The Role of Development Aid in Agriculture in the Common Market for Eastern and Southern Africa: A Panel Vector Autoregression Analysis

Grace Gondwe,Josue Mbonigaba

doi:10.5539/jas.v12n10p28

Abstract

This paper assessed the impact of foreign aid on agricultural productivity and growth in the Common Market for Eastern and Southern Africa (COMESA), using panel vector autoregressive methods. The results show a significant unidirectional causality from agricultural growth to foreign aid and thus confirming the theoretical dispositions of the developmental role of foreign aid. However, instead of complementing domestic resources in this regard, the results showed that foreign aid in the sector substitutes government financing, which effectively reduces its effectiveness. A mismatch in government resources and aid allocations to a sub-sector erodes the synergy that should typically exist between donor aid and government expenditure in a sector. A policy shift towards Result-Based (Aid on Delivery) approaches in aid disbursements will be critical to eliminating fungible resources. Misalignment of aid allocations that are inconsistent with the relative importance of subsectors in the sectoral development goals further undermines the potency of aid. A better understanding of the contribution of&nbsp;the various sub-sectors to the overall growth of the agriculture sector will be crucial for equitable resource allocation and enhanced aid effectiveness. Moreover, the higher impact of domestic resources compared to foreign aid calls for policies to increase domestic resource mobilization and a broader focus on reducing aid dependency.

Highlights

Agriculture continues to be a hinge for sustainable and inclusive growth for most developing countries, mainly due to its economic importance in facilitating industrial growth and economic structural transformation, food security, sustaining livelihoods, and poverty reduction in most of the poor population
The focus of this section is on the IFRs and forecast error variance decomposition (FEVD) that isolate the impacts of exogenous shocks in each variable on the other variables in the estimated Panel Vector Autoregressive (PVAR) system
The study opted for orthogonalized impulse response functions (IRF) and their implied FEVDs, which requires that each IRF provides a response path of one variable while holding exogenous shocks in all the other variables in the system constant

Summary

Introduction

Agriculture continues to be a hinge for sustainable and inclusive growth for most developing countries, mainly due to its economic importance in facilitating industrial growth and economic structural transformation, food security, sustaining livelihoods, and poverty reduction in most of the poor population. Research shows agriculture as the largest employing sector accounting for up to 81% of total employment in most developing countries and as much as 50% of their respective export earnings (Kaya et al, 2008). Agriculture remains key in sustaining livelihoods in most COMESA countries covering between 70% and 92% of the total employment in Burundi, DRC, Eritrea, Eswatini, Ethiopia, Madagascar, Malawi, Rwanda, Uganda, Zambia and Zimbabwe and less than 20% only in Libya and Mauritius (Figure 1). The sector is vital for COMESA’s industrial development and export revenue, covering at least 50% of the raw materials in its industrial sector and accounting for about 65% of its foreign exchange earnings (Karugia et al, 2012)

Methods

Results

Conclusion