Despite its uncertain effects on political violence, foreign aid is still used as a means to counter insurgency. Recent examples include the US Commander's Emergency Response Program (CERP) in Iraq and Afghanistan. This paper describes how local political dynamics can complicate the causal effect of development assistance on insurgent attacks and estimates the effect of small development projects on attacks targeting foreign donors. Dynamic panel data analysis shows that development assistance induced more attacks against the Coalition forces than reduced them. To further uncover the causal mechanism behind the relationship, I also examine three prominent explanations in the literature. The analysis reveals that the level of violence increased neither because insurgency became a more attractive option than legal economic activities (the opportunity costs explanation) nor because the insurgents tried to sabotage the development projects to pre-empt the hearts and minds effect (the pre-emption explanation). Furthermore, although the third, enrichment explanation agrees with the case, my analysis reveals that Iraqi insurgents did become stronger not only by looting, as most studies suggest. The level of violence in Iraq increased because project contractors needed to pay local leaders and insurgents to get access and buy security. While the US military buys down violence against them, discontented leaders contract violence out to third-party, most likely foreign fighters, to initiate attacks against the Coalition forces on behalf of them. In this light, future counterinsurgency efforts need to mind the ties between aid recipients and other actors, provide better security to contractors, or try to allocate aid more strategically.
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- Development aid, counterinsurgency, dynamic panel data model, Iraq