Rethinking Foreign Aid for Fragile States

Abstract

Many fragile states experienced conflict and its adverse impact on poverty and development at the end of the Cold War in the late 1980s. The conflict-trap on development and global security concern spawned empirical research on how policies should be distinctive in the conflict-affected and post-conflict recovery to avoid the recurrence of conflicts. The literature on aid effectiveness in fragile states is relatively limited in comparison to a much larger body of literature on aid effectiveness for all aid recipients. In this paper, we apply cluster analysis and robust regression to a set of OECD-DAC-designated fragile states to explore the effect of aid on development, measured by income, per capita income and by the UN Human Development Index, taking into account the interaction of weak institutional factors, and low absorptive capacity of aid associating with state fragility. The empirical results suggest positive relationship between aid and indicators of development, such as income and human development index.