Instability from trade and democracy: the long-run effect of aid

Abstract : Is there an effect of aid on democracy conditional on instability from trade? This paper reinvestigates the debated effect of aid on democracy with a new specification. We take advantage of previous empirical findings explaining the role of aid in mitigating the adverse effects of external shocks, and argue that in the long term, aggregate aid flows can potentially dampen the effects of terms-of-trade instability on the quality of democracy. An empirical investigation with data from 70 developing countries (28 of them African countries) over the period 1980-2003 (pooled in two twelve-years periods) provides supportive results. Moreover, the data suggest that terms-of- trade instability affects democracy through income instability. These results are robust to alternative specifications and to the use of different measures of aid intensity and democracy