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Economic Growth and the Role of Foreign Aid in Selected African Countries

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Abstract

This article revisits the question of aid effectiveness on economic growth by introducing a country’s legal origin in the debate. We provide compelling evidence to show that both quantity and quality of aid disbursed to Africa’s least developed countries matter and that these effects differ based on a country’s legal origin. A quadratic specification of the total aid variable and source-based proxies are used to capture the effects of quantity and quality of aid, respectively. The aid effects are evaluated in a dynamic framework using system GMM. Our results are robust to different model specifications and estimation techniques.

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Notes

  1. See an example in Sachs (2005: 250) regarding an impassable road due to a missing bridge for further explanation on the threshold effects.

  2. For more discussions on the takeoff hypothesis, see Easterly (2006).

  3. Examples include donors using aid disbursements to financing poorly conceived ‘white-elephant’ projects; aid serving as a carrot for donor countries to gain access to poor countries goods markets while denying market access for poor countries products; and in some cases, rich countries using aid to dump their highly subsidized agricultural products at the expense of the poor countries agricultural sector.

  4. Aid disbursed to political allies regardless of a country’s policy and institutional environment. For example, Israel and Egypt have benefited from aid flows from United States due to regional strategic reasons.

  5. Shah (2012) argues that donor countries have not lived up to their promises on both quantity and quality of aid.

  6. Because of lack of more appropriate measures of quality of foreign aid, we follow recommendations in Birdsall et al. (2010) and use source-based proxies.

  7. The regression model is derived using standard growth accounting in a neoclassical framework which we leave out to save space. Instead of trying to calculate total factor productivity (TFP) for African countries, which is bound to be an imprecise and biased measured given the lack of data, we choose to include explanatory variables in the model that can potentially affect TFP. A similar approach has been used in previous growth regressions for African countries (Sachs and Warner, 1997).

  8. Specifically: Δy it =y it yitτ

    Therefore, β1=δ1−1The average annual growth rate of output per worker between the years t−τ and t is calculated as (y it yitτ)/τ.

  9. UNICEF’s goal is to nurture and care for children by working with stakeholders to overcome the obstacles that poverty, violence, disease, and discrimination place in a child’s path. The agency’s focus include promoting girls’ education, advocating for children immunization against common childhood diseases, preventing HIV/AIDS among young people, providing safe environment for children and promoting equality among those who are discriminated against, girls and women in particular. UNFPA’s mission is to provide a world where every pregnancy is wanted, every birth is safe and every young person’s potential is fulfilled. WFP uses food aid to support economic and social development; meet refugee and other emergency food needs and the associated logistics support; and promote world food security in accordance with the recommendations of United Nations and Food and Agriculture Organization (FAO). UNTA ensures the implementation of the agreements of the comprehensive political settlement of countries in post-conflict. It establishes a unique legitimate body and source of authority in which, throughout the transition period, independence and unit of a country are enshrined. The mandate given to UNTA includes aspects relating to human rights, the organization and conduct of free and fair general elections, military arrangements, civil administration, the maintenance of law and order, the repatriation and settlement of the refugees and displaced persons, and the rehabilitation of essential structures in the country during the transition period.

  10. Several studies have tested the interaction between aid and the Burnside and Dollar (2000) policy index and they found the interaction to be insignificant (Dalgaard and Hansen, 2001; Hansen and Tarp, 2001; Lensink and White, 2001; Easterly and Levine (2003).

  11. As the share of merchandise trade in GDP is a policy outcome, a better proxy would include a policy instrument such as data on tariff or other non-tariff barriers. However, we do not have comprehensive data on these policy instruments and therefore we use policy outcome variables as proxies.

  12. They caution that money supply (M2 or M3) as a share of GDP does not capture the quality of the financial market development. However, the bias that may arise from the quality effects is not central to this study.

  13. Results based on FE estimation and detailed discussions of these results are available from the authors upon request.

  14. Additional results are available upon request.

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Makes the case for foreign aid to support African development, and links its effectiveness to governance reform and a legal structure based in common law as opposed to one on the juridical law tradition

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Wamboye, E., Adekola, A. & Sergi, B. Economic Growth and the Role of Foreign Aid in Selected African Countries. Development 56, 155–171 (2013). https://doi.org/10.1057/dev.2013.24

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