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

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

Essays on aid, growth and welfare

As from early 1960s, the question of whether aid works has been a central theme in development economics. The continued effort to analyse the effects of aid only now appears to be nearing consensus. A close examination of the literature suggests that there are certain aspects that are critical to this strand of studies that have not been fully addressed. In this thesis, we make a contribution by throwing light on three such issues that relate to the macroeconomic effectiveness of aid. Aid does not have a direct effect on growth; it operates via transmission mechanisms. Their role has not been given due consideration in the empirical literature. Our first objective is to revisit the question of aid effectiveness while taking into account the important effects through these mechanisms. Using generated regressors, we purge aid effect on these various mediators and obtain a coefficient on aid that gives a measure of the total effect aid has on growth. Our results consistently show that aid has had a positive effect on growth, largely through aid-financed investment and that Africa's poor growth record should not be attributed to aid ineffectiveness. Our second objective relates to the non-linear aspects that would seem to characterise the aid-growth link. This has consistently been represented by an 'aid squared' term and recently been referred to as the aid Laffer effect as proposed by Lensink and White (2001). Using a threshold model, we directly test the assumptions underlying this hypothesis. Contrary to an aid Laffer curve, we find that aid becomes effective beyond a certain critical level and human capital enhances its effects at higher aid levels. Hence, we find no evidence of diminishing returns in aid. Although, marginal impact of aid on growth does become weaker as human capital exceeds some high level. Overall, it seems that an 'aid squared' term is not an appropriate representation of the non-linearity in aid-growth link. Finally, we contribute to the limited literature on aid and welfare of the poor. Our findings consistently show that aid is associated with increases in welfare indicators. We highlight the role of pro-poor public spending as the channel through which aid improves welfare. These indirect effects are captured using residual generated regressors. Quantile regression estimates suggest that aid effects on human development vary across the welfare distribution; effects are more significant in economies located at the lower end of this distribution. Finally, we find that improving welfare may just be another way to promote growth in developing countries

Essays on aid, growth and welfare

As from early 1960s, the question of whether aid works has been a central theme in development economics. The continued effort to analyse the effects of aid only now appears to be nearing consensus. A close examination of the literature suggests that there are certain aspects that are critical to this strand of studies that have not been fully addressed. In this thesis, we make a contribution by throwing light on three such issues that relate to the macroeconomic effectiveness of aid. Aid does not have a direct effect on growth; it operates via transmission mechanisms. Their role has not been given due consideration in the empirical literature. Our first objective is to revisit the question of aid effectiveness while taking into account the important effects through these mechanisms. Using generated regressors, we purge aid effect on these various mediators and obtain a coefficient on aid that gives a measure of the total effect aid has on growth. Our results consistently show that aid has had a positive effect on growth, largely through aid-financed investment and that Africa's poor growth record should not be attributed to aid ineffectiveness. Our second objective relates to the non-linear aspects that would seem to characterise the aid-growth link. This has consistently been represented by an 'aid squared' term and recently been referred to as the aid Laffer effect as proposed by Lensink and White (2001). Using a threshold model, we directly test the assumptions underlying this hypothesis. Contrary to an aid Laffer curve, we find that aid becomes effective beyond a certain critical level and human capital enhances its effects at higher aid levels. Hence, we find no evidence of diminishing returns in aid. Although, marginal impact of aid on growth does become weaker as human capital exceeds some high level. Overall, it seems that an 'aid squared' term is not an appropriate representation of the non-linearity in aid-growth link. Finally, we contribute to the limited literature on aid and welfare of the poor. Our findings consistently show that aid is associated with increases in welfare indicators. We highlight the role of pro-poor public spending as the channel through which aid improves welfare. These indirect effects are captured using residual generated regressors. Quantile regression estimates suggest that aid effects on human development vary across the welfare distribution; effects are more significant in economies located at the lower end of this distribution. Finally, we find that improving welfare may just be another way to promote growth in developing countries

Debt Relief Effectiveness and Institution Building

The history of debt relief is now particularly long, the associated costs are soaring and the outcomes are at least uncertain. This paper reviews and provides new evidence on the effects of recent debt relief programs on different macroeconomic indicators in developing countries, focusing on the Highly Indebted Poor Countries. Besides, the relationship between debt relief and institutional change is investigated to assess whether donors are moving towards and ex-post governance conditionality. Results show that debt relief is only weakly associated with subsequent improvements in economic performance but it is correlated with increasing domestic debt in HIPCs, undermining the positive achievements in reducing external debt service. Finally, there is evidence that donors are moving towards a more sensible allocation of debt forgiveness, rewarding countries with better policies and institutions

Social Spending and Aggregate Welfare in Developing and Transition Economies

Notwithstanding the unprecedented attention devoted to reducing poverty and fostering human development via scaling up social sector spending, there is surprisingly little rigorous empirical work on the question of whether social spending is effective in achieving these goals. This paper examines the impact of government spending on the social sectors (health, education, and social protection) on two major indicators of aggregate welfare (the Inequality-adjusted Human Development Index and child mortality), using a panel dataset comprising 55 developing and transition countries from 1990 to 2009. We find that government social spending has a significantly positive causal effect on the Inequality-adjusted Human Development Index, while government expenditure on health has a significant negative impact on child mortality rate. These results are fairly robust to the method of estimation, the use of alternative instruments to control for the endogeneity of social spending, the set of control variables included in the regressions, and the use of alternative samples