Aid, institutions and economic growth: Heterogeneous parameters and heterogeneous donors
Hassen Wako
#2016-009
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.
JEL Classification: F35; O43; F63; F43
Keywords: aid; economic growth; institutions; donor/recipient
heterogeneity