Does Aid Work in Conflict? An Empirical Analysis of Pakistan

The effectiveness of aid, among many factors, depends upon the prevailing law and order situation in the recipient economy. Despite receiving relatively large aid inflows, the economy of Pakistan has not performed well and aid effectiveness is often subject to debate. This study has analyzed the role of conflict in explaining economic growth process and aid effectiveness in case of Pakistan, I have constructed conflict index to gauge the role of conflict in Pakistan economy. By using Generalized Method of Moments (GMM) technique and fully modified OLS, the results establish negative association between aid and economic growth in Pakistan. Moreover, through construction of aid-conflict interactive term, it has been established that aid provision in presence of conflict remains ineffectual. Furthermore, results have highlighted that aid made its way to finance arms imports in Pakistan to fight terrorism. This study suggests that Pakistan cannot avail gains from aid without elimination of conflict.