The Curious Case of Aid and Conflict: Causal Evidence from Panel Econometrics and Composite Indices

TL;DR

This study investigates how aid inflows relate to conflict and governance in African countries, revealing a complex interplay where aid responds to both needs and institutional weaknesses, with implications for aid effectiveness.

Contribution

It combines panel econometrics with composite indices to analyze aid allocation dynamics in conflict-affected African nations, offering new insights into aid-conflict-institutions interactions.

Findings

Aid is positively linked to poverty, inflation, and fragility.

Aid correlates negatively with voice and accountability.

Aid is concentrated where conflict and institutional weaknesses are greatest.

Abstract

This paper examines the relationship between Official Development Assistance (ODA) and conflict in the ten largest aid-receiving African countries between 2009 and 2023. Using Ordinary Least Squares, Principal Component Analysis, and Ridge (L2) regression, the study assesses whether conflict, proxied by political stability, governance indicators, and macroeconomic conditions, systematically influences aid inflows. Results reveal a nuanced relationship. Pooled regressions indicate that aid is positively associated with poverty, inflation, and fragility, while voice and accountability are negatively related to ODA. Fixed-effects estimates instead show positive associations between aid, political stability, and GDP per capita over time, alongside negative correlations with perceived corruption. Ridge regression confirms the robustness of various governance variables under multicollinearity. Overall, donors appear responsive to both humanitarian need and institutional quality, producing an aid-conflict-institutions trilemma: aid is most concentrated where conflict risk and institutional weakness are greatest, yet these same conditions which constrain aid effectiveness. The paper contributes by integrating theory with panel-econometric tools to to explore international development aid allocation.