Israeli Diplomatic Relations and Foreign Aid Disbursements

The Politics of Arab Foreign Aid PAL KRISHNAN

Geeva Gopalkrishnan & James Gadea

Krogh Honors Seminar

INAF - 339

Prof. Vreeland

April 05, 2014

I. Abstract

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Arab governments often deride the politics of Israel in public statements but may

secretly support Israel’s foreign policy but may secretly support Israel’s foreign policy

behind closed doors. Saudi Arabia, for example, is a close ally of the United States,

which in turn, often supports Israeli foreign policy. We use the disbursement of foreign

aid from the Arab Fund to identify the preferences of Arab donor governments over

Israel. Our key foreign policy variable of interest is diplomatic relations of Israel.

Analyzing a dataset of 22 countries observed during 1974 – 2012, we find a robust,

statistically significant positive relationship and not the negative relationship as

previously hypothesized, between the diplomatic relationship of the recipient country

with Israel and aid from the Arab Fund. It could be the case that the Arab Fund values

security and peace within the Middle East and therefore rewards countries that have

diplomatic relationships with Israel while “punishing” those who do not.

II. Introduction

Across a vast expanse of land at the cross roads of three continents lie a group of

countries that have bound their destinies together based on their Arab identities.

The League of Arab States, commonly called the Arab League, is a regional

organization of Arab countries in and around North Africa, the Horn of Africa, and

Southwest Asia. It stretches from the coast of the Atlantic, from Mauritania and Morocco,

east to the Persian Gulf, south to Somalia, and north to Syria. The League's main goal is

to “draw closer the relations between member States and co-ordinate collaboration

between them, to safeguard their independence and sovereignty, and to consider in a

general way the affairs and interests of the Arab countries”1. The unique nature of the

1 “Historical Overview.” League of Arab States. Web. 05 Mar. 2014. <http://www.lasportal.org/wps/portal/las_en/>.

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Arab League as an all-Arab regional organization led to questions about aid disbursement

patterns within the confines of the unique cultural environs of the League.

In order to focus this research on the role of regional politics in regional foreign

aid disbursements, the Arab Fund for Social and Economic Development was used as a

case study from which to draw analysis and further insights about foreign aid within an

all-Arab environment. The Arab Fund for Social and Economic Development

is a Kuwait-based pan-Arab development finance institution, and all member-states of

the Arab League are members of the Arab Fund2. The organization operates like many

other development banks, taking in large donations from donor Arab countries and then

deciding on reallocation of those donations to more impoverished countries. The Arab

Fund differentiates itself in that its money goes solely to other Arab countries, not to the

world-at-large, while at the same time all of its funds also come from within this Arab

group of countries. This kind of self-determination of aid provides an interesting system

that is worthy of further analysis to uncover what exactly determines why more aid goes

to certain countries and less aid goes to other Arab states.

The rest of the paper proceeds as follows: a background analysis on the available

literature and on the two organizations studied here, a section on the data analysis, a

section on the methodologies used in the data analysis, a results section which will give

an expose on the findings, and a conclusion section that will delve into any of the

ramifications from the research.

III. Background

2 “About AFESD.” The Arab Fund for Social and Economic Development. Web. Mar. 2014. <http://www.arabfund.org/Default.aspx?pageId=10&mid=40>.

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At first glance, the League of Arab States might seem like a very typical regional

organization; however, its underlying culture and its unique history make it quite

different from any other regional organization and particularly any other regional

development bank.3 The League is founded on the connection to the Arabic language, a

connection that permeates all of its members.

The League of Arab States has a long history of being publicly against the State

of Israel. The League of Arab States would boycott Israel for decades, not recognizing

the country or its citizens (Nancy, 1977). The Arab League has recently again reaffirmed

its perspectives on Israel, with leaders from the member states saying in a public address

on March 26th that the organization provides the world with a “categorical refusal to

recognize Israel as a Jewish state.” (Saletan, 2014) In addition, the Arab League leaders

in that same address state: “We hold Israel entirely responsible for the lack of progress in

the peace process and continuing tension in the Middle East.”4

3 “Historical Overview.” League of Arab States. Web. 05 Mar. 2014. <http://www.lasportal.org/wps/portal/las_en/>.4 Hendawi, Hamza. “Jewish State Rejected by Arab League.” The Boston Globe. 27 March, 2014.

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Figure 1. The Arab Fund Organizational Structure5

5 “Board of Governors.” The Arab Fund for Social and Economic Development. Web. Mar. 2014. <http://www.arabfund.org/Default.aspx?pageId=206>.

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Contrasted with the Arab League, the Arab Fund for Social and Economic

Development is a development bank, while the League is a political organization. All the

members of the League of Arab States are also members of the Arab Fund for Social and

Economic Development as a direct result that both organizations are completely based

around creating a sense of pan-Arabism. The organization and structure of the Arab Fund

is very important to understanding how the Arab Fund operates in the way that it does

and how its leadership determines the path and trajectory of the organization as a whole.

The Arab Fund is led by a Board of Governors who oversee the disbursement of all aid

within the Fund, with the Governors being vested “all the powers of the Fund.”6 The

Board of Governors consists of one governor and one alternate appointed by each

member state. This has startling implications for how aid is allocated among the recipient

countries because it means that an essentially democratic process is taking place in the

board room of the Arab Fund. Rather than any one country overpowering the others, each

country has an equal representation in the Board of Governors, meaning that Saudi

Arabia, for example, will not receive more representatives on the Board solely because it

gives more money to the Arab Fund.7

6 “Board of Governors.” The Arab Fund for Social and Economic Development. Web. Mar. 2014. <http://www.arabfund.org/Default.aspx?pageId=206>.7 “Board of Governors.” The Arab Fund for Social and Economic Development. Web. Mar. 2014. <http://www.arabfund.org/Default.aspx?pageId=206>.

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In addition, the Governors are vested all the powers of the Arab Fund, which

means their decisions have reverberating effects throughout the overall organization of

the Fund.8 As seen in Figure 1., the Arab Fund for Social and Economic Development is

organized in a top-down hierarchy where the decisions of the Board of Governors affect

the entire Fund, whether in the allocation of aid, the development projects approved, and

structural organization. At the same time, the way in which the Arab Fund is structured,

with a democratic process put into place at the highest levels of the leadership within the

organization, reveals that the decisions the Arab Fund partake in are based on a

consensus among Arab States. Thus, the findings themselves reveal that there were no

organizational biases in terms of substantial increased influence among certain member

states, but rather the member states make decisions collectively. This reveals that any

allocation patterns in the Arab Fund’s disbursement are indicative of endemic decision

making values, not of sole actors influencing the disbursement process, as some might

think.

The literature on Arab aid allocation is somewhat lean in comparison to the well-

stocked caches of research pieces on aid allocation in general. Throughout the research a

variety of authors were often encountered and reencountered and their works provided a

foundation for the exploration of the topic present within this paper. The research helped

delve into the reasons and prejudices of aid disbursers and how these applied in the case

of Arab aid, and in our case, the Arab Fund for Social and Economic Development.

One of the foremost experts in the field of foreign aid is Eric Neumayer. Eric

Neumayer is at the London School of Economics and is extremely influential for

8 “Board of Governors.” The Arab Fund for Social and Economic Development. Web. Mar. 2014. <http://www.arabfund.org/Default.aspx?pageId=206>.

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uncovering some of the motives for Arab aid disbursements. Neumayer finds “that

poorer, Arab, Islamic and sub-Saharan African countries are more likely to receive some

positive amount of Arab aid” in comparison to their financially better-off counter parts

(Neumayer 137). Neumayer additionally discovered that these countries also receive

more aid for “not maintaining diplomatic relations with Israel” and for voting in the

United Nations General Assembly with Saudi Arabia (Neumayer 141). Similarly “Arab

and more populous countries also receive a higher share of the total aid allocated”

(Neumayer 144). Neumayer’s discoveries cause a variety of reverberating consequences

in regards to this research. The motivation for the research was forged from the desire to

recreate Neumayer’s result at the regional level. In addition, few of the control variables

that this research later pursues in its analysis are drawn from Neumayer’s piece.

Another set of authors’ work also revealed that Arab aid followed similar patterns

in comparison to other aid disbursers. Like many donor organizations, the Arab Fund for

Social and Economic Development values the easy supply and access to oil and other

natural resources. Through this valuing of these resources, the Arab Fund also allocates

its foreign aid unevenly, being affected by resource allocation among the recipient

countries, much like the literature suggests would be the case. Lundsgaarde, Breunig, and

Prakash find that Arab “aid may also aim to assure the supply of crucial raw materials to

donor firms that are produced, extracted or mined in the recipient country.” Lundsgaarde,

Breunig, and Prakash provide a wide net of research that attempts to capture the exact

relationship between donor countries and natural resource allocation, and they discover

that if a country does have reserves of valued resources, that country will gain more in

foreign aid than other countries.

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In terms of the actual disbursement of the foreign aid, there are a lot of questions

that need to be asked. One in particular is, how exactly do Arab aid disbursers go about

seeking to make a difference in the world? Debra Shushan at the College of William and

Mary and Chris Marcoux at the New College of Florida find that in regards to the goals

of Arab aid, it favors “infrastructure, and especially transport, energy, and water”

(Shushan and Marcoux 1976). Arab foreign aid is directed at creating visible impact in

other words.9 Physical outcomes are something highly valued in terms of Arab foreign

aid and what the donors want achieved with that foreign aid. This all comes into play as

the paper looks at the Arab Fund in a little bit.

At the same time, Momani and Ennis, on the other hand, find that Arab countries

claim to give for both economic development and political reasons. They give an

example of political motivation being driven by ideological disparities in Saudi Arabia’s

aid during the Cold War, which was shuttled to countries where the aid might help

counter socialist movements, something Saudi Arabia was strongly against. Political

motivations, which may be more difficult to test, and much more difficult to measure

may very well influence the end game of Arab foreign aid disbursement.

Overall, the literature finds that countries that are (1) impoverished, (2) have no

relations with Israel, (3) vote with Saudi Arabia at the UN General Assembly, (4) Arab,

(5) populous, and (6) producers of necessary resources for donor country’s industries also

tend to receive more Arab aid.

IV. Quantitative Evidence: Data, Methods & Results

Our data set covers twenty-two member countries of the Arab League from 1974 to 2012.

9 Shushan, Debra, and Christopher Marcoux. “The Rise (and Decline?) of Arab Aid: Generosity and Allocation in the Oil Era.” World Development 39.11 (2011): 1969-980. Print.

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This section begins by presenting the data and descriptive evidence that responds to our

hypothesis. We then test the hypothesis more rigorously by employing regression

analysis, with potentially confounding variables controlled to test for the relative impact

of the principal independent variable, and also controlling for country and year fixed

effects.

1. D ata

DEPENDENT VARIABLE

OECD.Stat database of the OECD provided aggregate aid data disbursed by the

Arab Fund for Economic and Social Development to members of the Arab League. The

total net official development assistance (ODA) disbursed by the Arab Fund was drawn

from the database for this research. ODA constitutes grants and concessional loans (grant

element of at least 25 percent), with the primary objective of promoting economic

development and welfare of recipient countries. It is worth noting that the ODA excludes

the provision of grants, loans or credits for military purposes. The aid data obtained from

the database have been transformed from current US dollars to constant US dollars with

2011 as the base year. A natural logarithm of ODA disbursements was taken since it is

more sensitive to differences in orders of magnitude – more sensitive to differences when

integers are small than when they are large – and thus, producing more robust results than

with a linear scale. The dependent variable, thus, is the natural logarithm of ODA

disbursements, in constant 2011 US dollars, from the Arab Fund received by members of

the Arab League.

Annual aid allocations covering the period covering 1974 and 2012 were obtained

and observed. There was inadequate data for most Arab League countries prior to 1974.

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In addition, no aid data was available for Comoros within the OECD database for the

time frame, while Palestine was not even listed as a country within the database –

possibly an indication of the lack of recognition for Palestine by OECD members. This

limits the data available to only 20 out of the 22 member countries of the Arab League.

INDEPENDENT VARIABLE

The independent variable of interest is diplomatic relations with Israel, a

categorical variable coded 1 for any period a country has diplomatic relations with Israel

and 0 otherwise. The information revealing Israeli diplomatic relations was obtained from

the Israel Ministry of Foreign Affairs. Our data collection method does not include

references to print media, as Neumayer does, to reduce subjective biases.

CONTROL VARIABLES

Our empirical analyses include a wide range of control variables to reduce the

possibility of selection bias and overestimation of results. With reference to recipient

need, data on gross domestic product per capita (GDP per capita) in constant 2005 US

dollars was obtained from the World Bank database. It would be expected that countries

in the Arab League that are more affluent receive lesser aid disbursements from the Arab

Fund. In addition, we would expect more populous countries to receive greater

importance in aid disbursements than less populous ones, and thus, the former would be

expected to receive more aid too. Hence, we control for population – with information

obtained from the World Bank. In order to mitigate problems with distributional

skewedness and to accurately capture differences in orders of magnitude, both GDP per

capita and population are entered as their natural logarithm.

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We also include control variables for whether a country in the Arab League was

involved in a conflict, and if a country was classified as a pariah state by the international

community – identified as countries with “pariah” status in the eyes of one or more of the

major powers, and hence subject to U.S. and/or UN sanctions, as defined by Morgan,

Krustev, and Bapat (2006). This data was obtained from Dreher & Vreeland (2014).

Since the Arab League was formed on the ideals of Arab solidarity, we expect the Arab

Fund to support countries that are outcast by the international community as a pariah state

or countries that are involved in conflict with non-Arab nations. Though this is counter-

intuitive to the observation made by Dreher & Vreeland (ibid) where countries involved

in conflicts or surmised to be pariah states receive lesser foreign aid from international

organizations, we expect the politics of a regional organization with a strong and unitary

identity, such as the Arab Fund, to provide more aid to lend a hand of support or to bring

the conflict to a quick close. If true, these could lead to an overestimation of the effect of

diplomatic relations on aid disbursements from the Arab Fund.

With respect to controlling for donor interests, we include a categorical variable

for member countries that are geographically in Africa – indicated 1 and 0 otherwise – in

order to control for potential toward African countries. Other potential control variables

introduced are British colonial legacy and US alliance. Data on the latter obtained from

Dreher & Vreeland (2014). Since the Arab Fund is a Kuwait based financial organization,

a designated major non-NATO ally of the US and a former British colony, we address the

potential source of bias in our estimation of the effect of Israeli diplomatic relations on

aid disbursements, and ensure that their effects do not overshadow the analysis.

Along with the range of control variables introduced, we also include fixed effects

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for country and year. Country fixed-effects address biases related to outlying states. Year

fixed-effects account for peculiarities that occur over time, such as Israeli disputes with a

number of Arab countries or peace agreements signed within the past decades. While

Kuziemko and Werker (2006) propose a “region quartic” approach, which allows for

differing trends over time for regions, we do not see this approach providing significance

or robustness to our research – primarily due to the unitary Arab identity recognized by

all the member states of the Arab League. Notwithstanding, we expect the variable

controlling for African member states to discern any possible regional biases that might

affect results.

2. Method

We perform rigorous regression analysis to determine the effect of diplomatic

relations with Israel on aid disbursements by the Arab Fund. We begin (model 1) with the

ordinary least squares (OLS) method, a standard regression model, while controlling for

economic and demographic variables. We then add the political (model 2) and regional

(model 3) control variables accordingly to the OLS regression analysis. We allow for our

results to be robust by including country and year fixed-effects (model 4) into our

regression analysis. Control variables that remain constant over time, such as whether a

member-state is African or ever a British colony, are omitted from this model – since

year fixed-effects remove any time invariant components.

2. Results

DESCRIPTIVE EVIDENCE

Our data set covers twenty-two member countries of the Arab League from 1974

to 2012. The average Arab Fund disbursement is USD 13.5 million, and the

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disbursements vary from USD 0.02 million (Oman, 1987) to USD 176.5 million (Egypt,

1978). It is worth mentioning that the Egypt-Israel Peace Treaty was signed in 1979 –

sixteen months after Egyptian President Anwar El Sadat visited Israel in 1977 for intense

negotiations.

The independent variable of interest is diplomatic relations with Israel, a

categorical variable coded 1 for existing diplomatic relations in a given year and 0

otherwise. Seven of the twenty-two countries in the Arab League sample have had

diplomatic relations with Israel between 1974 and 2012: Egypt, Jordan, Mauritania,

Morocco, Oman, Tunisia and Qatar.

REGRESSION ANALYSIS

Table 1 – Effect of Israeli Diplomatic Relations on Arab Fund Aid DisbursementsVariable Model 1 Model 2 Model 3 Model 4

Diplomatic Relations 1.479***-0.03

1.399*** 1.401*** 1.147*

(0.435) (0.496) (0.497) (0.605)GDP/capita (ln) -0.354** -0.363** -0.346*

(0.144) (0.173) (0.176)Population (ln) 0.148 0.158 0.136 0.159

(0.108) (0.115) (0.122) (0.450)War -0.933* -0.914* 1.144***

(0.489) (0.491) (0.414)Pariah 0.146 0.261 0.040

(1.510) (1.529) (1.535)British Colonial Legacy 0.091 0.062

(0.434) (0.438)US Ally

African Country 0.153(-1.86)

Number of observations 186 166 166 214R-squared 0.13 0.11 0.11 -0.03

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Table 3: Note that * denotes significance at the |P|<.1 level; **denotes significance at the |P|<.05 level; *** denotes significance at the |P|<.01 level.

Does diplomatic relations with Israel influence aid disbursements by Arab Fund?

Model 1 of Table 3 presents the ordinary least squares regression results, while

controlling for economic and demographic variables. When controlling for member-

states’ wealth and population, we find a positive correlation and estimate that diplomatic

relations with Israel increases an Arab League member’s aid disbursement by USD 6.1

million, a result significant at the 1% significance level (99% confidence interval). This is

counter-intuitive to our hypothesis that Israeli diplomatic relations should reduce aid

received by members of the Arab League. As expected, we find a negative correlation

with regard to affluent countries, where countries with higher GDP per capita receive

lesser aid from the Arab Fund – however this result is not statistically significant. In

addition, we also find the expected positive correlation with regard to populous countries,

where countries with a greater population receive greater aid – a result significant at the

5% significance level (95% confidence interval).

Model 2 of Table 3 presents the ordinary least squares regression results, adding

the political control variables to those in Model 1. When controlling for incidences of

war, British colonial legacy, and pariah state categorization, we still find a positive

correlation between diplomatic relations with Israel and Arab League member’s aid

disbursement, significant at the 1% significance level (99% confidence interval). Unlike

our prediction, we find that incidences of war actually decreases aid received by those

countries as proposed by Dreher & Vreeland (2014) – a statistically insignificant result.

This could be due to the fact that a number of conflicts were inflicted by other Arab

neighbors and hence, the Arab Fund decided to prize impartiality. However, our

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prediction on Arab solidarity is valid when it relates to pariah state categorization. Pariah

states are observed to receive more aid disbursements than non-pariah states of the Arab

League. Countries with British colonial legacy were also noted to receive more aid than

countries without. The pariah state and British colonial legacy variables bore results that

are statistically insignificant. The variable controlling for alliance with the US was

omitted due to collinearity.

Model 3 of Table 3 includes the regional control variable into the mix presented in

Models 1 & 2. When controlling for African member-states of the Arab League, we still

find a positive correlation between diplomatic relations with Israel and Arab League

member’s aid disbursement, significant at the 1% significance level (99% confidence

interval) – indicating the robustness of our results. We observe a statistically insignificant

positive correlation with regard to African member-states, where African member-states

receive greater aid from the Arab aid than non-African members – pointing to the African

bias as mentioned by <insert author’s name>.

Model 4 of Table 3 includes country and year fixed-effects into the regression

analysis. Variables of African member-states and British colonial legacy are omitted from

this model, since they are time invariant components. When controlling for fixed effects,

we still detect a robust, statistically significant positive correlation between diplomatic

relations with Israel and Arab League member’s aid disbursement. Though the

significance slipped to the 5% significance level (95% confidence level) from the

previous 1% significance level (99% confidence interval), this result is still statistically

significant after a rigorous regression analysis. We observe a stronger statistical

significance for the positive correlation between populous countries and aid received

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when factoring fixed-effects. The negative significance between incidence of war and aid

disbursements gains statistical significance at the 10% significance level (90%

confidence interval). While the previously positive correlation between pariah states and

aid received flipped to a negative correlation when considering fixed-effects, it is

statistically highly insignificant, achieving only a 97% significance level (3% confidence

interval) – rendering any conclusions obsolete.

VI. Theory

Taking into account the unique identity of Arab League countries, the Arab Fund

for Social and Economic Development actually favors those recipient Arab countries who

maintain diplomatic relationships with Israel by providing them with more foreign aid

than their peers who do not have diplomatic relationships with Israel. How exactly does

Israel’s diplomatic relationship with a country in the Arab League affect that recipient

country’s aid from the Arab Fund for Social and Economic Development? Does the result

vary for regional organizations and when controlled for within the Arab League instead?

Due to strategic concerns, the Arab Fund for Social and Economic Development does in

fact favor those recipient Arab countries who maintain a relationship with Israel by

providing them with more foreign aid. We theorize this could occur as a result of hidden

motivations and political concerns. One possibility is that Arab countries purport a

disdain for Israel, but secretly operate in the foreign aid field with a grand strategy in

mind, aiding those countries that maintain relationships with Israel for unknown reasons

(possibly to get on Saudi Arabia’s good side, who maintains strong relations with the

United States or to promote peace and security in the region). This could be possibly due

to strategic concerns regarding Saudi Arabia’s relationship with the United States, and

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thus the United States’ relationship with Israel, something Arab League countries in

particular would be interested in. These are not the only explanations however, so the

paper revisits other possible explanations at the end of this section.

Bessma Momani of the University of Waterloo and Crystal A. Ennis of the

Balsillie School of International Affairs, find that there’s a lot of opaqueness in the

dispersal of Arab aid:

“Gulf states likely do not report certain aid transactions because there is

something they wish to hide. For instance, a leader may wish to make a donation

which he knows will be unpopular with his people, due to the identity of the

recipient and/or the amount of the gift.”

Arab countries give foreign aid for two reasons. First, they give it for the purpose of

promoting economic development (Momani and Ennis). And second, Arab countries give

foreign aid for political reasons (Momani and Ennis). It is for these political reasons that

opaqueness becomes a key factor in covering up after political motivation has played its

role in the aid process. According to Vreeland and Lim in their paper on the Asian

Development Bank, countries often hide behind regional organizations for the purposes

of “obfuscation”, hiding their actual purposes and obscuring their true beliefs through

their role in the international organization (Vreeland and Lim 14). They choose to use the

international organization not only as an arm to manipulate their own power abroad, but

also as a means of creating another entity from which the country can act without the

constant fears of backlash. Abbott and Snidal explain that international organizations are

often used to “launder… [the]… dirty work” of member states. This is largely due to the

political defense they get by acting through an outside, excised organization. The “mask”

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of the international organization, allows countries to be less fearful of the consequences

of their actions within their own country, instead making decisions that are strategically

sound while not compatible with the day to day life of that country’s perspectives and

views. Using international organizations as a “mask” allows the Arab League members to

act as they would have otherwise, freeing them from certain fears, and thereby not having

to worry about public concerns and political rhetoric.

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Figure 2. Arab Fund for Social and Economic Development – Member States10

10 “Member States.” The Arab Fund for Social and Economic Development. Web. http://www.arabfund.org/Default.aspx?pageId=129&mid=235

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Taking a look at the Arab Fund for Social and Economic Development’s website

reveals just how drastic the clashes between the public and private stances within the

Fund really are. This figure illustrates the public disapproval for the state of Israel among

Arab Fund members’ leadership very well. It seems at first to be a regular map of the

constituent states within the Arab League and thus within the Arab Fund for Social and

Economic Development, but through some careful examination this map reveals some of

the publicly-touted perceptions of the Arab Fund. The figure does not include Ethiopia,

revealing a blank bluish space between the other Arab neighbors of Somalia, Sudan, and

Djibouti. On the other hand, if one draws their attention to Israel, the country’s lands are

not considered separate from the Arab League. The word Palestine is present on the map

with the same font and color as the other Arab countries depicted. First off, politically,

this reveals the Arab Fund’s apparent recognition of a state for Palestinians. Second, it

reveals the Arab Fund’s public persona is one that does not recognize the State of Israel.

Were Israel to be recognized by the organization in the same way as Ethiopia for

example, the outline of Israel’s territory would have been a blue background and not the

brownish yellow one given in the figure.

This dissociation between the closed door reckonings of the Arab Fund for Social

and Economic Development and that of the Fund’s public relations, the Arab League, and

the member states’ reveal there must be some sort of pattern to explain this discrepancy.

We propose three possibilities, although there may very well be a variety of other

explanations.

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First, it is possible that behind the closed doors of the Arab Fund for Social and

Economic Development, the member states reward countries with relationships with

Israel because they value security and peace within the region. Unlike Neumayer’s paper,

we focus specifically within the League of Arab States, and thus there is a lot more at

stake here for these countries (as the countries they give aid to will be in their close

vicinity, and those countries choices will affect the donor states as well). The Arab

countries may not recognize Israel’s right to exist in public, but in reality they value their

own security and peace over their ideological beliefs. Thus they reward those countries

who have positive relationships with Israel. This theory is the one that we have come to

think as most reasonable.

Another possibility is that of economic engagement. The Arab Fund may actually

still be applying its ideological beliefs to its aid allocation. It may be operating through

the carrot system of rewards i.e. rather than punishing a country for its relationship with

Israel, the Fund gives that country more aid, to attempt to regain its ally.

A third possibility is that more aid goes to countries that do have relationships

with Israel, because the Fund is competing with Israel on the ground for influence. In

essence this argument would say that Israel and the Arab Fund (and thus the League of

Arab States) would metaphorically fight over influence in a certain country. Israel makes

gains in its diplomatic relationship with an Arab country, and the Arab Fund could

potentially provide foreign aid as a response, attempting to win over that country and

make sure that Arab countries follow accepted ideologies.

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VII. Conclusion

Our study suggests that regional financial institutions are able to leverage their

ability to disburse aid to influence political decisions in member states. In particular, we

show that the Arab Fund for Economic and Social Development has leveraged on its

capacity as an aid agency for the Arab League to further regional political ideals. Our

robust, statistically significant findings suggest that member-states that have diplomatic

relations with Israel receive greater aid disbursements from the Arab Fund.

The results vary significantly from Neumayer, who concludes that countries (on a

global scale) with diplomatic relations with Israel receive less aid – be it bilateral or from

Arab multilateral agencies (the latter showed no statistical significance). Key differences

between the research methodology employed by Neumayer and us might possibly explain

the starkly varying results. Firstly, the sample size tested by Neumayer includes all

countries of the world while ours simply examines the Arab League countries – a mere

22 out of the 197. In addition, the significance of Arab solidarity and its impact on

regional politics is possibly diluted in Neumayer’s research, while pronounced in this

paper. Secondly, Neumayer has his data presented in three-year aggregates, while we

observe data presented annually. This introduces several biases in Neumayer’s research

for the effects of variables might be diluted and significant observations omitted. In

addition, Neumayer’s data lasts till 1995 while our observations extend till 2012 and we

account for fixed-effects while Neumayer does not. These indicate that our findings are

much more likely to be robust in comparison to that of Neumayer. All of this might point

to the variance observed between his results and ours.

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VIII. Reference

Abbott, Kenneth W. and Snidal, Duncan, Why States Act Through Formal International Organizations (1998). Journal of Conflict Resolution, Vol. 42, 1998. Available at SSRN: http://ssrn.com/abstract=1470242.

“About AFESD.” The Arab Fund for Social and Economic Development. Web. Mar. 2014. <http://www.arabfund.org/Default.aspx?pageId=10&mid=40>.

“Board of Governors.” The Arab Fund for Social and Economic Development. Web. Mar. 2014. <http://www.arabfund.org/Default.aspx?pageId=206>.

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