Foreign Aid and Policy Concessions: Counterterrorism Assistance as Insurance

A puzzling feature of conditional military aid is that its amount is correlated negatively with the level of its recipients’ security cooperation. I propose a new explanation for the apparent failure of security assistance, demonstrating that using foreign aid as a source of income stabilisation for the recipient rationalises the inverse relationship observed between the provision of foreign aid and policy concessions. Aid conditionality is modelled as an implicit interstate agreement that specifies how a recipient allocates domestic and foreign financial resources across different security-related policy areas in an infinitely-repeated agency game. It is shown that efficient security cooperation between countries with conflicting interests involves a certain diversion of conditional assistance. I illustrate the model’s logic by reference to the purported epitomes of the ineffectiveness of foreign aid as a counterterrorism tool, which are the post-9/11 security relationships between the United States and Pakistan as well as Yemen.