A Comparative Analysis of ODA and Growth in East Asia Pacific and Sub-Saharan Africa

Abstract

This paper reports a comparative empirical analysis on the role of official development assistance (ODA) in influencing growth in East Asia Pacific (EAP) and Sub-Saharan Africa (SSA) regions. The distinct difference in growth patterns between these two regions in the past five decades motivates our research to examine what factors contributed to the difference in growth. This study examines, from the financial gap perspective, the role of foreign aid in promoting growth in the two regions. On this basis, our study constructs a theoretical framework by specifying a behavioral equation to examine the relationship between foreign aid and growth supported by capital formation and human resource development. The empirical inquiry uses: two-stage least square instrumental variable estimator; and the generalized method of moments (GMM) estimation of dynamic panel data model. The analytical results induce two conclusions: ODA impacts positively on economic growth in the EAP region but with time lagged effects, and ODA influences economic growth differently by region. The results from the dynamic GMM approach have shown that ODA contributed positively to economic growth in the EAP region but not in the SSA region. Hence, donors, recipients, and aid practitioners must reexamine aid effectiveness especially in the SSA region.