Modeling the Gravity of Foreign Aid: A Dyadic Panel Analysis on the Impact of Bilateral Aid Commitments on Bilateral Immigration from 1994 to 2011

While research shows policymakers increase bilateral foreign aid commitments in response to an increase in bilateral immigration, supposedly as a means for reducing the demand for immigration, the effectiveness of this strategy is given only passing consideration in the literature. Many doubt this approach\u27s success, but little effort has been made to empirically justify this doubt. This paper attempts to fill this gap in the literature and proposes a novel hypothesis. It is argued here that aid, more than simply failing to promote development quickly enough to reduce the demand for immigration, functions as a signal of donor wealth. When donors increase the amount of aid they commit to a given migrant sending country, residents in said country interpret that increase in aid as an indication of greater economic opportunity in the donor, thereby influencing would-be migrants\u27 perceptions of the balance of wealth and resources between donor and recipient, tilting the cost-benefit ratio associated with leaving versus staying in favor of leaving. Using a dyadic panel dataset for 18 donor countries and 130 aid recipient countries from 1994 to 2011, a gravity-type equation is estimated using both ordinary least squares and Tobit. The results support this hypothesis, but a number of caveats are considered. Aid\u27s positive pull on immigration does not appear to be contingent on past colonial ties, common language, and the aid recipient\u27s political regime. Furthermore, aid\u27s effect does not appear to be contingent on either bilateral distance or the restrictiveness of the donor\u27s immigration policies; however, its marginal effect does seem to slightly diminish in response to an increase in each. Further analysis reveals a potentially curvilinear relationship between aid and immigration. Implications for policymakers and future research are discussed