Aid and growth in Sub‐Saharan Africa: accounting for transmission mechanisms

Abstract

This paper is a contribution to the literature on aid and growth. Despite an extensive empirical literature in this area, existing studies have not addressed directly the mechanisms via which aid should affect growth. We identify investment as the most significant transmission mechanism, and also consider effects through financing imports and government consumption spending. With the use of residual generated regressors, we achieve a measure of the total effect of aid on growth, accounting for the effect via investment. Pooled panel results for a sample of 25 Sub-Saharan African countries over the period 1970 to 1997 point to a significant positive effect of foreign aid on growth, ceteris paribus. On average, each one percentage point increase in the aid/GNP ratio contributes one-quarter of one percentage point to the growth rate. Africa's poor growth record should not therefore be attributed to aid ineffectiveness.

Foreign aid on economic growth in Africa: A comparison of low and middle-income countries

“…The first studies claim that foreign capital inflow is necessary and sufficient for economic growth in lessdeveloped countries. They assert that there is a positive relationship between aid and economic growth because it not only augments domestic resources, but also supplements domestic savings, assists in closing the foreign exchange gap, creates access to modern technology and managerial skills, and allows easier access to foreign markets, ultimately leading to economic growth (Chenery & Strout, 1996;Islam, 1992;Dalgaard, Hansen & Tarp, 2004;Gupta & Islam, 1983;Burnside & Dollar, 2000;Hansen & Tarp, 2000;Morrissey, 2001;Gomanee et al, 2005). By the same token, Pallage and Robe (2001) noted that foreign aid is a major source of economic growth for developing countries, especially in Africa, where it averages 12.5 per cent of the gross domestic product and establishes by far the most important source of foreign capital.…”

Controversies over the impact of development aid: it works; it doesn't; it can, but that depends …

“…Robinson and Tarp, 2000, Beynon, 2001Morrissey, 2002). Gomanee et al (2002) analyse aid transmission mechanisms, channels through which aid can potentially contribute to growth. Aid can effect growth directly, but also through its impact on investment, imports, public sector fiscal aggregates and government policy.…”

Foreign aid, legal origin, economic growth and Africa’s least developed countries

“…Notwithstanding, the positive sign on the inflation measure and government consumption spending contradicts the negative link found in cross-country growth regressions (e.g., Barro, 1996;Sala-i-Martin et al, 2004;Gomanee et al, 2005), although some studies have found favorable effects in the case of government consumption spending (Yasin, 2003).…”