, we find substantial evidence that countries respond to MCC incentives by improving their indicators. Controlling for general time trends, potential recipients of MCC funds improve 25 percent more indicators after the MCC was created than before it. While still too early to make a final assessment, a range of specifications yield similar results. We do not find any corresponding increase in growth rates.

Suggested Citation

  • Tristan Zajonc & Doug Johnson, 2006. "Can Foreign Aid Create an Incentive for Good Governance? Evidence from the Millennium Challenge Corporation," CID Working Papers 11, Center for International Development at Harvard University.
    • Handle: RePEc:cid:wpfacu:11
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    Cited by:

    1. Nunnenkamp, Peter & Öhler, Hannes, 2011. "Throwing Foreign Aid at HIV/AIDS in Developing Countries: Missing the Target?," World Development, Elsevier, vol. 39(10), pages 1704-1723.
    2. Öhler, Hannes & Nunnenkamp, Peter & Dreher, Axel, 2012. "Does conditionality work? A test for an innovative US aid scheme," European Economic Review, Elsevier, vol. 56(1), pages 138-153.
    3. repec:got:cegedp:99 is not listed on IDEAS
    4. David Fielding, 2014. "The Dynamics of Aid and Political Rights," The World Economy, Wiley Blackwell, vol. 37(9), pages 1197-1218, September.
    5. Charles Kenny, 2008. "What is effective aid? How would donors allocate it?," The European Journal of Development Research, Taylor and Francis Journals, vol. 20(2), pages 330-346.
    6. Dreher, Axel & Nunnenkamp, Peter & Öhler, Hannes, 2012. "Why it pays for aid recipients to take note of the Millennium Challenge Corporation: Other donors do!," Economics Letters, Elsevier, vol. 115(3), pages 373-375.
    7. Maike Sippel & Karsten Neuhoff, 2009. "A history of conditionality: lessons for international cooperation on climate policy," Climate Policy, Taylor & Francis Journals, vol. 9(5), pages 481-494, September.
    8. Rachel M. Gisselquist & Miguel Niño-Zarazúa & Melissa Samarin, 2021. "Does aid support democracy?: A systematic review of the literature," WIDER Working Paper Series wp-2021-14, World Institute for Development Economic Research (UNU-WIDER).
    9. Eunmi Lee & Kwangho Jung & Jinbae Sul, 2019. "Searching for the Various Effects of Subprograms in Official Development Assistance on Human Development across 15 Asian Countries: Panel Regression and Fuzzy Set Approaches," Sustainability, MDPI, vol. 11(4), pages 1-21, February.
    10. repec:got:cegedp:111 is not listed on IDEAS

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    More about this item

    Keywords

    aid effectiveness; MCC effect; performance-based aid; Millennium Challenge Corporation; Millennium Challenge Account;
    All these keywords.

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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