Journals Proceedings

Abstract

While ODA mostly funds the fundamental rather than the proximate determinants of growth; its economic effectiveness is often denied using short run empirical findings. Considering this inappropriate, long term reassessments are now conducted. However, they still consider ODA and growth as homogeneous. Subsequently, these reassessments fail to capture specific nexuses between their respective components. Drawing on co-integration features of SSA data, this paper fills that gap. Unlike in most short run studies, the estimation results show that both aid-grants and aid-loans positively affect the overall growth with a higher magnitude assigned to aid-loans. More importantly, when shifting focus from the overall to the inequality adjusted growth, both components perform much better. However, while the annual adjustment of deviations from this long run equilibrium is 10% for the inequality adjusted growth, it is only 0.02% for the impact on the overall growth. This spells out why most short run estimations end up with opposite results.