Foreign Aid-Growth Nexus in Africa: Do Institutions Matter?

Abstract

The aim of this work is to investigate the institution’s role on amelioration of the effectiveness of foreign aid in two subregions: 25 low-income and 23 middle-income African economies. To do this, we estimate an OLS (ordinary least squares), FMOLS (fully modified ordinary least squares), and SGMM (system generalized method of moments) models. Yearly data from 48 African provinces in a panel framework for the period 1996–2014 has been used. The evidence reveals that both in short- and long-run results confirm that foreign aid is not effective in terms of economic growth and with increasing returns. In addition, aid ineffectiveness is more important in the low-income African countries than in the middle-income African countries. But, the aid effectiveness is promoted with the presence of good institutions. In this case, the analysis evidence finds that foreign aid is more effective in two subregions. About the six institutional dimensions, the pertinent governance indicators that ameliorate aid effectiveness are Rule and Laws, Government Effectiveness, and Voice and Accountability, in low-income countries. However, all institutional indicators, except Rule and Laws, ameliorate aid effectiveness in middle-income countries. The long-run aid effectiveness is promoted by Government Effectiveness and Voice and Accountability, in low-income countries. But, in middle-income countries, aid effectiveness can be ameliorated, especially, by Political Stability and Regulatory Quality.

Appendices

Appendix 1

$$ {\boldsymbol{INSTITUTION}}_{\boldsymbol{i}}={\boldsymbol{\mu}}_{\mathbf{1}}{\boldsymbol{CC}}_{\boldsymbol{i}}+{\boldsymbol{\mu}}_{\mathbf{2}}{\boldsymbol{GE}}_{\boldsymbol{i}}+{\boldsymbol{\mu}}_{\mathbf{3}}{\boldsymbol{PS}}_{\boldsymbol{i}}+{\boldsymbol{\mu}}_{\mathbf{4}}{\boldsymbol{QR}}_{\boldsymbol{i}}+{\boldsymbol{\mu}}_{\mathbf{5}}{\boldsymbol{RL}}_{\boldsymbol{i}}+{\boldsymbol{\mu}}_{\mathbf{6}}{\boldsymbol{VA}}_{\boldsymbol{i}} $$

(3)

with

	Low-income African countries	Middle-income African countries
μ 1	0,8260	0,9410
μ 2	0,8570	0,9430
μ 3	0,8100	0,7990
μ 4	0,8810	0,9080
μ 5	0,9410	0,9610
μ 6	0,7620	0,8670

Appendix 2

Table 7 Governance dimensions correlation analysis in low-income countries

Table 8 Governance dimensions correlation analysis in middle-income countries

Appendix 3. List of countries

Middle-income African countries		Low-income African countries
Afrique du Sud	Mauritanie	Bénin	Mali
Angola	Namibie	Burkina Faso	Mozambique
Botswana	Nigéria	Burundi	Niger
Cabo Verde	Sao Tomé-et-Principe	Comores	Ouganda
Cameroun	Sénégal	Congo, République démocratique du	République centrafricaine
Congo, République du	Sudan	Ethiopie	Rwanda
Côte d’Ivoire	Swaziland	Gambie	Sierra Leone
Gabon	Zambie	Guinée	Tanzani
Ghana	Tunisia	Guinée-Bissau	Tchad
Kenya	Maroc	Libéria	Togo
Lesotho	Egypt	Madagascar	Zimbabwe
Maurice	Algérie	Malawi
Libye