Impact of Bilateral and Multilateral Aid on Economic Growth in Low and Middle-Income Sub Sahara African Countries: Mediating Role of Institutional Quality

Abstract

The purpose of the study was to compare the impact of bilateral and multilateral aid on economic growth in middle and low-income Sub Sahara Africa (SSA) countries, and determine whether the impact is contingent on institutional quality. The study relied on panel data from 28 SSA countries from 1999 – 2015. Countries were grouped into middle and low-income countries following the World Bank classification, and a dynamic model was specified and estimated for both categories of countries using the technique of system GMM. After accounting for the differences in levels of economic development, the results showed that only multilateral aid had a positive and significant effect on economic growth in both middle and low-income countries, and that the impact is contingent on existence of good quality institutions. The study therefore recommends that donors should focus more on advancing aid through multilateral channels, and that governments of SSA countries—both middle and low-income—should focus on strengthening the quality of their institutions if they are to maximize value from multilateral aid.