Foreign Aid as Counterterrorism Policy
Federal Reserve Bank of St. Louis Working Paper Series No. 2009-021B
40 Pages Posted: 25 Apr 2009 Last revised: 5 Sep 2010
Date Written: August 1, 2010
This paper presents a model where foreign aid bolsters a developing country’s proactive counterterrorism efforts against a resident transnational terrorist group. In stage 1 of the game, the donor country allocates resources to terrorism-fighting tied aid, general assistance, and defensive actions at home. The recipient country then decides its proactive campaign against the common terrorist threat in stage 2, while the terrorists direct their attacks against the donor and recipient countries in stage 3. Terrorists’ choices in the final stage provide a solid microfoundation for the terrorists’ likelihood of success function. In stage 2, greater tied aid raises the recipient country’s proactive measures and regime instability, while increased general aid reduces these proactive efforts and regime instability. In stage 1, a donor’s homeland security decisions are interdependent with its aid package to a recipient country, hosting resident transnational terrorists. This interdependency has gone unrecognized to date.
Keywords: Transnational terrorism, Tied foreign aid, Untied foreign aid, Strategic substitutes, Strategic complements, Regime stability
JEL Classification: H40, O10, D74
Suggested Citation: Suggested Citation