Recent literature has proliferated with studies examining the relationship between aid and governance but has provided little agreement on the impact of aid flows on recipient country institutional quality and effectiveness. This lack of consensus is largely due to the fact that the relationship is both theoretically and empirically ambiguous. There is certainly reason to suspect that aid could engender a negative effect on governance by facilitating cronyism and patronage politics, fostering aid dependence and hindering public accountability through a displacement of local tax revenue capacity, and/or by focusing government capacity on donor-priorities rather than local concerns. Conversely, following evidence that foreign aid can be effective when combined with good governance, a number of bilateral and multilateral donors have made good governance a criterion of aid allocation. This conditionality both rewards current levels of good governance but also presumably provides an incentive for improving governance in order to attract future aid flows. Unsurprisingly, the empirical work on aid and governance also lacks clear conclusions with studies finding both positive and negative relationships between aid and governance. This paper adds to the debate by developing a theoretical and empirical argument to help resolve the contradictory claims. The paper suggests that the aid-governance relationship need not be linear but rather that aid may improve governance to some threshold of aid and work against governance beyond that point. This result might be akin to an aid-governance “aid dependence” wherein “too much” aid leads to counter-productive results. By including non-linear aid terms in established techniques for examining aid and governance this paper finds significant support for a non-linear relationship between aid and governance. This finding suggests that aid may improve governance, but only when provided at levels sufficiently low to avoid negative effects.
