Institutional Quality, Conflict and Aid Dependency

This study attempts to explore the impact of foreign aid on the quality of governance and how conflicts, whether internal or external affect the overall situation. Conflicts affect governance directly by creating instability which adversely affects economic development as investment climate is fouled and output drops leading to fall in revenues. In this vicious cycle governance is left with no funds to improve institutional quality. Annual data from 1984 to 2010 have been used for the Asian developing economies. The results indicate a negative impact from the confluence of foreign aid in a climate of conflicts that leads to institutional deterioration. These results are robust for various alternative specifications.