Aid and Democratization in the Transition Economies

There is a growing consensus that aid has not improved economic growth and market institutions among developing nations (Boone 1996, Knack 2001, Collier and Hoeffler 2004, Heckelman and Knack 2008, Rajan and Subramanian 2008). Far less attention has been paid so far to the ability of aid to promote and support democratization. The effect of foreign aid on democratization is theoretically ambiguous. Many donors devote funds specifically to bolster democratic institutions (Carothers 1999). There can also be an indirect impact from aid to the extent that development aid is successful in increasing education and health (Gomanee, et al. 2003), as these factors have been shown to be correlated with greater levels of democracy (Barro 1996). However, foreign aid can also insulate elites and, by increasing the rent-seeking interests of retaining or obtaining power (Oechslin 2006), actually increase the incentives to consolidate power and limit competition and information (Grossman 1992). Perhaps reflecting these countervailing possibilities, Knack (2004) has found that in a large crosssection of nations, aid was not significantly related to democratic reforms, as captured by changes in the Freedom House index of political rights and civil liberties. In this study I investigate the effect of aid on democratization but strictly within the transition economies of Eastern Europe and former Soviet Union for two reasons.First, Imakeuseofadifferent indexofdemocracy, alsocreated by Freedom House, which allows for a more nuanced investigation of democracy by analyzing changes in several distinct components of democracy. Even if aiddoesnot affect a broad indexofdemocracy, it is still possible that aid can have an effect on specific attributes of democracy. For example, HeckelmanandKnack (2009) found thatwhile aiddoesnot significantlyaffect abroad index of economic freedoms which treats every component area of economic KYKLOS, Vol. 63 – November 2010 – No. 4, 558–579