Terrorism, Armed Conflict and Foreign Aid

Armed conflict, and to a lesser extent terrorism, have detrimental effect on economic and social development through destruction of human and physical capital and ensuing disruption to economic activity. There is also likely to be an indirect effect of political instability through its impact on foreign aid. The net effect is not obvious; violence may discourage aid donors and hence lead to a fall in received aid on the one hand, but it may well lead to an increase in foreign aid as donors offer reimbursement for counterterrorism efforts on the other hand. This paper uses a panel of countries to identify the net effect of armed conflict and terrorism, both domestic and international, on aid receipts. It shows that armed conflict has a negative effect on the amounts of both bilateral and multilateral aid. It also finds that terrorism tends to increase foreign assistance. The effect is stronger for bilateral aid; this is consistent with the expectation that they are likely to use foreign aid to directly or indirectly assist governments fighting terrorism. Nonetheless, these results do not hold for Muslim countries which do not receive increased aid when suffering from terrorism.