Foreign Aid and Development: The Civil Conflict Channel Reexamined

Abstract

ABSTRACTLiterature on civil conflict effect of foreign aid provides contradictory findings. Some studies find a conflict-reducing effect of aid while for others aid sparks violent conflicts. Another strand of the literature reports the lack of any systematic and robust link between aid and conflict. The aim of this paper is to look beyond this debate on the effect of the volume of aid by investigating whether the volatility of aid could have any independent explanatory power in this empirical literature. Using a logit model of conflict onset on a panel of 130 developing countries from 1974 to 2005, I find that aid per se could have negative, positive or no-effect on conflict outbreak while the volatility of aid positively affects the risk of conflict. This latter result has proven to be robust to some extensions of the econometric model. Therefore, the volatility of aid is an important variable in the determination of aid’s impact on the risk of civil conflict. Consequently, analyses of development effects of aid must consider not only aid per se but also the dynamic behavior of this variable; particularly its volatility.