Armed conflict, terrorism, and the allocation of foreign aid

Abstract

Armed conflict and terrorism damage economic development through disruption of economic activity, trade, and the destruction of human and physical resources. They also can affect foreign aid allocation, but the likely net effect of this is not obvious. On the one hand, donors may be discouraged and reduce aid. On the other hand, donors may provide more aid, for instance as a reimbursement for counter-terrorism efforts that benefit the donor country. This article aims to identify the net effect using data for a panel of countries. It finds that armed conflict does have a large and negative effect on bilateral and multilateral aid, but that bilateral donors seem to turn a blind eye to violence occurring in oil-exporting countries. Further, the article finds that while transnational terrorism tends to increase bilateral aid, bilateral donors seem indifferent to domestic terrorism. In contrast, multilateral aid is found not to react to transnational terrorism, but does react to domestic terrorism.