For rich, foreign aid is a tool of persuasion

US aid to Pakistan, cut off in 1998 when Pakistan exploded an atomic bomb, was renewed when the country became a US ally in the fight against terrorism and Al Qaeda. In the case of North Korea, the US and South Korea are struggling with a predicament: Should they provide food aid to help ward off hunger in the North on a humanitarian basis or hold up help to engage or punish Pyongyang for its pursuit of nuclear weapons?

Other political factors affect aid levels. The Alesina-Dollar paper finds that "friends" of the US or Japan that vote "correctly" at the UN have been rewarded substantially with extra foreign aid. An alternative but less favored explanation is that donors simply "buy" political support in the UN from developing countries, the authors note.

Another factor influencing aid is colonial status. A nondemocratic former colony gets about twice as much aid from its former colonizer as a democratic noncolony nation; former colonies closed to trade get more than open noncolonies. This is especially true of French aid.

The report found that Nordic countries do better in responding to the "correct" incentives for aid, namely low income levels, good governmental institutions, and openness to trade and foreign investment.

In general, though, the pattern of giving foreign aid across developing nations "provides evidence as to why [aid] is not more effective at promoting growth and poverty reduction," it says.

In the case of Israel, a key question today is whether President Bush will use foreign aid as leverage in seeking peace in the Middle East. "To what extent will the administration try to tie it to implementation of the road map?" asks Scott Lasensky, an analyst at the Council on Foreign Relations in New York. "He will have an opportunity to do so."

Israel may be specially vulnerable to economic pressure today. The costs of the intifada and suicide bombers - hitting tourism, shrinking the supply of relatively cheap Palestinian labor, keeping military reservists from their civilian jobs - have pushed Israel's economy into recession. Unemployment exceeds 10 percent.

The new $1 billion in military assistance became Israel's 30 days after Mr. Bush signed the supplemental bill. Because Israel can spend $263 million of that sum on purchases from its own defense firms, the aid amounts to support of Israel's defense industry.

But the $9 billion in loan guarantees - spread over three years - has conditions attached. These, in theory, could be used to pressure Israel to make concessions. One condition allows Bush to reduce the size of the loan guarantee by the amount Israel's government spends expanding settlements in the West Bank or Gaza.

"The president has an authority to stop the loan guarantee if we do not comply," notes Boaz Raday, economic minister of the Israeli Embassy in Washington.

If Bush uses the road map and economic leverage to win a settlement of the Israeli-Palestinian conflict, he will go down in history as a peacemaker. But with reelection looming, one source says he does not expect Bush to stick to a tough stand for long.

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