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Aid Volatility and Structural Economic Transformation in sub-Saharan Africa: Does Finance Matter?

This paper departs from the traditional aid–economic growth studies through its examination of 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 1980–2014. Findings from our system generalised methods of moments (GMM) show that, while foreign aid significantly drives economic transformation, aid volatility deteriorates sectoral value additions with huge impact on the non–tradable sector and a no apparent effect on the agricultural sector. However, the deleterious effect of aid volatility on structural economic transformation in SSA is weakened by a well–developed financial system with a large dampening impact on the tradable sector. Our evidence therefore provides unequivocal support for the notion that development of domestic financial markets enhances aid effectiveness.

 

Working paper 655
1 January 2017
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