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Analysing the effect of foreign aid on industrialization: Evidence from Africa

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  • Tékam Oumbé, Honoré
  • Djeunankan, Ronald
  • Kos A Mougnol, Alice

Abstract

The importance of industrialization as an engine of economic growth and structural transformation has been largely documented. Despite the benefits of industrialization, Africa has witnessed a de-industrialization in recent decades. This means that some important determinants of industrialization remain unidentified in Africa. This study fills this gap by analysing the effect of foreign aid on industrialization in 42 African countries over the period 1995–2021. Using the two-step system Generalized Method of Moments, the following results are established. First, on average, foreign aid hurts industrialization in Africa. Second, the effect of foreign aid depends on the nature of the aid since education and energy aid improve industrialization while health and humanitarian aid negatively affect it. Third, we find a U-shaped relationship between foreign aid and industrialization. Interestingly, democracy and human capital can mitigate the negative effect of foreign aid on industrialization. These results have strong economic policy implications for African countries, showing that they should put in more effort to strengthen their level of democracy and human capital in order to enjoy the positive effect of foreign aid on industrialization. Finally, this research contributes to the development of aid distribution plans that support African nations' industrialization.

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  • Tékam Oumbé, Honoré & Djeunankan, Ronald & Kos A Mougnol, Alice, 2024. "Analysing the effect of foreign aid on industrialization: Evidence from Africa," International Economics, Elsevier, vol. 178(C).
    • Handle: RePEc:eee:inteco:v:178:y:2024:i:c:s2110701724000210
    DOI: 10.1016/j.inteco.2024.100498
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    Keywords

    Foreign aid; Industrialization; Democracy; Human capital; Africa;
    All these keywords.

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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