Institutional Quality, Conflict and Aid Dependency

This study attempts to explore the impact of foreign aid on the quality of governance while also taking into consideration the role of both internal and external conflict. Conflict does affect the governance directly by inducing instability and volatility in the economy, this precariousness gives rise to inauspicious climate that puts off the investment. Low level of investment and output will in turn decrease the required tax revenues or the available funds that can be used to improve the quality of governance. Conflict and foreign aid jointly determine the state of an economy and have a great impact on the institutional quality. Annual data from 1984 to 2010 have been used for the Asian developing economies, the results indicate that aid as well as both external or internal conflict have negative impact on the institutional quality and these results are robust for various alternative specifications.