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

  • Karuna Gomanee

    (Regent's Business College, London, UK)

  • Sourafel Girma

    (Business School, University of Nottingham, UK)

  • Oliver Morrissey

    (CREDIT, School of Economics, University of Nottingham, UK)

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. Copyright © 2005 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jid.1259
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of International Development.

Volume (Year): 17 (2005)
Issue (Month): 8 ()
Pages: 1055-1075

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Handle: RePEc:wly:jintdv:v:17:y:2005:i:8:p:1055-1075
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  1. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  2. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
  3. Gomanee, Karuna & Morrissey, Oliver & Mosley, Paul & Verschoor, Arjan, 2005. "Aid, Government Expenditure, and Aggregate Welfare," World Development, Elsevier, vol. 33(3), pages 355-370, March.
  4. Lensink, Robert & Morrissey, Oliver, 1999. "Aid instability as a measure of uncertainty and the positive impact of aid on growth," CDS Research Reports 199906, University of Groningen, Centre for Development Studies (CDS).
  5. Dollar, David & Easterly, William, 1999. "The search for the key : aid, investment, and policies in Africa," Policy Research Working Paper Series 2070, The World Bank.
  6. R. Lensink & H. White, 2001. "Are There Negative Returns to Aid?," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 42-65.
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  8. Michael Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting Chickens When They Hatch: The Short-term Effect of Aid on Growth," Working Papers 44, Center for Global Development.
  9. 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.
  10. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
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  12. Joshua Greene & Delano Villanueva, 1991. "Private Investment in Developing Countries: An Empirical Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 33-58, March.
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  14. Gomanee, Karuna & Girma, Sourafel & Morrissey, Oliver, 2005. "Aid and Growth in Sub-Saharan Africa: Accounting for Transmission Mechanisms," Working Paper Series RP2005/60, World Institute for Development Economic Research (UNU-WIDER).
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  20. Englebert, Pierre, 2000. "Solving the Mystery of the AFRICA Dummy," World Development, Elsevier, vol. 28(10), pages 1821-1835, October.
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