The Heterogeneous Impacts Of Foreign Aids Inflows On Sectoral Growth:Evidence From The Sector-level Data From The SSA And MENA Countries

The economic impacts and consequences of foreign aid vary substantially among the recipient countries,regardless of the exerted efforts from the side of donors to provide and annually increase the amounts of aid inflows in various types and forms to the recipient countries.A variety of studies on aid’s efficacy for growth focused on many aspects,both aggregate and disaggregated,have been conducted in search of an interpretation of this phenomena,but they provide inclusive results.A great deal of this literature finds that the net effect of aggregate aid on total growth appears to be insignificant.The current study argues that such insignificant net effect of aggregate aid on total growth can be better explained by testing the variation responses for each of growth sectors to their corresponding allocated aid inflows.Accordingly,this study aims to investigate the heterogeneous effects of sectorally allocated aid inflows on their corresponding growth sectors(industry,agriculture and services)using data from 37 Sub-Saharan African and MENA-recipient developing nations from 1996 to 2017.An important contribution of the study is employing an innovative decomposition analysis framework to check the missed effect mechanisms of the heterogeneous variations of sectoral aid allocation on their targeted developmental sectors and then growth sectors,which reveals the reasons for the absence of net effects of total aids on total growth.As per the objective of study,the key questions we intended to address are how and to what extent the heterogeneous impact of sectorally allocated aid inflows on their corresponding growth sectors(services,agriculture and industry)can affect the recipient countries’ economic development and growth.First,we investigated the extent to which MDGs tendency of aid allocation toward different developmental sectors and,thus,growth sectors in recipient countries is predictable(stable)or transitory in nature,and/or fungible,beneficial,or biased in terms of a decomposition analysis of growth sectors and their allocated aid,hypothesizing that aid allocated to the industrial growth sector is more transitory and fungible than other growth sectors.Then,we examined how differences in aid allocation across different sectors in recipient nations affect each sector’s growth(sectoral growth competitiveness)and,consequently,overall growth.Hence,the goal was to determine how the link between aid and growth depends on growth sectors’ responses to heterogeneous differences in aid allocated to developmental sectors directed toward each of their corresponding growth sectors,hypothesizing that there may be a stronger effect when aid is explicitly targeted at its corresponding growth sectors.To answer the two aspects of focus for the main questions of the study,we used general to specific approach as full specification and regional analysis.The study first build three empirical models,it modelled three specifications for empirical analysis that progressed in their steps along with the lines and theoretical and empirical framework of the aid-growth literature.Accordingly,the first specification was modelled to define the first aspect of our question,this was carried out by operating covariates drawn from the major assumptions of neoclassical and endogenous growth aid-growth models in our decomposition analysis of sectoral aid on sectoral growth.The second and third specifications were designed to address the second aspect of the study question,using covariates obtained from the standard literature of the aid-growth nexus in order for our decomposition analysis results to be comparable with the standard literature of the aid-growth nexus.For empirical analysis,this study used the’commitment’ statistics on aid to examine annual data from 37 Sub-Saharan African and MENA-recipient developing nations classified as low-income,middle-income and uppermiddle-income by the World Bank during a 22-year period from 1996 to 2017.As for the data used in the second and third specifications,the 37 countries were reduced to 30 due to the lack of alternative control variable data in the second and third specifications.Then,the study constructed two measures for aids allocated to their corresponding growth sectors,which is one of the major contribution of the thesis,we introduced new disaggregation of sectoral aids measures;one is the(SAASG)Sectoral-Allocated-Aid-for Sectoral-Growth,which was used as a major measure in the first two econometric specifications,and another one was the revised Clemens early-impact aid categories measure,which was used as the secondary measure in the third specification.For empirical estimation techniques,the seemingly unrelated regression framework(SUR)was employed as the basic estimation approach to consider the interdependence among different growth sectors,while the GMM and Pooled OLS approaches were used to check robustness in all three specifications.We further checked the time lagged effect of our primary variables of interests in the first specification by GMM.Furthermore,the paper checked the regional and income-level effects in all specification;moreover the role of institutional and governance related variables towards different types aids were checked in the last step of our analysis to provide stronger interpretation of the results.The findings of the summary statistics for our primary variables of interest,control variables,and institutional factors found no outliers in the data.The empirical estimations in context of sectoral allocated aids and sectoral growth for full specification,regions and income levels report very interesting and innovative outcomes.In overall empirical estimations,the main findings were consistent with the paper’s main argument,the results reported sectoral aids allocated to each sector of growth as significant contributor in reducing or increasing the efficiency of their corresponding sectors and overall growth for Sub-Sahara African,MENA region countries,this helps explain why the net effect of total aid on total growth appears to be insignificant in overall growth..First,the results of the first specification showed that allocated aids to growth sectors can be transitory and fungible in services and industrial growth sectors due to governance factors which can obscure the net total influence of aids on overall growth:while they were non-fungible in agricultural growth boosting overall growth.Then the results of the second specification further highlight how differences in growth sectors’ responses to their corresponding allocated aid help to reduce the effects of total aids on overall growth using the most prominent factors of aid-growth standard literature.The findings showed that allocated aid inflows have a strong positive impact on agricultural growth,helping boost overall growth,whereas aid allocated to the service and industrial growth sectors tends to minimize the net benefits of total aid on growth due to financial and institutional reasons.The responses of early-impact aid in the third specification emphasized the results of the second specification in these countries even in short term.Furthermore,the study revealed the factors and conditions through which sectoral aids allocated to sectoral growth influence each of growth sectors in full sample.In comparison to previous literature,our results are in line with previous literature and they further provide more detailed picture of the fungibility problem in terms of sectoral decomposition;they also suggest more effect mechanism for some prominent factors discussed in literature review such as early impact aids,the negative impact of aid in more tropical areas countries,financial depth and institutional quality factors.After discussing the role of sectoral aids on sectoral growth in full sample,we conducted regional and income-level analysis to make our analysis more specific which is also another contribution of paper.These effects were also considered with restriction to time and countries fixed effects as well as lagged effects.The overall pattern of the results in subsamples analysis was that that allocated aids to agricultural growth appeared to be helpful in SSA and varies in low income and upper-middle-income countries,allocated aids to services growth seems to perform well in lower-income countries and varies in MENA region,whereas allocated aids to industrial growth substantially varies in MENA and upper-middle income countries.Overall,in addition to the geo-political and social changes,the role of governance and institutional quality factors was essential in mitigating the effectiveness of sectoral aids on sectoral growth.Finally,our empirical findings are innovative and allow us to draw innovative conclusions and to formulate several fruitful strategic policies regarding controlling aids aid allocation across sectors recipient countries.These findings can be used by policy makers economists,and individual investors to maintain incentives in the MENA and SSA regions’selected recipient countries to overcome structural bottlenecks of sectoral growth,the results can be used to successfully re-scale-up the planned aid across sectors to recipient countries bearing in mind the financial system,institutional quality policies,and the ability to design a way.