Impact of Foreign Aid on Corruption: An Econometric Case Study of South Asia and East Asia

An interesting area of research has emerged that explores the relationship between foreign aid and corruption in developing countries. Several studies have found that corruption is festered by rent seeking activities in the recipient countries when aid-funded resources are transferred without accountability at the decision makers’ discretion. On the other hand, several studies have concluded that foreign aid helps curb corruption by improving the quality of governance. This study uses 1996-2013 annual data from 14 developing countries in South Asia and East Asia to analyze the impact of aid on corruption. Results estimated in this study suggest that foreign aid has helped lower corruption in the sample countries and the impact of multilateral aid on curbing corruption is stronger than that of bilateral aid. In addition, rule of law, political stability and accountability are found to be strong deterrents of corruption. These results improve our understanding of the aid-corruption dynamics, which is critical for designing strategies to promote long-term economic efficiency in developing countries