Official Development Assistance and Agricultural Fixed Capital Formation in Africa: Evidence from A Panel of Countries

ABSTRACT

Sub-Saharan Africa (SSA) has attracted substantial amounts of Official Development Assistance (ODA) over the years. General ODA flows to the continent currently stands at around $80 billion per annum and the figure is projected to be well above $125 billion due to the Sustainable Development Goals. Over the last five decades, SSA has received about $1 trillion in foreign aid for sector-specific (agriculture, health, etc.) development. Even though the impact of aid on economic growth is inconclusive, the question is whether sector-specific aid has led to sectorspecific growth. Little is known about the relationship between ODA and agricultural fixed capital formation. In this study we examine how agricultural ODA impacts agricultural fixed capital formation in the short and long-terms in Africa. ODA has the potential of augmenting scarce domestic resources to form fixed capital in developing countries. Nonetheless, ODA can also be a disincentive to wealth building by depressing governments’ motivation for revenue generation; thereby impeding capital formation for economic growth and poverty reduction. For these reasons, this study tests the hypotheses that total ODA and its decomposed forms: bilateral and multilateral, enhances the formation of agricultural fixed capital needed for agricultural growth and employment.

Using data on 40 SSA countries over the period 1996 to 2014 and exploiting the instrumental variable two stage least squares (IV-2SLS) in a fixed-effects setting and the generalized method of moment (GMM) estimators, the study finds that in the short-term, total and bilateral ODA have a strong positive and statistically significant impact on fixed capital formation. However, we do not find short-term impacts of multilateral ODA on fixed capital formation. In terms of the growth impacts of total ODA on fixed capital formation, the study finds marginal impact of bilateral ODA on growth in fixed capital formation in Sub-Saharan Africa at the 10% level of significance. Total and multilateral aid do not have University of Ghana http://ugspace.ug.edu.gh vi longer-term impact on agricultural fixed capital formation. For this reason, bilateral ODA seem to be more suitable for sustainable rural and agricultural development. The insignificant impact of multilateral ODA at level (short-term) and growth (long-term) could be as a result of free-riding in monitoring. With many donors providing aid in a multilateral arrangement, monitoring could be seem as a public good where individual donors expect others to monitor, and that can result in non-monitoring or under-provision of monitoring. Thus, for policy directions, it is recommended that in the design of multilateral ODA, monitoring by donors should be invigorated to enhance aid effectiveness. Generally, the study finds limited impact of overall aid on agricultural fixed capital. Therefore, governments of African countries should reconsider their over-reliance on official development assistance and strengthen private sector channels that encourage internally generated revenue.