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Aid, institutions and economic growth: Heterogeneous parameters and heterogeneous donors

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  • Wako, Hassen

    (UNU-MERIT)

Abstract

Aid effectiveness has been a subject of long-sustained debate. This study contributes to this debate using panel data from 43 Sub-Saharan African countries. Its novelty lies in assessing the intermediary role of institutional quality between aid and growth, and in taking a disaggregated view of aid (at the level of a donor). Using estimation techniques which allow for recipient-specific (slope) parameters and suit the context of non-stationary and cross-sectionally dependent panels, the study finds that the relationship between aid and growth is characterised by heterogeneous (or recipient-specific) short-run parameters but a shared long-run coefficients. In the long-run, the direct growth effect of (aggregate) aid from 'traditional' donors is robustly non-positive, and the indirect effect is negative and robust to different specifications. Disaggregation reveals that there is heterogeneity in aid-effectiveness from the donor side as well: there are cases of 'good' aid (four donors), 'bad' aid (ten donors), 'neutral' aid (three donors) as well as cases where the total effect of aid is 'indeterminate' (four donors). With a lesser confidence, attributed to smaller sample size and less reliable quality of data, Chinese aid to Sub-Saharan Africa has a positive direct growth effect, a negative institutional effect, and thus an indeterminate total effect. The short-run relationships are generally not robust to alternative specifications. Comparison of the behaviour of donors with differing degrees of aid-effectiveness suggests that the future of aid would benefit more from focusing on its quality than quantity. In particular, two quality aspects - reduced fragmentation (or better specialisation) and better donor alignment (with recipient country's policy and system) - deserve much more attention.

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  • Wako, Hassen, 2016. "Aid, institutions and economic growth: Heterogeneous parameters and heterogeneous donors," MERIT Working Papers 2016-009, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  • Handle: RePEc:unm:unumer:2016009
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    2. Isaksson, Ann-Sofie & Durevall, Dick, 2021. "Aid and Institutions: Local Effects of World Bank Aid on Perceived Institutional Quality in Africa," Working Paper Series 1391, Research Institute of Industrial Economics.
    3. Savin, Ivan & Marson, Marta & Sutormina, Marina, 2020. "How different aid flows affect different trade flows: Evidence from Africa and its largest donors," Structural Change and Economic Dynamics, Elsevier, vol. 55(C), pages 119-136.
    4. Kaya, Ilker & Kaya, Ozgur, 2020. "Foreign aid, institutional quality and government fiscal behavior in emerging economies: An empirical investigation," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 59-67.
    5. Boateng, Elliot & Agbola, Frank W. & Mahmood, Amir, 2021. "Foreign aid volatility and economic growth in Sub-Saharan Africa: Does institutional quality matter?," Economic Modelling, Elsevier, vol. 96(C), pages 111-127.
    6. Isaksson, Ann-Sofie & Durevall, Dick, 2021. "Aid and institutions: Local effects of World Bank aid on perceived Institutional quality in Africa," Working Papers in Economics 806, University of Gothenburg, Department of Economics.

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    More about this item

    Keywords

    aid; development aid; economic development; economic growth; institutions; donor countries; recipient countries; beneficiaries; heterogeneity; donor/recipient heterogeneity; aid effectiveness;
    All these keywords.

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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