Foreign Aid and Out-of-Pocket Health Expenditure in Sub-Saharan Africa: Does Institutional Development Matter

Abstract

This paper examines whether and to what extent foreign aid and its interaction with the recipient country's institutional quality reduce out of pocket health expenditure in Sub-Saharan Africa (SSA). We also investigate the validity of fungibility hypothesis in SSA's context by examining the impact of aid on public health expenditure. The study employed the fixed-effects instrumental variables panel regressions using a dataset for 45 SSA countries over the period 1995-2015. We find that aid does not robustly affect out of pocket health expenditure. Neither does the effect of aid depend on institutional quality. This outcome contradicts the previous evidences which have repeatedly emphasised the role of institutional quality as the main factor influencing aid effectiveness. Excluding aid from non-Development Assistance Committee (DAC) donors, we find that aid had no effect on public health expenditure. This finding confirms the absence of fungibility hypothesis in SSA context.