Aid, Reform, and Interest Groups

Foreign aid is often granted to encourage market-oriented reform. It is not clear that this approach to reform has been effective. We seek to understand this seeming failure of aid. We ask whether and how political markets for institutions have influenced the impact of aid allocations on reform, and we explore the extent to which the impact of aid on reform is conditional on the influence of a particular player in those markets - special interest groups. In a panel of 92 aid-receiving nations over four decade-long time periods, for several measure of reform, we find evidence that the aid-reform relation is conditional on the influence of interest groups. We find that only under relatively extreme and rare conditions has aid been positively associated with reform. Mostly, we find that aid has been associated with reform backsliding. The effects are economically meaningful in magnitude