Foreign Aid and Insurrection

Literature › Works

Herschel I. Grossman (1992). Foreign Aid and Insurrection. Defence Economics, Vol. 3 (reprinted as IRIS Reprint No. 16, Center for Institutional Reform and the Informal Sector, University of Maryland). Harwood Academic Publishers.

Type	journal article
Scope	Comparative and methods
Method	theoretical or conceptual
Period studied	-
Regions	generic / non-specific (abstract recipient economy)
Themes	comparative theory
Citation key	grossman1992

Argument

Grossman builds a one-shot general-equilibrium game between a self-interested ruler, who maximises the expected income of a parasitic clientele, and many peasant families, who split their labour time among production, soldiering for the ruler, and joining an insurrection. Foreign aid is modelled as a gift to the ruler that enlarges the potential booty for successful insurgents. This raises the expected return to insurrection. The ruler responds by cutting taxes, possibly to the point of subsidising production, and by hiring more soldiers. Aid therefore shifts resources from production into an intensified distributive struggle, and unless insurrection is fully deterred it raises the probability of a successful insurrection. Even so, the threat of insurrection forces the selfish ruler to pass part of the aid to the general population, by an amount that depends on the 'technology of insurrection' (parameters theta and alpha). The policy lesson is that donors should judge aid by the political-economic constraints the ruler faces rather than by the ruler's motives.

Evidence and method

Purely theoretical. Kuhn-Tucker analysis of the ruler's optimisation problem, plus simulated equilibria (Tables 1-3) comparing no aid with aid sufficient to double potential income across selected parameter values. The only empirical reference is Tong (1988) on insurrections during famines in Ming China. There are no South African data.

Findings

• Foreign aid raises political instability as measured by the probability of successful insurrection. (p. 4)

  The analysis also shows how foreign aid increases political instability as measured by the probability of a successful insurrection.

• Where soldiering is less effective at deterrence, total income is lower but peasant income is higher, because the ruler must make bigger concessions. (p. 12)

  The important result is that the less effective is soldiering time in deterring insurrection the smaller is total income, but the larger is the income of the peasants.

• Repressive and conciliatory responses together do not fully offset the higher incentive to rebel created by aid. (p. 14)

  These optimal responses, however, are not sufficient to prevent an increase in time allocated to insurrection.

• The ruler's response to aid may turn taxation into subsidy of production. (p. 15)

  In fact. the ruler even could choose to subsidize production instead of taxing production.

• Aid raises peasant income but lowers the peasants' share of total income, worsening distribution. (p. 15)

  Second, foreign aid decreases the peasants' expected share of total income.

• Lost production from diversion into conflict can offset a substantial fraction of the aid. (p. 15)

  Specifically, the decrease in production would be small if 0 and a are both small, but would be in the range of fifteen to thirty percent of the amount of foreign aid if either 0 or a is large.

• The net pass-through of aid to peasant income ranges widely with insurrection technology. (p. 16)

  the expected income of the peasants could increase by as little as barely more than one-third or by as much as more than ninety percent of the amount of foreign aid.

• The threat of insurrection forces a selfish ruler to share gains with the population. (p. 16)

  the threat of insurrection induces a policy response that increases the income of the general population.