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Reversed Economics and Inhumanity of Development Assistance in Africa

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  • Simplice A, Asongu

Abstract

Purpose – The purpose of this paper is to assess the aid-development nexus in 52 African countries using updated data(1996-2010) and a new indicator of human development(adjusted for inequality). Design/methodology/approach – The estimation technique used is a Two-Stage-Least Squares Instrumental Variable approach. Instruments include: income-levels, legal-origins and religious-dominations. The first-step consists of justifying the choice of the estimation technique with a Hausman-test for endogeneity. In the second-step, we verify that the instrumental variables are exogenous to the endogenous components of explaining variables(aid dynamic channels) conditional on other covariates(control variables). In the third-step, the strength and validity of the instruments are examined with the Cragg-Donald and Sargan overidentifying restrictions tests respectively. Robustness checks are ensured by: (1) the use of alternative aid indicators; (2) estimation under restricted and unrestricted hypotheses ; and (3) adoption of two interchangeable sets of instruments. Findings – The findings broadly indicate that development assistance is detrimental to GDP growth, GDP per capita growth and inequality adjusted human development. Given concerns on the achievement of the MDGs, the relevance of these results point to the deficiency of foreign aid as a sustainable cure to poverty in Africa. Social implications – It is a momentous epoque to solve the second tragedy of foreign aid; it is high time economists and policy makers start rethinking the models and theories on which foreign aid is based. In the meantime, it is up to people who care about the poor to hold aid agencies accountable for piecemeal results. Originality/value – These findings are based on data collected after pioneering works on the aid-development nexus. Usage of the inequality adjusted human development index first published in 2010, corrects past works of the bunch of criticisms inherent in the first index.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36542.

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Date of creation: 09 Feb 2012
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Handle: RePEc:pra:mprapa:36542

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Keywords: Foreign Aid; Political Economy; Development; Africa;

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References

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  1. Easterly, William, 1999. "The ghost of financing gap: testing the growth model used in the international financial institutions," Journal of Development Economics, Elsevier, vol. 60(2), pages 423-438, December.
  2. Michael A. Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting chickens when they hatch: The short-term effect of aid on growth," International Finance 0407010, EconWPA.
  3. Svensson, Jakob, 2000. "Foreign aid and rent-seeking," Journal of International Economics, Elsevier, vol. 51(2), pages 437-461, August.
  4. Simplice A. Asongu, 2012. "Law and Finance in Africa," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 55(4), pages 385-408.
  5. William Easterly, 2002. "What did Structural Adjustment Adjust? The Association of Policies and Growth with Repeated IMF and World Bank Adjustment Loans," Working Papers 11, Center for Global Development.
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  7. Murphy, Kevin M. & Shleifer, Andrei & Vishny, Robert W., 1989. "Industrialization and the Big Push," Scholarly Articles 3606235, Harvard University Department of Economics.
  8. Simplice A., Asongu, 2011. "Law, Finance and Investment: does legal origin matter?," MPRA Paper 34698, University Library of Munich, Germany.
  9. P. Guillaumont & L. Chauvet, 2001. "Aid and Performance: A Reassessment," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 66-92.
  10. Asongu Simplice, 2011. "Law, finance, economic growth and welfare: why does legal origin matter?," Working Papers 11/007, African Governance and Development Institute..
  11. Pritchett, Lant & Woolcock, Michael, 2004. "Solutions When the Solution is the Problem: Arraying the Disarray in Development," World Development, Elsevier, vol. 32(2), pages 191-212, February.
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  13. Stephen Knack, 2001. "Aid Dependence and the Quality of Governance: Cross-Country Empirical Tests," Southern Economic Journal, Southern Economic Association, vol. 68(2), pages 310-329, October.
  14. Simplice A., Simplice, 2011. "Why do French civil-law countries have higher levels of financial efficiency?," MPRA Paper 33950, University Library of Munich, Germany.
  15. Addison, Tony & Mavrotas, George & McGillivray, Mark, 2005. "Development Assistance and Development Finance: Evidence and Global Policy Agendas," Working Paper Series RP2005/23, World Institute for Development Economic Research (UNU-WIDER).
  16. William Easterly & Ross Levine & David Roodman, 2003. "New Data, New doubts: A Comment on Burnside and Dollar's "Aid, Policies, and Growth" (2000)," NBER Working Papers 9846, National Bureau of Economic Research, Inc.
  17. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-41, September.
  18. Fielding, David & McGillivray, Mark & Torres, Sebastian, 2006. "A Wider Approach to Aid Effectiveness: Correlated Impacts on Health, Wealth, Fertility and Education," Working Paper Series RP2006/23, World Institute for Development Economic Research (UNU-WIDER).
  19. René M. Stulz, 1999. "Golbalization, Corporate Finance, And The Cost Of Capital," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(3), pages 8-25.
  20. Paul Mosley & John Hudson & Sara Horrell, 1992. "Aid, the public sector and the market in less developed countries: A return to the scene of the crime," Journal of International Development, John Wiley & Sons, Ltd., vol. 4(2), pages 139-150, 03.
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Citations

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Cited by:
  1. Antonio R. Andrés & Asongu Simplice & Voxi S. H. Amavilah, 2013. "The Impact of Formal Institutions on Knowledge Economy," Working Papers 13/025, African Governance and Development Institute..
  2. Simplice Asongu, 2013. "How Would Population Growth Affect Investment in the Future? Asymmetric Panel Causality Evidence for Africa," African Development Review, African Development Bank, vol. 25(1), pages 14-29.
  3. Asongu Simplice, 2012. "Development thresholds of foreign aid effectiveness in Africa," Working Papers 12/010, African Governance and Development Institute..
  4. Simplice A, Asongu, 2012. "The impact of health worker migration on development dynamics: evidence of wealth-effects from Africa," MPRA Paper 38189, University Library of Munich, Germany.
  5. Asongu Simplice, 2012. "Are financial benefits of financial globalization questionable until greater domestic financial development has taken place?," Working Papers 12/007, African Governance and Development Institute..
  6. Simplice A, Asongu, 2012. "Institutional benchmarking of foreign aid effectiveness in Africa," MPRA Paper 38095, University Library of Munich, Germany.
  7. Simplice A, Asongu, 2012. "Globalization, (fighting) corruption and development: how are these phenomena linearly and nonlinearly related in wealth effects?," MPRA Paper 36899, University Library of Munich, Germany.

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