Armed Conflict, Terrorism, and the Allocation of Foreign Aid

Armed conflict and terrorism have damaging impacts on economic development through disruption of economic activity and trade and the destruction of resources, both human and capital. They can also have another indirect effect through their impact on aid, but the likely net effect is not obvious. The impact on the economy and polity may well discourage aid donors and lead to a reduction in aid. On the other hand donors may provide aid as a reimbursement for counter-terrorist efforts that benefit the donor country. This paper tries to identify the net effect using a panel of countries. It finds that armed conflict does have a large and negative effect on both multilateral and bilateral aid, but that bilateral donors also seem to turn a blind eye to violence in oil exporting countries. It also finds that while international terrorism tends to increase bilateral aid, bilateral donors seem indifferent to domestic terrorism. In contrast, multilateral aid is found not to react to international terrorism, but does react to its domestic terrorism.