Tertiarization, Industrial Adjustment, and the Domestic Politics of Foreign Aid

This paper explains the varying degrees to which commercial interests or recipients’ development needs shape donor governments’ foreign aid allocation decisions. I argue that domestic interest group politics is a major driver of the heterogeneity in donors’ aid allocation policies. As proxy measures of donor governments’ dependence on the political support of industrial producer lobbies and their susceptibility to the demands of development interest groups, I exploit variation in the level of tertiarization and in the intensity of industrial restructuring processes across donor countries and over time. While higher levels of tertiarization increase donor governments’ relative responsiveness to the aid allocation demands of development interest groups, intense periods of industrial adjustment provide incentives for governments to allocate aid in line with the preferences of their industrial producer constituencies. Statistical analyses of a dyadic panel data set of 21 OECD donor and 124 developing recipient countries for the period from 1980 to 2001 support the theoretical predictions.