This paper uses a disaggregated cross-national time-series aid data and a Least Squares Dummy Variables (LSDV) model to investigate the effects of aid on economic growth in Sub-Saharan Africa. We find that, contrary to what some critics of aid argue, aid has a small but positive and significant effect on economic growth in Sub-Saharan Africa. A simultaneous equation specification of the model shows that aid affects economic growth in Sub-Saharan Africa directly and indirectly through increased domestic savings and investment.
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Studies that indicate a positive relationship between aid and economic growth rate in LDCs include Hollis Chenery and A. Strout, “Foreign Assistance and Economic Development,” American Economic Review, Vol. 56 (1966), pp. 679–733; Victor Levy, “Aid and Growth in Sub-Saharan Africa: The Recent Experience,” European Economic Review, Vol. 32 (1988), pp. 1777-1795; “Does Concessionary Aid Lead to Higher Investment Rates in Low Income Countries?”, Review of Economics and Statistics, Vol. 69 (1) (February 1987), pp. 152–156; and Gustav Papanek, “Aid, Foreign Private Investment, Savings, and Growth in Less Developed Countries,” Journal of Political Economy, Vol. 81 (1) (1973), pp. 152–156.
The leading critic of aid as an instrument for increasing the economic growth rate in LDCs is Peter Bauer. Examples of his criticisms include Dissent on Development, (Cambridge MA: Harvard University Press, 1972), Equality, The Third World and Dilusion (London: Weidenfield and Nicolson, 1981), “Foreign Aid: What is at Stake?”, The Public Interest (Summer 1982), and “Foreign Aid: Rewarding Impoverishment?”, Swiss Review of World Affairs (October 1985). Other critics of aid include T. Haavelmo, “Comments on Wassily Leontief ‘The Rate of Long Term Growth and Capital Transfer from Developed to Underdeveloped Areas’,” in Study Week, on The Econometric Approach to Development Planning (Amsterdam: North Holland, 1963); M. A. Rahman, “Foreign Aid and Domestic Savings: A Test of Haavelmo’s Hypothesis with Cross-Country Data,” Review of Economics and Statistics, Vol. 50 (1968), pp. 137-138; Keith Griffin, “Foreign Capital, Domestic Savings and Economic Development,” Bulletin of the Oxford University Institute of Economics and Statistics, Vol. 32 (2) (May 1970); Keith Griffin and J. L. Enos, “Foreign Assistance: Objectives and Consequences,” Economic Development and Cultural Change, Vol.. 18 (April 1970); and T. E. Weisskopf, “The Impact of Foreign Capital Flows on Domestic Savings in Underdeveloped Countries,” Journal of International Economics, Vol. 2 (1) (1972), pp. 25–38.
See P. Mosley, “Aid, Savings and Growth Revisited,” Oxford Bulletin of Economics and Statistics (May 1980), pp. 79-95, G. Papanek, op cit., and M. Lipton, “Aid Effectiveness, Prisoners’ Dilemmas, and Country Allocations,” IDS Bulletin, Vol. 17 (2) (April 1985).
Howard Pack and J. R. Pack, “Is Foreign Aid Fungible?: The Case of Indonesia,” Economic Journal, Vol. 100 (March 1990), pp. 188–194, Saeid Mahdavi, “The Effects of Foreign Resource Inflows on Composition of Aggregate Expenditures in Developing Countries: A Seemingly Unrelated Model,” Kyklos, Vol. 43 (1990), pp. 111–137, and Daniel Landau, “Public Choice and Economic Aid,” Economic Development and Cultural Change (1990), pp. 559–575.
Peter Cashel-Cordo and Steven Craig, “The Public Sector Impact of International Resource Transfers,” Journal of Development Economics, Vol. 32 (1990), pp. 17–42.
Roger Riddell, Foreign Aid Revisited (Baltimore, MD: Johns Hopkins University Press, 1987).
See Peter Cashel-Cordo and Steven Craig, “The Public Sector Impact of International Resource Transfers,” Journal of Development Economics, Vol. 32 (1990), pp. 17–42.
See for example, Levy (1988) op. cit. and K. L. Gupta, “Foreign Capital Inflows, Dependency Burden and Savings Rate in Developing Countries: A Simultaneous Equation Model,” Kyklos, Vol. 28 (2) (1975), pp. 358-374.
See World Development Report, 1980 and 1987, (London: Oxford University Press).
G. Feder, “On Exports and Economic Growth,” Journal of Development Economics, Vol. 12 (1982), pp. 59–73.
Peter Cashel-Cordo and Steven Craig op. cit.“.
See Levy (1988) op. cit. and Gupta op. cit.
Riddell op. cit.
World Bank, World Tables, 1988—89 Edition (Baltimore, MD: Johns Hopkins University Press, 1989).
O.E.C.D., The Geographical Distribution of Financial Flows to Developing Countries (Paris: O.E.C.D. Publications, various years).
Jerry A. Hausman, “Specification Tests in Econometrics,” Econometrica, Vol. 46(1978), pp. 1251–1272.
For example, see Weisskopf op. cit.
E. Shaw, Financial Deepening and Economic Development (London: Oxford University Press, 1973).
K. Gupta and M. A. Islam, Foreign Capital, Savings and Growth: An International Cross-Sectional Approach (Dordrecht, Holland: Reidel Publishing Company, 1983).
K. Gupta and M. A. Islam, ibid.
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Gyimah-Brempong, K. Aid and economic growth in LDCs: Evidence from Sub-Saharan Africa. The Review of Black Political Economy 20, 31–52 (1992). https://doi.org/10.1007/BF02689933
- Economic Growth Rate
- Domestic Saving
- Official Development Assistance
- Error Component Model
- Little Square Dummy Variable