Aid, Aid Volatility and Sectoral Growth in Sub-Saharan Africa: Does Finance Matter?

ABSTRACT

This article examines the impact of aid and its volatility on sectoral growth by relying on panel dataset of 37 sub-Saharan African (SSA) countries for the period 1983–2014. Findings from the system-generalized methods of moments show that, while foreign aid significantly drives sectoral growth, aid volatility deteriorates sectoral value additions impacting heavily on non-tradable sectors with no apparent effect on the agricultural sector. The deleterious effect of aid volatility on sectoral value additions in SSA is weakened by a well-developed financial system with significant impact on the tradable sector. Evidently, development of domestic financial markets enhances aid effectiveness.

KEYWORDS:

• Official Development Assistance
• aid
• volatility
• sectoral growth
• sub-Saharan Africa

JEL CLASSIFICATION:

• F35
• O10
• O14
• O47
• O55

Acknowledgement

The authors are very grateful to the two anonymous reviewers for their constructive comments on the manuscript.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. These countries are Benin, Botswana, Burkina Faso, Cape Verde, Cameroon, Burundi, Congo, Rep., Cote d’Ivoire, Central African Republic, Chad, Congo, Dem. Rep., Ethiopia, Gabon, Ghana, Gambia, The, Guinea-Bissau, Kenya, Lesotho, Madagascar, Mali, Mauritius, Malawi, Nigeria, Niger, Namibia, Mozambique, Rwanda, Senegal, Seychelles, Sierra Leone, South Africa, Sudan, Swaziland, Togo, Uganda, Zimbabwe and Zambia.

2. Ibrahim and Alagidede (2017) also used this approach as a sensitivity check in their examination of the relationship among financial development, economic volatility and shocks in SSA.

Additional information

Funding

This study did not receive grants or funding from any organization.