Asiama, Rex Kweku Awuku; Nell, Ke in
A icle
Can o eign aid in luence he le el o indus ializa ion in
A ican coun ies?
Cogen Economics & Finance
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Sugges ed Ci a ion: Asiama, Rex Kweku Awuku; Nell, Ke in (2024) : Can o eign aid in luence he le el
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Can o eign aid influence he le el o
indus ializa ion in A ican coun ies?
Rex Kweku Awuku Asiama & Ke in Nell
To ci e his a icle: Rex Kweku Awuku Asiama & Ke in Nell (2024) Can o eign aid influence
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DEVELOPMENT ECONOMICS | RESEARCH ARTICLE
Can o eign aid in luence he le el o indus ializa ion in A ican
coun ies?
Rex Kweku Awuku Asiama
a
and Ke in Nell
b
a
Sus ainable Ene gy and Resou ces, Uni e si y o En i onmen and Sus ainable De elopmen , Somanya, Ghana;
b
College
o Business and Economics, Uni e si y o Johannesbu g, Johannesbu g, Sou h A ica
ABSTRACT
Capi al in lows, such as o eign aid, can se e as a means o enhance in as uc u e
de elopmen in de eloping coun ies. This sugges s ha o eign aid migh ha e an
impac on he le el o indus ializa ion in A ican na ions. While exis ing s udies indi-
ca e ha o eign aid can a ec he compe i i eness o he manu ac u ing sec o by
app ecia ing he eal exchange a e, he e aci y o his claim elies on empi ical e i-
dence. This pape explo es he in luence o aid on manu ac u ing alue added using
ime-se ies da a spanning om 1990 o 2018 o 27 A ican coun ies. Employing a
panel ec o au o eg ession echnique and gene a ing associa ed impulse esponse
unc ions, he s udy sc u inizes he in e ac ions be ween o eign aid and manu ac u -
ing. The analysis is conduc ed on bo h he ull da ase and subsamples disagg ega ed
based on he income le els o coun ies. The esul s indica e ha o eign aid ac s as a
s imulus o manu ac u ing, p ima ily h ough a sus ained dep ecia ion o he eal
exchange a e. This inding holds ue o bo h he o e all da ase and he subse o
low-income coun ies. The s udy a ibu es his phenomenon o he s a egic u iliza-
ion o aid o enhance in as uc u e, leading o a educ ion in he p ice o non- ad-
ables ela i e o adables. Consequen ly, his enhances he p o i abili y and ou pu
capaci y o he manu ac u ing sec o in A ican coun ies. In essence, he esul s sug-
ges ha o eign aid plays a ole in in luencing o s imula ing indus ializa ion in
A ican coun ies. The s udy concludes wi h a discussion on he implica ions o hese
indings o indus ial policy in A ican na ions.
IMPACT STATEMENT
This pape de e mines he ex en o which o eign aid in luences he le el o indus ial-
iza ion in A ican coun ies. By using ime-se ies da a spanning om 1990 o 2018 o
27 A ican coun ies, a panel ec o au o eg ession echnique and gene a ing associ-
a ed impulse esponse unc ions, he s udy sc u inizes he in e ac ions be ween o eign
aid and he le el o indus ializa ion in A ican coun ies. The analysis is conduc ed on
bo h he ull da ase and subsamples disagg ega ed based on he income le els o
coun ies. Ou esul s nega e he gene al pe cep ion ha o eign aid in lows ha m
indus ializa ion in de eloping coun ies, which can a ec he compe i i eness and
p o i abili y o manu ac u ing and lead o deindus ializa ion. Howe e , his pe cep ion
has been one-sided because o eign aid can also be used o boos in as uc u e in
de eloping coun ies. The pape helps o unea h he dominan e ec o o eign aid in
his con ex and samples A ican coun ies because hey a e gene ally less de eloped
and indus ialized and s and o bene i om o eign aid.
ARTICLE HISTORY
Recei ed 9 Augus 2023
Re ised 10 Janua y 2024
Accep ed 12 Ma ch 2024
KEYWORDS
Fo eign aid; manu ac u ing;
indus ialisa ion; A ica
JEL CLASSIFICATION
C23; E60; E61; E65
REVIEW EDITOR
Tiwa i A i al, Rajagi i
Business School, India
SUBJECTS
Economics and
De elopmen ; Sus ainable
De elopmen ; Economics
1. In oduc ion
A ica alues o eign aid because i helps he con inen achie e i s global de elopmen objec i es. I s
impac s on de elopmen , howe e , ha e been une en. Da a om he O ganisa ion o Economic
Coope a ion and De elopmen (OECD) show ha A ican coun ies ha e been he highes ecei e s o
CONTACT Rex Kweku Awuku Asiama [email p o ec ed] Sus ainable Ene gy and Resou ces, Uni e si y o En i onmen and
Sus ainable De elopmen , Somanya, Ghana
ß2024 The Au ho (s). Published by In o ma UK Limi ed, ading as Taylo & F ancis G oup
This is an Open Access a icle dis ibu ed unde he e ms o he C ea i e Commons A ibu ion License (h p://c ea i ecommons.o g/licenses/by/4.0/), which
pe mi s un es ic ed use, dis ibu ion, and ep oduc ion in any medium, p o ided he o iginal wo k is p ope ly ci ed. The e ms on which his a icle has been
published allow he pos ing o he Accep ed Manusc ip in a eposi o y by he au ho (s) o wi h hei consen .
COGENT ECONOMICS & FINANCE
2024, VOL. 12, NO. 1, 2331369
h ps://doi.o g/10.1080/23322039.2024.2331369
o eign aid since he Sus ainable De elopmen Goals (SDGs) we e a i ied. Fo example in 2018, Sou h
A ica opped he lis o A ican coun ies ha ecei ed he mos aid (US$ 4.2 billion), ollowed by Egyp
(US$ 3.5 billion), Mozambique (US$ 3.2 billion), Kenya (US$ 2.4 billion), E hiopia (US$ 2.3 billion) and
Nige ia (US$ 2 billion) (O ganisa ion o Economic Coope a ion and De elopmen [OECD], 2021). In add-
i ion, some schola s also poin ou aid’s con ibu ion o achie ing SDGs on po e y, hunge and gende
inequali y and imp o ing access o social se ices in A ican coun ies (Dhah i & Om i, 2020; Ndikumana
& Pickbou n, 2017; Pickbou n & Ndikumana, 2016).
Despi e i s seeming impo ance o de eloping coun ies, o eign aid can ha e some ad e se e ec s—
wo sening esou ce go e nance, p omo ing co up ion and weakening domes ic expo compe i i eness
(Cai e al., 2018; Mahembe & Mbaya Odhiambo, 2019). These nega i e e ec s o aid educe i s e ec i e-
ness and make i di icul o de e mine he e ec o aid a p io i. Some schola s ha e u he a gued ha
aid causes an app ecia ion o a economy’s eal exchange a e, esul ing in symp oms o he Du ch dis-
ease, which ha ms he manu ac u ing sec o in de eloping coun ies and a ec s hei expo compe i-
i eness (Magud & Sosa, 2013). This is an impo an issue o A ican coun ies because e en hough
A ican coun ies ecei e se e al amoun s in o eign aid, he g ow h and de elopmen o hei manu ac-
u ing sec o is c ucial o hei s uc u al ans o ma ion and sus ainable g ow h. In e ec , he e could be
po en ial in suppo ing he sec o using o eign aid. Hence, his pape ’s e-examina ion o aid’s in luence
on manu ac u ing alue added o he le el o indus ializa ion in A ican coun ies.
Typically, a p oduc i e sec o , like manu ac u ing, mus ade wi h he es o he wo ld and especially
wi h de eloped economies, which usually in luence he p ice o aded inal consump ion and se ice
goods (gene ally e e ed o as adables). Mos A ican economies a e known o be p ice ake s, assum-
ing a ixed wo ld p ice o inal goods and u ilizing a ela i e exchange a e, known as he eal exchange
a e. This eal exchange a e is de ined as he a io o he ixed o eign p ice o adables (usually
p oxied by he p ice in he Uni ed S a es) o he domes ic p ice o non- adables (mainly conside ed o
include in as uc u e like powe supply and he cos o capi al in es men ). In his sense, a dep ecia ion o
he eal exchange a e esul s om a dec ease in he domes ic p ice o non- adables, ela i e o he
domes ic p ice o adables, which inc eases he p o i abili y o manu ac u ing. Fo eign aid, on he o he
hand, may cause he eal exchange a e o app ecia e by inc easing he demand/impo s o non- ad-
able goods and se ices, which aises he p ice o non- adables, and educes he ela i e p o i ibali y o
manu ac u ing, a si ua ion likened o he Du ch disease synd ome ha esul s om o e eliance on e e-
nues om pa icula na u al esou ces.
Indeed, se e al s udies ha e examined he e ec o aid in de eloping coun ies o e ime (A nd
e al., 2010; Boone, 1994; Eas e ly, 2003,2006; He ze e al., 2015; He ze & Mo issey, 2009; Lo e al.,
2015). None heless, a small sec ion o he li e a u e has a gued ha aid can po en ially c owd ou manu-
ac u ing expo s because o he loss o compe i i eness caused by he app ecia ion o he eal
exchange a e (Addison & Baliamoune-Lu z, 2017; Magud & Sosa, 2013). This is an empi ical ma e
because o eign aid can also be used o inc ease he supply o non- adable and p oduc i e in as uc-
u e like powe supply, cons uc ion and anspo . Aid used in his way causes he eal exchange a e
o dep ecia e, causes manu ac u ing expo s o become mo e p o i able and accele a es indus ial
de elopmen .
In any case, he non- adable sec o in A ican coun ies is unde de eloped and aid in lows can a ec
bo h he supply and demand o non- adables, depending on i s use. These di e en pe spec i es on
aid e ec i eness, he e o e, gi e us a basis o empi ically examine he e ec o aid and he eal
exchange a e on manu ac u ing in A ican coun ies, which equi e s uc u al ans o ma ion, despi e
ecen g ow h and la ge eceip s o aid (Akobeng, 2020; Rod ik, 2018).
Using a panel au o eg essi e echnique, wi h da a on 27 A ican coun ies om 1990 o 2018, he
pape empi ically examines he ela ionships be ween o eign aid, he eal exchange a e and manu ac-
u ing. We analyze hese ela ionships i s a an agg ega e le el and la e disagg ega e he analysis
acco ding o he income le els o coun ies in he sample. This is he pape ’s i s con ibu ion o he li -
e a u e. By ocusing on he income le els in ou analysis, we con ol o he di e ence in de elopmen
le els o sampled coun ies, which e lec s he eali y ha he e ec o aid is unlikely o be he same
ac oss all coun ies, since some A ican coun ies depend on aid o de elopmen mo e han o he s. The
pape ’s second con ibu ion o he li e a u e is hinged on he applica ion o impulse esponse unc ions
2 R. K. A. ASIAMA ET AL.
in he aid e ec i eness li e a u e. These esponse unc ions a e gene a ed om panel ec o au o eg es-
sion models and show he pe sis ence o he e ec o aid and he eal exchange a e on manu ac u ing.
To he bes o ou knowledge, p e ious s udies ha examine he e ec o o eign aid and he eal
exchange a e in de eloping coun ies do no analyse he pe sis ence o he e ec s o hese a iables
using impulse esponse unc ions, lea ing a gap in he li e a u e ha his pape con ibu es o illing.
The esul s i s show ha aid does no cause an app ecia ion o he eal exchange a e in A ican
coun ies. Ins ead, he esul s show ha o eign aid causes a dep ecia ion o he eal exchange a e,
which s imula es manu ac u ing in A ican coun ies. Also, he nega i e and independen e ec o aid
on manu ac u ing, is signi ican o he i s ew yea s and insigni ican in la e yea s, based on i s
impulse esponse unc ion. Thus, his e ec o aid does no pe sis as i is o se by aid’s s imula ion o
he eal exchange a e ( eal exchange a e dep ecia ion), which hen s imula es manu ac u ing ou pu
ela i e o se ices. The e o e, he esul s sugges ha o eign aid can in luence manu ac u ing alue
added o he le el o indus ializa ion in A ican coun ies. In addi ion, he esul s show ha he eal
exchange a e and manu ac u ing a e in e sely ela ed. This means ha a eal exchange a e dep eci-
a ion s imula es manu ac u ing in A ican coun ies. This inding sugges s ha compe i i e eal exchange
a es can boos manu ac u ing ou pu in A ican coun ies. Also, we ind ha he e ec o he eal
exchange a e pe sis s o e ime, sugges ing ha a compe i i e eal exchange a e is c ucial o manu-
ac u ing de elopmen in A ican coun ies. We ind simila esul s om some exis ing s udies (Guzman
e al., 2018; Rape i e al., 2012; Rod ik, 2008) and discuss u he he implica ions o he esul s o
indus ial policy in A ica.
The es o his pape is s uc u ed as ollows: Sec ion wo e iews exis ing li e a u e on aid, he eal
exchange a e and manu ac u ing. Sec ion h ee discusses he esea ch me hodology and sec ion ou
p esen s he empi ical esul s. Sec ion i e concludes.
2. Li e a u e e iew
The dominan a gumen in he li e a u e has been ha unde alua ion o he eal exchange a e is good
o g ow h and indus ializa ion, especially in de eloping coun ies (Chukwu & Malikane, 2018; Rape i
e al., 2012; Rod ik, 2008).
1
In ac , no many s udies ecommend o e alua ion o he eal exchange a e
in de eloping coun ies.
2
Se e al heo e ical a gumen s suppo ing he unde alua ion o dep ecia ion o he eal exchange
a e ha e been pu o h (Rod ik, 2008). The i s heo e ical a gumen in a ou o unde alua ion o
dep ecia ion o he eal exchange a e is ha i is indica i e o in e na ional compe i i eness and helps
p omo e expo s om he manu ac u ing sec o . The apid indus ializa ion success o he Eas -Asian
coun ies, in which expo -led g ow h policies we e pu sued in conjunc ion wi h an exchange a e
egime ha suppo ed unde alua ion, bea s es amen o his a gumen . Indeed, as a esul o unde al-
ued exchange a es and posi i e ex e nali ies o he manu ac u ing sec o , sa ings and in es men s we e
boos ed by e enues om manu ac u ing expo s in hese economies (Dooley e al., 2004; Le y-Yeya i &
S u zenegge , 2007).
In addi ion, eal exchange a e unde alua ion is a guably a compensa o y mechanism o he manu-
ac u ing sec o , despi e exis ing dis o ions ha make i di icul o he sec o o ecei e equilib ium
alloca ion o esou ces, especially in de eloping coun ies (Rape i e al., 2012; Rod ik, 2008; Sch €
ode ,
2013). These dis o ions a e a gued o esul om bad ins i u ions and ma ke ailu es ha a ec he
adable sec o , especially in de eloping coun ies (Ribei o e al., 2020; Rod ik, 2008). Fu he mo e, schol-
a s a gue ha eal exchange a e unde alua ion p omo es economic di e si ica ion and echnology-
in ensi e s uc u al change. This is plausible because a compe i i e exchange a e ac s as a subsidy o
he adable sec o ha can gene a e lea ning spillo e s ac oss i ms and o he ela ed sec o s, hus
making unde alua ion a o m o indus ial policy (Guzman e al., 2018; Rod ik, 2008).
The empi ical li e a u e mos ly shows suppo o an unde alua ion o dep ecia ion, and no an o e -
alua ion o app ecia ion, o he eal exchange a e (Guzman e al., 2018; Rape i e al., 2012; Rod ik,
2008). Howe e , hese s udies do no show whe he a eal exchange a e unde alua ion o dep ecia ion
d i en by aid a ec s manu ac u ing in de eloping coun ies like his pape does.
COGENT ECONOMICS & FINANCE 3
Ano he s and o he li e a u e u he a gues ha o eign aid, among many o he capi al in lows,
leads o an app ecia ion o he eal exchange a e, which hen e lec some o he e ec s o he Du ch
disease. This is because aid aises he demand o non- adables and causes hei p ice o ise. The
inc ease in he p ice o non- adables causes an app ecia ion o he eal exchange a e, which educes
he p o i abili y and, hence, amoun o ou pu manu ac u ing can p oduce a he gi en wo ld p ice
(Adam & Be an, 2006; Addison & Baliamoune-Lu z, 2017; Issa & Oua a a, 2008; Li & Rowe, 2007; Magud
& Sosa, 2013; Monga dini & Rayne , 2009). Thus, aid-induced Du ch disease ha ms a ecipien coun y’s
manu ac u ing sec o by making i s expo s less p o i able.
3
Howe e , he esponse o he eal exchange a e de e mines whe he o no o eign aid a ec s he
p o i abili y o he manu ac u ing sec o . The eal exchange a e is a ela i e p ice and can change o be
misaligned based on consume ac i i y in he adable (consume goods) and non- adable ( ixed in a-
s uc u e) sec o s (Magud & Sosa, 2013). Based on he way he eal exchange a e esponds o o eign
aid in lows, one o he ollowing e ec s may esul om o eign aid in lows. Fi s , when aid is spen o
inc ease he a ailabili y o non- adables se ices like educa ion and heal h, highe wages may d aw
mo e skilled labou in hese sec o s. The wage demands o highly-skilled labou may cause he p ice o
non- adable se ices o go up and cause he eal exchange a e o app ecia e. The app ecia ion o he
eal exchange a e educes he p o i abili y o manu ac u ing and, because a de eloping economy is
small and open, expo s o adable p oduc s decline. This aises he domes ic p ice o non- adables
ela i e o he domes ic p ice o adables and a ec s he p oduc i i y o he adable sec o .
Secondly, aid used o in es in in as uc u e ( oads and po s) and powe supply inc eases he supply
o non- adables and causes hei p ice o all. In his way, he eal exchange a e dep ecia es and he
adable sec o becomes p o i able, which is good o g ow h. Thus when o eign aid is used o imp o e
ac o p oduc i i y by pu chasing p oduc i e capi al, in e media e goods and o eign consul ing, he eal
exchange a e may dep ecia e and s imula e manu ac u ingbecause o he eal exchange a e app eci-
a ion Again, highe wages paid o labou o non- adable se ices leads o highe expendi u e on non-
adables. The eal exchange a e is likely o be app ecia ed i o eign aid is spen on impo s o sa is y
local demand, which he domes ic supply sec o canno coun e . This means ha The e o e, he conclu-
sions o ea lie s udies ha aid is bad o manu ac u ing in de eloping coun ies because o i s app eci-
a ion o he exchange a e canno be ully accep ed wi hou mo e empi ical in es iga ion. This is
because capi al in lows, such as aid, a e impo an o some de eloping coun ies, especially in Sub-
Saha an A ica (Oued aogo e al., 2021).
The dominance o any o he abo e-men ioned e ec s is he e o e an empi ical ma e , since he
e ec o o eign aid canno be de e mined be o ehand and equi es empi ical es ing. Mo e so, in he
case o A ican coun ies who ecei e so much in o eign aid and ha e no ully indus ialized, he empi -
ical es be ween o eign aid and manu ac u ing alue added o he le el o indus ializa ion is c ucial o
guide indus ial policy in he such coun ies.
3. Me hodology
This sec ion begins wi h a discussion on he ec o au o eg essi e model and p esen s he model speci-
ica ion. I hen p esen s he es ima ion echnique and desc ip i e s a is ics o he sample da a.
3.1. VAR & endogenei y conce ns
We use a VAR model o de e mine whe he aid causes he Du ch disease in A ican coun ies. Diagnos ic
es s o uni oo s, op imal lag leng h and s abili y a e conduc ed be o e es ima ing he VAR model, in
o de o ensu e ha meaning ul in e ences can be gene a ed om he model. The panel VAR model
allows one o examine he in e ac ions be ween o eign aid, he eal exchange a e and he manu ac u -
ing sec o and de e mine whe he he e a e e e se causali ies be ween hese a iables. We also use
impulse esponse unc ions, which a e gene a ed om he VAR model, o de e mine he dynamics in
manu ac u ing and he pe sis ence o inno a ions in aid and he eal exchange a e.
O he me hods, such as ixed e ec s panel eg ession analysis, co-in eg a ion eg ession echniques
(DFGLS) and di e ence-in-di e ences analysis ha e been used in he li e a u e o analyse he e ec o
4 R. K. A. ASIAMA ET AL.
aid (Cai e al., 2018; Dupuy e al., 2016; Minasyan e al., 2017; Nowak-Lehmann e al., 2012).
Ne e heless, he VAR model is p e e ed because i can be e con ol o simul anei y by endogenizing
all he a iables. By using an un es ic ed VAR model, in e ac ions be ween he a iables a e cap u ed o
allow o e e se causali y in he model. In his way, i is possible o de e mine he in luence o aid on
manu ac u ing and ice e sa, while analysing he in e ac ions be ween he eal exchange a e, aid and
manu ac u ing.
Mo e so, he measu e o aid can a ec he de e mina ion o aid’s e ec . Lo e al. (2015) use aid pe
capi a bu his is c i icized by He ze e al. (2015), who a gue ha he use o aid pe capi a is a ec ed
by changes in aid in he nume a o and he popula ion in he denomina o . As a esul , aid, as a sha e
o GDP is a be e measu e o use in empi ical s udies (He ze e al., 2015). The e o e, aid’s sha e o
G oss Domes ic P oduc (GDP) is adop ed o de e mine he e ec o o eign aid.
Finally, impulse esponse unc ions can be de i ed om he panel VARs. Acco ding o Lo e al.
(2015), impulse esponse unc ions show he dynamic esponse o a iables o inno a ions in o he a ia-
bles in he sys em o e a gi en pe iod. Also, we ollow Ab igo and Lo e (2016) because hey use con i-
dence in e als ha a e es ima ed wi h Mon e Ca lo simula ions ob ained om he dis ibu ion o a
i ed educed- o m panel VAR model, which imp o es he eliabili y o he model es ima es.
3.2. Model speci ica ion
Following he wo k o Ab igo and Lo e (2016) and adap ing hei es ima ion codes, a panel VAR model
is speci ied.
4
The panel VAR codes o Ab igo and Lo e a e elied on because hey gi e one he op ion
o con ol o exogenous a iables, use GMM es ima o s, and conduc causali y es s and op imal lag
selec ion es s in line wi h And ews and Lu (2001) and G ange (1969).
The panel VAR model examines in e ac ions be ween he ollowing a iables: aid, measu ed as he sha e
o o eign aid in o al ou pu (AIDi ), manu ac u ing, measu ed as manu ac u ing alue added sha e o o al
ou pu (MVAi ) and he eal exchange a e (RERi ), which is measu ed as he domes ic p ice le el ela i e o
he Uni ed S a es (US) p ice le el, so ha an inc ease indica es an app ecia ion. This RER is used as a p oxy
o he p ice o non- adables ela i e o adables and he domes ic p ice le el cap u es he p ice o non-
adables. An inc ease in he domes ic p ice ep esen s a ise in he p ice o non- adables, which causes
he RER o app ecia e. In addi ion, he model con ols o ixed capi al in es men , which is measu ed as
he sha e o g oss ixed capi al o ma ion in o al ou pu (INVi ), in line wi h he HD and wo-gap models
ea lie discussed. The a iables and hei sou ces a e de ined ully in he nex sec ion.
The causali y p edic ion o he aid-induced Du ch disease is p esen ed as:
AIDi !
þRERi !
−
MVAi (3.1)
Secondly, he causali y p edic ion o he posi i e e ec o AID wo king hough in es men is p e-
sen ed as:
AIDi !
þINVi !
þMVAi (3.2)
Thi dly, he causali y p edic ion o he posi i e/nega i e e ec o aid ope a ing hough o he o ces,
besides he Du ch Disease e ec o in es men e ec is p esen ed as:
AIDi !
þ=−
MVAi (3.3)
To es he causali y p edic ions o Equa ions (3.1) -(3.3), he ollowing VAR models a e speci ied:
MVAi ¼a0þa1MVAi −1þ...þapMVAi −pþb1AIDi −1þ...þbpAIDi −p
þc1RERi −1þ...þcpRERi −pþd1INVi −1þ...þdpINVi −pþliþei
(3.4)
AIDi ¼c0þc1AIDi −1þ...þapAIDi −pþg1MVAi −1þ...þgpMVAi −p
þd1RERi −1þ...þdpRERi −pþh1INVi −1þ...þhpINVi −pþmiþei
(3.5)
RERi ¼k0þk1RERi −1þ...þkpRERi −pþj1MVAi −1þ...þjpMVAi −p
þe1AIDi −1þ...þepAIDi −pþi1INVi −1þ...þipINVi −pþsiþ i
(3.6)
COGENT ECONOMICS & FINANCE 5
INVi ¼p0þp1INVi −1þ...þppINVi −pþq1MVAi −1þ...þqpMVA −p
þ 1AIDi −1þ...þ pAIDi −pþ/1RERi −1þ...þ/pRERi −pþ iþwi
(3.7)
Whe e c,a,b,g,h,j,k,q,p,i,c,d,e, a e coe icien s o be es ima ed in he VAR models. Also,
ixed e ec s a e cap u ed by i,si,miand li:Fu he mo e, he s ochas ic e o e ms a e ep esen ed by
wi , i ,ei and ei :
F om Equa ion (3.4), he null hypo hesis ha aid does no G ange cause MVAi ,H0:b1¼b2¼... ¼
bp¼0, is es ed agains he al e na i e ha aid G ange causes MVAi ,HA:b16¼ 0Úb26¼ 0... Úbp6¼
0:In addi ion, he null hypo hesis ha he eal exchange a e does no G ange cause MVAi ,H0:c1¼
c2¼... ¼cp¼0, is es ed agains he al e na i e ha he eal exchange a e G ange causes MVAi ,
HA:c16¼ 0Úc26¼ 0... Úcp6¼ 0:Fu he mo e, he null hypo hesis ha g oss ixed capi al in es men
does no G ange cause MVAi ,H0:d1¼d2¼... ¼dp¼0, is es ed agains he al e na i e ha g oss
ixed capi al in es men G ange causes MVAi ,HA:d16¼ 0Úd26¼ 0... Údp6¼ 0:
Hypo heses cap u ing e e se causali y a e also es ed. Hence, om Equa ion (3.5), he null hypo hesis
ha MVAi does no G ange cause aid, H0:g1¼g2¼... ¼gp¼0, is es ed agains he al e na i e
ha MVAi G ange causes aid, HA:g16¼ 0Úg26¼ 0... Úgp6¼ 0:
Again om Equa ion (3.6), he null hypo hesis ha MVAi does no G ange cause he eal exchange
a e, H0:j1¼j2¼... ¼jp¼0, is es ed agains he al e na i e ha MVAi G ange causes he eal
exchange a e, HA:j16¼ 0Új26¼ 0... Újp6¼ 0:Simila ly, om Equa ion (3.6), he null hypo hesis ha
AIDi does no G ange cause he eal exchange a e, H0:e1¼e2¼... ¼ep¼0, is es ed agains he
al e na i e ha AIDi G ange causes he eal exchange a e, HA:e16¼ 0Úe26¼ 0... Úep6¼ 0:
Finally om Equa ion (3.7), he null hypo hesis ha MVAi does no G ange cause g oss ixed capi al
in es men , H0:q1¼q2¼... ¼qp¼0, is es ed agains he al e na i e ha MVAi G ange causes
g oss ixed capi al in es men , HA:q16¼ 0Úq26¼ 0... Úqp6¼ 0:
3.2.1. Es ima ion echnique & speci ica ion es s
Conside now he es ima ion echnique and speci ica ion es s used o he speci ied panel VAR model.
The sys em GMM es ima o is used o con ol o endogenei y, in line wi h Ab igo and Lo e (2016). This
es ima ion echnique—de eloped by A ellano and Bo e (1995)—is used because i allows he a iables
o be es ima ed in le els, so ha da a loss is minimized. Using he A ellano and Bo e GMM es ima o ,
oge he wi h ixed e ec s and u he speci ica ion es s, imp o es he eliabili y o he esul s om he
panel VAR model. Ande son and Hsiao (1982) de eloped an al e na i e me hod— he di e ence GMM
echnique—which in ol es he use o i s di e ences. Howe e , his app oach can be p oblema ic when
he panel used has missing obse a ions o is unbalanced.
Fu he mo e, he speci ica ion es s o he panel VAR model begin wi h panel uni oo es s. The
p esence o uni oo s educes he e iciency o ins umen s used in he GMM es ima o (Blundell &
Bond, 1998). Also, momen condi ions o he GMM es ima o a e nulli ied when uni oo s a e p esen
(Ab igo & Lo e, 2016). We use bo h he Le in-Lin-Chu (LLC) and he Ha is-Tza alis (HT) es s, in line
wi h he wo k o Le in e al. (2002) and Ha is and Tza alis (1999). Bo h es s use he null hypo heses
ha he e a e uni oo s in all he panels. Also, he uni oo es s, include and exclude he ime ends
as a obus ness check o he esul s ob ained. In addi ion, he zsco es and adjus ed -s a is ics o he
uni oo es s a e used o ejec he null hypo hesis o uni oo s in he panels.
A e uni oo es ing, he op imal lag leng h o he VAR model is equi ed. The op imal lag leng h o
he VAR model is de e mined using Momen Model Selec ion C i e ia (MMSC) based on Hansen’sJs a is-
ic o o e iden i ying es ic ions (And ews & Lu, 2001; Hansen, 1982). These MMSC a e simila o e-
quen ly used maximum likelihood-based c i e ia such as he Akaike, Bayesian and Hannan-Quinn
in o ma ion c i e ia (Ab igo & Lo e, 2016). The decision c i e ia, he e o e, is o selec he lag leng h ha
shows he lowes alue o he Akaike, Bayesian o Hannan-Quinn MMSCs.
Again, he panel VAR model mus be es ed o s abili y. The VAR model is s able when each moduli
o he companion ma ix is lowe han one (Hamil on, 1994;L
€
u kepohl, 2005). S abili y o he VAR model
is impo an because i p o es ha he VAR is in e ible and i s impulse esponse unc ions a e use ul
o in e p e a ion. This is an impo an p e- es o ensu e ha he VAR model is no misspeci ied.
6 R. K. A. ASIAMA ET AL.
In addi ion, he G ange causali y es s a e used o de e mine causali y in he model. These es s a e
pe o med a e he VAR es ima es a e ob ained. Wald es s a e used o es he null hypo heses in
Equa ions (3.4)–(3.7). In addi ion, o hogonalized impulse esponse unc ions a e de i ed om he unde -
lying VAR models. These unc ions show he esponse o one a iable o inno a ions in ano he a iable
in he sys em. In his way, he e ec o he a iables on each o he can be discussed.
Finally using his me hodology, his pape is unique in he ollowing way: a sub-sample analysis is
conduc ed, whe e coun ies a e g ouped by hei income le els o see he e ec o aid, a e he agg e-
ga e analysis. We use he Wo ld Bank’s income classi ica ion o coun ies o e ime, as his da a is eli-
able. We an icipa e ha because low-income coun ies ely mo e on o eign aid, he e ec o aid may
be mo e no iceable in such coun ies, han in middle-income coun ies. In addi ion, by using impulse
esponse unc ions gene a ed om he panel VAR model, we a e able o examine he dynamics o man-
u ac u ing o e ime and he pe sis ence esul ing om shocks in aid and he eal exchange a e. Ea lie
s udies examining he aid and he Du ch disease e ec do no show he pe sis ence o he e ec o aid
and he eal exchange a e.
3.3. Da a & desc ip i e s a is ics
3.3.1. Da a
The analysis uses a balanced panel da ase , con aining da a o 27 A ican coun ies om 1990 o 2018.
The sample size is selec ed based on da a a ailabili y. The de ini ions o all a iables in he da ase a e
shown in Table 1.
Mos o he da a a e ob ained om he Wo ld De elopmen Indica o s (WDI) da abase o he Wo ld
Bank,
5
wi h he excep ion o da a on he eal exchange a e, which is ob ained om he Penn Wo ld
Tables (PWT) da abase e sion 9.1 (Feens a e al., 2015). In addi ion, he lis o coun ies sampled in he
s udy a e shown in Table 11 o he Appendix A.
3.3.2. Desc ip i e s a is ics
The summa y s a is ics o he main a iables in ou analysis a e p esen ed in Table 2. The esul s om
he able show ha he a e age ou pu sha e o manu ac u ing alue added in A ican coun ies
sampled is 12% whe eas he a e age sha e o o eign aid in o al ou pu is 6.5%. Also, he esul s om
Table 2 show ha he a e age eal exchange a e ( ela i e p ice a io) in A ican coun ies sampled is
0.3993 while he a e age sha e o g oss capi al o ma ion in o al ou pu ( ixed in es men ) is app oxi-
ma ely 21.9%.
Looking u he a he dis ibu ion o manu ac u ing alue added sha e and he sha e o o eign aid
in o al ou pu ac oss coun ies (see Table 3), he esul s show ha he a e age sha e o aid o GDP is
Table 1. De ini ion o a iables.
Va iable De ini ion Sou ce
MVAi Manu ac u ing alue added sha e o GDP (cons an 2010 US$) WDI
RERi Rela i e p ice a io, measu ed as he domes ic p ice le el ela i e o he p ice
o he Uni ed S a es (US). An inc ease in he a io deno es an app ecia ion.
The ela i e p ice a io is calcula ed by di iding he Pu chasing Powe
Pa i y (PPP) exchange a e o each coun y by i s nominal exchange a e.
PWT
INVi G oss capi al o ma ion sha e o GDP (cons an 2010 US$) WDI
AIDi Fo eign aid sha e o GDP. Aid is measu ed as a combina ion o ne o icial
de elopmen assis ance and o icial aid ecei ed (cons an 2015 US$).
WDI
Sou ce: Au ho ’s compila ions.
Table 2. Summa y s a is ics using ull sample.
S a s Mean Min Max
MVAi 0.121 0.016 0.511
AIDi 0.065 −0.02 0.805
RERi 0.399 0.149 1.163
INVi 21.886 −2.424 58.188
Sou ce: Au ho ’s es ima ions.
COGENT ECONOMICS & FINANCE 7
P e ious s udies such as Rajan and Sub amanian and Magud and Sosa (2013) also ind simila esul s.
Howe e , hese s udies do no examine he pe sis ence o aid’s e ec on manu ac u ing, as we do in
his pape . Rajan and Sub amanian gi e he imp ession ha he nega i e e ec is impo an , bu wi hou
explici ly es ing he pe sis ence. Bu om his analysis, i is shown ha i is impo an o quali y he
nega i e e ec ; whe he i is pe sis en o no . Thus, by using impulse esponse unc ions and de e min-
ing he pe sis ence o aid’s e ec , a con ibu ion is made o he li e a u e on aid-induced Du ch disease
in de eloping coun ies.
4.3. The in luence o he eal exchange a e
The impulse esponse unc ions showing he esponse o manu ac u ing o inno a ions o shocks om
he eal exchange a e a e now examined in his sec ion. Using he ull sample, he impulse esponse
unc ion p esen ed in Figu e 5 shows ha , a 5% le el o signi icance, he RER has a nega i e and signi i-
can in luence on manu ac u ing in A ican coun ies sampled. This is because he ze o line alls ou side
he con idence in e als shown in Figu e 5. This inding sugges s ha inno a ions in he RER nega i ely
and signi ican ly in luence manu ac u ing in he i s ew yea s and pe sis s well in o he en h yea . This
means ha an app ecia ion o he eal exchange a e educes he sha e o manu ac u ing alue added
in GDP. The independen e ec o he RER on manu ac u ing in his pape is in line wi h he indings o
ea lie s udies like Rajan and Sub amanian, e en hough hei pape a gues ha he RER is he ansmis-
sion channel o aid’s e ec on manu ac u ing. This majo inding is also in line wi h he esul s ob ained
om he VAR model, p esen ed in Table 7. Fu he mo e, i suppo s a gumen s in he li e a u e on
unde alua ion and manu ac u ing p omo ion in de eloping coun ies (Rape i e al., 2012; Rod ik 2008;
Guzman e al. 2018; Missio e al. 2015; Sch €
ode , 2013).
We u he examine he esponse o manu ac u ing o inno a ions in he RER by analysing impulse
esponse unc ions acco ding o he income le els o coun ies in ou da ase . These a e p esen ed in
Figu e 4. Response o MVA/GDP o inno a ions om AID/GDP o Uppe -Middle Income coun ies.
Figu e 5. Response o MVA/GDP o inno a ions om RER using ull sample.
14 R. K. A. ASIAMA ET AL.
Figu es 6–8. The esul s om his sub-sample analysis show ha he RER nega i ely in luences manu ac-
u ing and his e ec pe sis s in o he six h yea in low-income coun ies. A e he six h yea , inno a-
ions in he RER ha e no signi ican in luence on manu ac u ing in low-income coun ies. Howe e , o
lowe -middle income and uppe -middle-income coun ies, impulse esponse unc ions showing manu ac-
u ing’s esponse o inno a ions in he RER a e insigni ican . This is because he ze o line passes h ough
he con idence bands shown in he impluse esponse unc ions in Figu es 6–8.
Figu e 6. Response o MVA/GDP o inno a ions om RER - Low-Income coun ies.
Figu e 7. Response o MVA/GDP o inno a ions om RER - Lowe -Middle Income coun ies.
Figu e 8. Response o MVA/GDP o inno a ions om RER - Uppe -Middle Income coun ies.
COGENT ECONOMICS & FINANCE 15
4.4. Impulse esponses om aid o RER
Finally, impulse esponse unc ions ha show he esponse o he eal exchange a e o impulses in aid
a e conside ed. F om he VAR es ima es p esen ed ea lie , we ind ha aid nega i ely in luences he RER
in A ican coun ies. This is also he case in low-income coun ies in ou sample. We a gue ha his
nega i e ela ionship is no consis en wi h he hypo hesis o aid-induced Du ch disease, in which he
RER would espond posi i ely o aid in lows.
We ind ha he impulse esponse unc ion showing he esponse o he RER o aid con i ms he
nega i e in luence o aid on he RER, as seen in he VAR model. This impulse esponse unc ion, shown
in Figu e 9, indica es ha aid’s in luence on he RER does no pe sis o e ime. F om Figu e 9, he nega-
i e in luence o aid on he RER is s a is ically signi ican o he i s ou yea s, a e which i becomes
insigni ican , because he ze o line alls wi hin he con idence bands o he impulse esponse unc ion.
Ou inding di e om esul s o ea lie s udies like Rajan and Sub amanian and Magud and Sosa (2013),
who a gue ha aid causes he Du ch disease because i has a posi i e in luence on he RER.
Addi ional impulse esponse unc ions ob ained om he subsample analysis also show ha he e ec
o o eign aid on he RER is nega i e in low-income coun ies, albei insigni ican . Also o lowe -middle-
income and uppe -middle-income coun ies, he impulse esponse unc ions ob ained we e insigni ican .
5. Conclusion
The p ima y goal o his pape is o in es iga e he impac o o eign aid on he le el o indus ializa ion
in A ican coun ies. Gi en he subs an ial signi icance o o eign aid o A ican economies, which a e s ill
in he p ocess o ca ching up wi h he de eloped wo ld, he s udy del es in o he deba e su ounding
he g ow h e ec s o aid. While some schola s emphasize he posi i e ole o aid in suppo ing in a-
s uc u e and manu ac u ing, o he s exp ess skep icism due o he po en ial app ecia ion o he eal
exchange a e, eminiscen o he Du ch disease synd ome. The ocus o his pape is o assess he in lu-
ence o aid on manu ac u ing alue added and he o e all le el o indus ializa ion in A ican na ions.
The pape employs a panel VAR es ima ion echnique o model he dynamic in e ac ions among
manu ac u ing, aid, and he eal exchange a e, while accoun ing o ixed in es men in alignmen wi h
es ablished aid heo ies. Two key con ibu ions a e made o he exis ing li e a u e. Fi s ly, he s udy ana-
lyzes he impac o aid and he eal exchange a e based on he income le els o he sampled coun ies,
ecognizing he a iabili y o aid e ec s ac oss di e en economic con ex s. Secondly, i u ilizes impulse
esponse unc ions o gauge he pe sis ence o shocks om aid and he eal exchange a e on manu ac-
u ing in A ican coun ies. Th ough his app oach, he pape empi ically con ibu es o he aid e ec i e-
ness li e a u e, o e ing insigh s no commonly explo ed in ea lie s udies examining aid-induced Du ch
disease, pa icula ly in de eloping coun ies.
In con as o he con en ional expec a ion ha o eign aid in lows in de eloping economies lead o
a eal exchange a e app ecia ion, ou indings do no align wi h his pa e n. The ou comes de i ed
om he VAR and impulse esponse unc ions indica e a con a y e ec , whe ein aid is associa ed wi h a
Figu e 9. Response o RER o inno a ions om AID using ull sample.
16 R. K. A. ASIAMA ET AL.
eal exchange a e dep ecia ion. Rema kably, his dep ecia ion, in u n, ac s as a s imulus o manu ac u -
ing in A ican coun ies. As a esul , ou conclusion is ha o eign aid can indeed exe an in luence on
he le el o indus ializa ion in A ican na ions.
Ou indings also show ha he independen e ec o o eign aid on manu ac u ing is nega i e.
Howe e , his e ec is sho -li ed—i linge s o he i s ew yea s, a e which i becomes insigni ican .
P e ious s udies such as Rajan and Sub amanian and Magud and Sosa (2013) ind a simila esul , e en
hough hey do no show any e idence o pe sis ence as we do. We a gue ha i such sho - e m e ec s
ha con ince o he schola s ha o eign aid nega i ely a ec s he g ow h. We sugges ha he e is
me i in looking a he pe sis ence o he aid’s e ec on manu ac u ing in he long- e m because o he
lead ime in ol ed in es ablishing indus ies and manu ac u ing.
Also, we ind ha he eal exchange a e nega i ely in luences manu ac u ing in A ican coun ies.
This means ha a eal exchange a e dep ecia ion s imula es he ou pu sha e o manu ac u ing in
A ican coun ies. This esul is in line wi h indings o ea lie s udies such as (Rape i e al. 2012; Rod ik
2008; Guzman e al. 2018; and Missio e al. 2015). The e ec o he eal exchange a e on manu ac u ing
also pe sis s, all he way in o he en h yea . This is an addi ional con ibu ion o he li e a u e as ea lie
s udies do no look a pe sis ence as we do in his pape .
The e a e po en ial policy implica ions a ising om he ob ained esul s. Policymake s in A ica migh
con empla e u ilizing o eign aid o enhance he p o ision o non- adable goods, such as powe supply
and in as uc u e. This app oach could e ec i ely lowe he cos o non- adables ela i e o adables,
s imula e he exchange a e ( esul ing in eal exchange a e dep ecia ion), and ende manu ac u ing
mo e economically iable. The esul an s imula ion o he eal exchange a e could po en ially os e
g ow h in he manu ac u ing sec o ac oss A ican coun ies.
Howe e , he u iliza ion o o eign aid in his manne equi es a cau ious app oach, aligning wi h
each coun y’s exis ing indus ial and ade policies. This ensu es ha each na ion secu es a compe i i e
ad an age in p oduc ion, c ea ing and sus aining employmen in hei p oduc i e sec o s. By adop ing
such a s a egy, dono s can be assu ed o ob aining alue o hei unds, po en ially mo i a ing hem o
con inue di ec ing inancial suppo o de eloping coun ies in A ica, independen o o he con ex ual
ac o s in luencing o eign aid alloca ions.
Al hough A ica is ecognized o i s leade ship in esou ce-based expo s, i has no ye es ablished
i sel as a hub o p oduc -based expo s due o he ela i ely high p oduc ion cos s aced by local
en ep eneu s and manu ac u e s. Real exchange a e dep ecia ions p esen an oppo uni y o econo-
mies o gain a compe i i e ad an age, a s a egy success ully employed by cu en global economic
leade s. Encou aging eal exchange dep ecia ion can incen i ize p oduce s o boos ou pu and expo s.
This s a egy could be conside ed o egional and con inen al ade egimes in A ica, aiming o
enhance p oduc i i y and ou pu o e ime. Ne e heless, u u e esea ch on aid and indus ializa ion
migh explo e he e ec s o aid a he sec o al le el using inpu -ou pu analysis, p o iding addi ional
insigh s in o he impac o aid and he eal exchange a e on a ious sec o s in A ican economies.
Acknowledgmen s
The au ho exp esses hei g a i ude o P o esso Fiona T egenna o he aluable e iews ha ha e imp o ed he
quali y o his pape .
Disclosu e s a emen
No po en ial con lic o in e es was epo ed by he au ho (s).
No es
1. The downside is ha unde alua ion o he exchange a e esul s in domes ic in la ion in small open economies
who a e mos ly dependen on impo s o inal goods and se ices (Ribei o e al., 2020).
2. See o ins ance O ei o and D’Agos ini (2017); Co ani e al. (1990); Ghu a and G ennes (1993).
3. The spending and esou ce mo emen e ec s, which a ise om aid in lows in o an economy, a e undamen al
o he heo y o aid-induced Du ch disease (Rajan & Sub amanian)
COGENT ECONOMICS & FINANCE 17
4. Ab igo and Lo e’s app oach is an upda e o he me hodology de eloped by Lo e and Zicchino (2006), which
in es iga es he ela ionship be ween i m inancial condi ions and in es men in 36 coun ies o he pe iod
1988–1998.
5. Al hough openly a ailable, we ind ha cu en checks o upda e he da ase p o ed u ile due o missing da a.
We p o ide a da a a ailabili y s a emen a he end o he pape ega ding access o he da ase used in his
pape , as we ha e no con ol o e upda es o he WDI da abase.
6. O he schola s ha e a gued agains he bene i s o unde alua ion o dep ecia ion o he RER o manu ac u ing
and g ow h (Ribei o e al., 2020).
7. The high-income ca ego y is omi ed in his analysis due o insu icien coun y obse a ions.
Abou he au ho s
D Rex Kweku Awuku Asiama is an applied economis specializing in indus ial policy in A ica, de elopmen eco-
nomics and de elopmen s udies.
P o esso Ke in Nell is a p o esso o Economics, specializing in mac oeconomics, wi h speci ic e e ence o de elop-
ing coun ies.
ORCID
Rex Kweku Awuku Asiama h p://o cid.o g/0000-0002-3530-2549
Da a a ailabili y s a emen
Da a is a ailable upon eques o he co esponding au ho .
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Appendix A.
Income classi ica ions o sampled coun ies
Panel VAR s abili y s a s
Table 11. Income classi ica ions o sampled coun ies.
Income ca ego y Coun y name(s)
Low Bu kina Faso, Congo (Democ a ic Republic), The Gambia, Malawi, Mozambique, Rwanda, Sie a Leone, Sudan, Togo, Uganda.
Lowe -middle Benin, Came oon, Congo Republic, Eswa ini (Swaziland), Kenya, Mo occo, Nige ia, Tanzania, Tunisia, Zimbabwe.
Uppe -middle Bo swana, Gabon, Mau i ius, Namibia, Seychelles, Sou h A ica.
No e. Wo ld Bank Coun y Income classi ica ions as a July 1, 2021.
Sou ce: Wo ld Bank Da a.
Table 12. Panel VAR s abili y s a s.
Eigen alue Modulus
Real Imagina y
0.9417 0 0.9417
0.811 0 0.811
0.711 −0.082 0.715
0.711 0.082 0.715
Sou ce: Au ho ’s compu a ion.
Figu e 10. Panel VAR S abili y G aph.
Figu e 11. Panel VAR S abili y G aph—Low-income coun ies.
COGENT ECONOMICS & FINANCE 21
Figu e 12. Panel VAR S abili y G aph—Lowe -middle-income coun ies.
Figu e 13. Panel VAR S abili y G aph—Uppe -middle-income coun ies.
22 R. K. A. ASIAMA ET AL.
