Aid Volatility and Structural Economic Transformation in Sub-Saharan Africa : Does Finance Matter?

This paper departs from the traditional aid — economic growth studies through its examination of the impact of aid and its volatility on sectoral growth by relying on panel dataset of 37 sub-Saharan African (SSA) countries for the period 1980-2014. Findings from our system generalised methods of moments (GMM) show that, while foreign aid significantly drives economic transformation, aid volatility deteriorates sectoral value additions with huge impact on the non — tradable sector and a no apparent effect on the agricultural sector. However, the deleterious effect of aid volatility on structural economic transformation in SSA is weakened by a well — developed financial system with a large dampening impact on the tradable sector. Our evidence therefore provides unequivocal support for the notion that development of domestic financial markets enhances aid effectiveness