When aid builds states: party dominance and the effects of foreign aid on tax collection after civil war

Does foreign aid strengthen or weaken post-conflict states? We examine the effects of aid on tax collection after civil war, an important dimension of state effectiveness. While the literature emphasizes aid’s perverse effects, the relationship between aid dependence and the growth of tax collection is unclear. We argue that the impact of aid reflects its political utility for ruling elites in consolidating their authority after civil war. While dominant parties subvert tax strengthening reforms to solidify their political base, elites in more fractionalized settings rely on external political backing to manage internal challenges to their authority, and are more likely to comply with donor conditions. We test this argument through a Latent Curve Analysis of tax collection rate growth in post-civil war countries from 1978 to 2012. We find that aid is associated with slower growth in tax collection in dominant party settings, and more rapid tax growth in politically fractionalized settings. The findings highlight the need for attention to internal political dynamics to explain aid effectiveness after civil war, and point to opportunities to strengthen institutions in some post-conflict countries.