Since the end of the World War II foreign aid has been at the center of development politics. Foreign aid has been promoted as one of the main tools for eradicating global poverty, but its effectiveness has been contested. Over the last decades researcher have debated whether aid is good for economic growth, has no effect, or whether it is in fact hindering economic development (Radelet 2006). However, some agreement has formed between researchers on foreign aid in that aid works under specific conditions (see e.g. Burnside and Dollar 2000, Collier and Dollar 2002}. Thus, for now, what is most pressing, is to find the conditions for when aid has the most effect. Mostly, the research on the conditions for aid's effectiveness has been directed at economic policies of the country, not its political institutions. Despite the fact that increasing amounts of aid are being tied to demands for democratization and political reforms, there has been relatively few studies that examine the impact of aid in democratic regimes in comparison with autocratic regimes; especially in relation to its effect on poverty levels.
My main hypothesis is that foreign aid will be more effective in reducing poverty in democratic regimes than in autocratic regimes. I base this argument on political and economic theory, and test it through the use of both statistical techniques and qualitative analysis; more specifically a Time-Series Cross-Section (TSCS) analysis and a case study of a Norwegian aid project in Tanzania. The causal effect of democracy on aid effectiveness is examined through the use of statistical tools, while the potential causal mechanisms behind such an effect is studied through the use of process tracing in the case study. The quantitative data is made up of 155 countries in the period from 1960-2011, consisting of all the countries in the world that have received foreign aid at least once in this period. In the case study, I look closer at a Norwegian development project, namely the subsea cable from Tanga on the mainland of Tanzania to one of the islands of Zanzibar; Pemba, to highlight the mechanisms of aid allocation in a democracy.
The findings of this thesis indicate that aid becomes more effective in alleviating poverty at higher levels of democracy. However, it is clear that there are several processes and mechanisms that work in parallel, and there are some uncertainties tied to the importance of the democratic mechanisms highlighted in this thesis. The results of the statistical analysis reflects this, turning out non-robust and relatively low point estimates of a democratic effect. However, the case study highlights the potential importance of contested elections, as well as a minimum level of political rights and civil liberties for the effective allocation and distribution of aid.