Calumn Hamilton (University of Groningen): “Foreign Aid and Structural Change''

Abstract:
This paper contrasts the effects of DAC and Chinese aid on the sectoral structure of Sub-Saharan African economies. It extends the GGDC/UNU-WIDER Economic Transformation Database with subnational sectoral employment data such that analysis can be performed at the national and sub-national levels. 2SLS regressions are estimated using a novel IV strategy for identifying the effects of aid which exploits exogenous variation in the frequency and severity of natural disasters in donor countries. The findings suggest that Chinese aid is more conducive for industrialization in recipient countries than DAC aid. On average, a ten percent increase in DAC aid causes an estimated 0.14 percentage point decrease in the manufacturing employment share after four years, whereas Chinese aid may cause an increase. Policy implications for DAC aid and industrialization-led development strategies are discussed.