Can an iPhone be used after a Find My iPhone erasure? My sister in law's iPhone 5 just showed up as online in Pakistan 4 months after it was stolen from Australia.

We have locked the iPhone remotely from the Find My iPhone function on icloud.com

If we choose to erase the iPhone remotely, will the person with the stolen phone then be able to use the phone, but with all her personal data gone?

Ultimately  she just wants her personal photos and whatnot gone from the phone. But it would be nice if we could do that and stop the person with the stolen phone from just re-activating it with their own iCloud account.
It seems like Activation Lock does make erasing harder starting with iOS 7.

Find My iPhone includes a new feature called Activation Lock, which is designed to prevent anyone else from using your iPhone, iPad, or iPod touch if you ever lose it. It starts working the moment you turn on Find My iPhone in iOS 7
Even if you erase your device remotely, Activation Lock can continue to deter anyone from reactivating your device without your permission.

However there several methods that enable you to bypass this activation lock. Simply google for bypass activation lock iphone.