The Effects of Post-Conflict Aid on Economic Development

Abstract

The purpose of this thesis is to provide an empirical analysis of the effects of foreign aid on foreign direct investment and the labour market in conflict-affected countries, as well as providing an analysis of war victims’ (i.e. war wounded and war widows) attitudes towards the peace building process through a case study of post-conflict Sierra Leone. In particular, the focus is on three main areas: First, to examine the relationship between disaggregated aid and foreign direct investment in conflict-affected countries using panel regression analysis and instrumental variable techniques, as well as examining the long-run relationship between multilateral aid (disbursed) and foreign direct investment using the error correction panel co-integration approach of Persyn and Westerlund (2008). Second, to examine the relationship between disaggregated aid and the labour market, as well as demographic components of the latter (females and youths) in conflict-affected economies using fixed and random effects models and reverse causality, as well as investigating the long-run relationship between foreign aid and employment rates in these economies by employing the aforementioned error correction panel co-integration approach. Third, to provide an analysis of war victims’ (war wounded and war widows) attitudes towards the peace building process in post-conflict Sierra Leone using ordered probit approach.

In most post-conflict societies, foreign aid, foreign direct investment and the labour market are crucial factors. In particular, they can play a significant role in the accumulation of human and physical capital aimed at the enhancement of economic growth and development of these economies. Furthermore, an understanding of war victims’ attitudes towards peace can be imperative for mitigating the potential risk for conflict reoccurrence and thus ensuring sustainable peace building and development. The first chapter introduces the background and motivation of the study. It also highlights the aims and objectives of the study and briefly discusses the advantages of the methods employed, the contributions to literature, and a brief summary of the estimated results, as well as the structure of the thesis.

The second chapter discusses the theoretical framework, in particular, the theoretical relationship between foreign aid and growth, foreign aid and foreign direct investment, and foreign aid and the labour market are examined. The chapter also contains a detailed review of the extant empirical evidence regarding links between foreign aid and the itemised macroeconomic variables, as well as identifying the gaps in the literature. The third chapter provides concepts and definitions relating to post-conflict economies, whilst the fourth to the sixth chapters provide three empirical analyses, which address the identified gaps in the literature.

More specifically, chapter four examines the effect of foreign (disaggregated) aid on foreign direct investment in conflict-affected countries. The empirical estimation approach in this chapter entails a panel regression analysis (fixed effects and random effects) and instrumental variable techniques. The chapter also explores the long-run relationship between multilateral (disbursed) aid and foreign direct investment using the error correction panel co-integration approach of Persyn and Westerlund (2008), which accounts for cross-sectional dependence. The results show that multilateral aid and foreign direct investment have a long-run relationship in these economies. The results also suggest a positive and significant relationship between physical capital aid and foreign direct investment in conflict-affected economies and thus, provide an indication that physical capital aid has a ‘crowding-in’ effect on foreign direct investment. Moreover, the effect of physical capital aid and complementary aid is found to be positively associated with foreign direct investment and primary commodity exports emerge as being likewise, in these economies. However, conflict is found to be negatively associated with foreign direct investment in the focal countries, which is robust across all specifications and estimators.

The fifth chapter examines the relationship between disbursed (disaggregated) aid and the labour market, as well as certain demographic components of this market (i.e. females and youths) in conflict-affected economies. Further to using panel regression analysis (fixed effects and random effects models) to examine the above relationship, the analysis in this chapter also employs the error correction panel co-integration approach of Persyn and Westerlund (2008) to examine the long-run relationship between foreign aid and the employment rate. The results show that there is weak evidence of a co-integrating equilibrium relationship between these two variables in these economies. Furthermore, to account for the possibility that the impact of the explanatory variables on the labour market may take some time, lag values are used in the model, which also helps to resolve problems of simultaneity. The results indicate that a unit change in the previous value of the inflow of foreign direct investment is positively associated with labour force participation among the total working-age population and the magnitude of the effect is large relative to that for the random effects. Tertiary school enrolment is found to be positively associated with labour force participation among the total working-age population in these economies. The estimates also show that conflict has a negative and significant relationship with labour force participation and employment rates among the young working-age group, as well as the female labour force participation rate. In the case of disbursed aid (disaggregated), the results reveal that technical aid has a positive and significant relationship with labour force participation and employment among the young working-age population. Multilateral aid is also found to have a positive relationship with employment among young working age group. As mentioned, it is apparent from these results that the impacts of the explanatory variables do take some time to happen in these economies. Based on the reverse causality approach, there is no evidence of this running from overall labour force participation to total aid, multilateral aid, bilateral aid or technical aid. In addition, there is no evidence of reverse causality running from the employment rate to these aid variables.

The sixth chapter examines war victims’ (i.e. war wounded and war widows) attitudes towards the peace process in post-conflict Sierra Leone using the ordered probit approach of Torgler (2003), Torgler et al. (2004, 2007), and Alm et al. (2005, 2006) and linear probability model. The results, which confirm the hypothesis that women have more positive attitudes towards the peace process relative to men among war victims in Sierra Leone is consistent across all specifications and accord with previous studies. The estimates reveal some negativity amongst relatively younger women, but that positive attitudes tend to predominate amongst those people aged 46 and above. Moreover, participation in the truth and reconciliation commission is found to be positively associated with attitudes towards how to achieve peace among war victims. Furthermore, among war victims being unemployed is found to be negatively associated with attitudes towards the peace process relative to those employed, a finding that is consistent across specifications. Finally, the provision of foreign aid is also found to be positively associated with attitudes towards the peace process among war victims in Sierra Leone.

Details of the main contributions are presented in chapter one, chapters four to six, as well as in the concluding chapter seven, which also contains a summary of the key findings and policy recommendations, as well as suggestions for further research.

Date of Award	24 Jun 2015
Original language	English
Awarding Institution	University of Bath
Supervisor	John Sessions (Supervisor), John Hudson (Supervisor) & Horst Feldmann (Supervisor)