- Title
- An empirical investigation of the impact of foreign aid and institutional quality on savings, investment and economic growth in Sub-Saharan Africa
- Creator
- Boateng, Elliot
- Relation
- University of Newcastle Research Higher Degree Thesis
- Resource Type
- thesis
- Date
- 2020
- Description
- Research Doctorate - Doctor of Philosophy (PhD)
- Description
- The objective of this thesis is to investigate the effects of foreign aid and institutional quality on savings, investment and economic growth in Sub-Saharan Africa (SSA). For many developing countries, foreign aid remains a significant financial resource for economic development. Despite its relevance, the literature on foreign aid to developing countries is often critical of its effectiveness in fostering economic growth. Further, proponents of foreign aid argue that it promotes the recipient’s economic growth, whereas critics argue that it has little or no significant influence in this regard. Several studies also suggest that the effectiveness of foreign aid depends on the quality of the recipient’s institutional architecture, the motive behind foreign aid transfers and the extent of foreign aid volatility. Yet, the empirical findings are contradictory. These conflicting views motivate the present thesis. This thesis consists of four empirical studies. The first empirical study examines the key determinants of savings in SSA at the aggregate level and across income and regional groupings. It emphasises the need to incorporate institutional quality into savings models from the aggregated and sub-dimensional measures of institutional quality. Using comprehensive panel data for the period 1980–2015 and the two-step instrumental variable generalised method of moments (2SIV-GMM) estimator, the study offers three findings. First, institutional quality induces savings at the aggregated level and after controlling for income and regional effects in the estimation. Second, large government size, and the absence of voice and accountability, political stability and the rule of law, impede savings, whereas the control of corruption and the improvement of monetary policy support savings. Lastly, factors such as the terms of trade, youth dependency and the level and growth of per capita income enhance savings, whereas financial sector development, government consumption expenditure and the elderly dependency rate inhibit it. The second empirical study examines the determinants of foreign aid transfers to SSA, focusing on the role of institutional quality. The effects of institutional quality on aid transfers are analysed through aggregated and sub-dimensional measures of institutional quality. The study employs a panel dataset for the period 1980–2015 and the 2SIV-GMM, which accounts for the recipient-country heterogeneity and the endogeneity inherent in panel data. The empirical results reveal that the economic and legal sub-dimensions of institutional quality induce foreign aid flows to SSA, whereas the political sub-dimension inhibits aid transfers to the SSA. Further, the effects of savings, trade openness and foreign direct investment (FDI) on aid transfers are negative, whereas population growth and income growth attract foreign aid to SSA. The third empirical study investigates the impact of foreign aid on investment in SSA. It employs panel data for the period 1980–2015 and the 2SIV-GMM estimator to examine the threshold and the complementarity effects of foreign aid on investment. The estimations reveal four key findings. First, foreign aid exerts a positive effect on investment, with magnitudes varying substantially across SSA countries at the aggregated level and across income and regional groupings. Second, the empirical findings lend support to the theoretical argument that there are diminishing returns to foreign aid in SSA at the aggregated level and across income and regional groupings. This indicates that past a certain level, the incremental effect of foreign aid on investment in SSA starts to fall. Third, the study finds that not only does foreign aid exhibits diminishing returns on investment, but also crowd-out the effect of savings on investment. Lastly, savings, FDI, trade openness and institutional quality promote investment in SSA. The results are robust to alternative specifications using bilateral and multilateral aid and an alternative specification. The fourth empirical study examines the effects of foreign aid and aid volatility on economic growth in SSA—at the aggregated level and across income and regional groupings—and the ways in which institutional quality moderates the aid volatility – growth nexus. Utilising a comprehensive panel dataset for the period 1980–2015, the study estimates the aid–growth model using the 2SIV-GMM estimator. The three main findings are as follows. First, aid volatility hurts economic growth. Second, institutional quality and its sub-dimensions enhance economic growth at the aggregate level and across regional and income groupings. Third, there is no robust evidence that the institutional quality and its sub-dimensions of economic, political and legal indicators curtail the adverse effect of aid volatility on economic growth. The findings are robust to alternative model specifications. The thesis makes four significant contributions to policy. Empirical Study 1 contributes to the theoretical debates on the determinants of savings. Unlike previous studies that focused on macroeconomic determinants of savings, this study combines both traditional and institutional theories of savings to demonstrates that better institutional quality drives savings in SSA. Policies designed to improve institutional quality should aim at strengthening the quality of economic, political and legal institutions since developing these institutional dimensions could reduce institutionally induced uncertainty, high transaction cost and corruption, which are essential for asset accumulation. The second contribution is based on empirical Study 2, which explores the drivers of foreign aid transfer to SSA, focusing on the role of institutional quality. The evidence presented implies that policies tailored towards the establishment of superior-quality institutions are critical to attracting foreign aid flows to SSA. Precisely, interventions designed to strengthen the quality of political institutions in SSA are critical since the political factors inhibit foreign aid transfer. Policy formulation in pursuing institutional quality should promote political stability, control corruption, ensure voice and accountability, and regulatory quality in SSA. Empirical Study 3 contributes to theory by providing new evidence on the threshold and complementarity effects of foreign aid on investment. It stresses that policies aimed at scaling up aid flows to SSA should account for the threshold and complementarity effects of foreign aid as this is crucial to promoting aid effectiveness. The findings presented in Study 3 indicate that diminishing returns to aid is an absorption problem. Hence, policies aimed at eliminating absorptive capacity constraints through the establishment of an effective public institution and human capital development is crucial to enhance foreign aid effectiveness in SSA. Lastly, empirical Study 4 offers two policy contributions to foreign aid effectiveness. First, it contributes to theory by showing that aid volatility hurts economic growth in SSA. It is argued that a timely allocation of foreign aid is critical to minimising aid volatility. Besides, SSA countries should comply with conditions attached to foreign aid flows to limit delays or disruptions to foreign aid disbursements. Second, while institutional quality promotes economic growth, there is no robust evidence that it moderates the adverse impact of aid volatility on economic growth. As a result, policies tailored towards improving institutional quality of an aid-recipient country are required to enhance its influence on aid volatility – growth nexus.
- Subject
- institutional quality; savings; economic growth; foreign aid; thesis by publication
- Identifier
- http://hdl.handle.net/1959.13/1421282
- Identifier
- uon:37712
- Rights
- Copyright 2020 Elliot Boateng
- Language
- eng
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