Selectivity on aid modality: Determinants of budget support from multilateral donors

Since the late 1990s a selection on policy approach to aid was advocated such that more aid should be allocated to countries with good policies, but there is little evidence that this has occurred. This paper argues that donors may exercise selectivity over the aid modality. Specifically, multilateral donors will cede more recipient control over aid by granting more budget support to those recipients with better expenditure systems and spending preferences (towards the poor) aligned with the donor. We test this for European Commission and World Bank budget support over 1997–2009 and find some support. Both donors have given budget support to almost half of the countries they give aid, and it is usually a significant share of their aid. The principal determinants of receiving budget support are having a poverty reduction strategy in place, which can be considered a good indicator of aligned preferences, and indicators of government efficiency. These variables did not, however, influence the amount of budget support given. Multilateral donors have been more likely to give budget support to countries with aligned spending preferences and better quality systems, even if they have not reallocated the total aid envelope in that way.