Analysis of total factor production and official development assistance relationship in developing countries

Abstract

The objective of this paper was to analyze the relationship between official development assistance (ODA) and total factor production (TFP) in developing countries to allow a better allocation of aid. We used a panel of 69 developing countries, 29 low-income and 40 middle-income countries, from 2005 to 2019. System GMM and fixed effects were used both with time, and country fixed effects to get rid of unobserved heterogeneity and possible aid endogeneity. For more precision, we disaggregated aid by sector to assess their effect on the main parts of TFP. The results found showed no significant impact of ODA on TFP. However, for low-income countries, aid in the sector of agriculture had a positive impact on human capital, employment, and real GDP. Aid in the sector of industry had a positive impact on human capital, the share of labor compensation, and the real GDP. For middle-income countries, Aid in the sector of education had a positive impact on employment and capital stock. Aid in the sector of economic infrastructure had a positive impact on human capital, employment, and capital stock. We recommend that donors direct most of the aid to low-income countries in the agropastoral sector and in the sector of industry and mining. In addition, we recommend that donors direct a significant part of their support to middle-income countries in the sectors of economic infrastructure and education. Furthermore, very good coordination between donors and institutions in receiving countries is a priority to adapt assistance to the policies of receiving countries.

Keywords:

• ODA TFP relationship
• developing countries
• ODA by sector
• aid effectiveness
• total factor production

Reviewing Editor:

• Aye Goodness
• University of Agriculture
• Nigeria

Subjects:

• Econometrics
• Development Economics
• Political Economy

JEL CLASSIFICATION CODES:

• O4
• C33
• F35

Acknowledgments

B. Evole Pierre and B. Regine for their tremendous moral support and encouragement throughout the research process.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

Ezako Jean Tony

Ezako Jean Tony, Burundian citizen, holder of a bachelor’s degree from the Faculty of Economics and Management of the University of BURUNDI. Moreover, I am passionate about economic research with the aim of contributing to the development of my country, Burundi, and developing countries in general. Thus, this paper on ‘Analysis of Official Development Assistance and Total Factor Production relationship in developing countries’ is part of a research project consisting of four papers that I initiated to focus on the role of financial economics in the development process. The other three papers are; analyze of inflation and economic growth relationship in Burundi: The nexus between human development, ODA, carbon emissions and governance in developing countries: analyze of globalization and total factor production in developing countries.