Analysis of the Sub-National Distribution of Foreign Aid in Sub-Saharan Africa: Patterns, Institutions and Effects on Regional Inequality

Chapter 1 provides an introduction and preliminary comparisons of economic and human development indicators to present current differences in levels of development between different countries grouped by their income level. Since World War II foreign aid has proved to be one of the main instruments for the developed countries to promote and increase economic development in less developed parts of the world. Chapter 2 will give a brief chronological overview of economic theories about economic growth and development and highlight recent approaches in development research. It will be shown that the focus of development policies has changed several times since its emergence. Given positive and negative growth experiences in developing countries, the development research literature is still inconclusive concerning the effects of development assistance and foreign aid on economic development. The gap in economic performance between developing and developed countries remains considerable, even in the face of constant flows of foreign aid and continuously changing policy prescriptions addressing pressing issues and obstacles of development. Chapter 3 uses sub-nationally disaggregated data to assess the importance of recipient countries' governance on the allocation of aid projects within recipient countries. The results show that incumbent presidents' birth regions do not signiffcantly attract more project aid than other regions in a country. Accounting for levels of governance in recipient countries does not change the results. On the other hand, capital city regions appear to attract more project aid. Higher levels of governance seem to have a negative effect on the allocation of aid projects in capital city regions, which might be driven by clientelistic and corrupt motives of political decision makers. Considering the results from the research literature and from Chapter 3 one may wonder how different sub-national distributional patterns of aid projects and foreign aid influence regional and spatial inequalities within recipient countries. If the sub-national allocation of foreign aid follows certain ethnic, political or economic considerations, instead of addressing poverty or alleviating human misery, then foreign aid might further deepen regional inequalities in recipient countries. Thus, Chapter 4 first elaborates on different theories and highlights existing empirical evidence about regional inequality. The chapter additionally presents trends and levels of different measures of regional inequality in sub-Saharan Africa. Chapter 5 assesses the relationship between foreign aid and regional inequality. First, different measures of regional inequality and necessary considerations for proper interpretation are discussed. Secondly, using sub-nationally disaggregated GDP data these measures of regional inequality in sub-Saharan Africa are calculated to further discuss their patterns and levels over the years 1998 to 2015. The data shows that regional inequalities vary largely within and between countries and that the pattern is on average highly persistent in the entire sample. The empirical analysis to understand the effects of foreign aid on regional inequality first provides estimation results using a static panel estimation approach. However, due to serious endogeneity concerns, especially between foreign aid and regional inequality, these results need to be taken cautiously. The empirical analysis further uses dynamic panel estimation methods such as system GMM to account for endogeneity issues and for the high persistence of regional inequalities. The results indicate that foreign aid does not increase regional inequalities, but instead even reduces regional inequalities in some specifications. Interestingly, higher trade ratios significantly reduce regional inequalities in all specifications. Furthermore, the estimation using the decomposition of regional inequalities by within and between capital and non capital city regions could not detect any significant effects in almost all specifications. This results from the limited instrument set due to fewer countries in the sample and the higher persistence of within and between regional inequalities. As a results, the analysis provides no support for the assumption that foreign aid increases regional inequalities. The uneven distribution of aid projects sub-nationally does not appear to affect overall regional inequalities.