Sectarian Aid, Sanctions and Subnational Development

Hezbollah, a Shia Islamist political party and militant group based in Lebanon, receives a significant amount of funding from Iran. In this paper we evaluate whether Iranian aid to Hezbollah and Western sanctions against Iran have had any economically meaningful effects on subnational development in Lebanon. Since informal aid is not observed, we take a reduced-form approach and use the changes in oil rents of Iran over the years as a plausibly exogenous driver of such aid. Studying the 1993-2010 period, we find an economically significant and robust relationship between Iranian oil windfalls and nighttime lights. Consistent with the sectarian bias in Hezbollah's spending, this relationship is significantly stronger in areas with greater concentration of Shia population. We also find evidence that nighttime lights are relatively lower in Shia areas than elsewhere during periods when sanctions against Iran intensified. These results attest to the non-negligible developmental effects of informal aid as well as how economic sanctions against donors might offset such effects.