The Effectiveness of Development Aid for Agriculture in Sub-Saharan Africa

One of the key economic development challenges facing Sub-Saharan Africa (SSA) is its low agricultural productivity. Governments, donors, and foreign investors have underinvested in African agriculture even though research evidence shows that higher agricultural productivity would boost economic growth and poverty reduction. Solutions to the problem require a number of interconnected strategies, including, but not limited to, research on seeds and inputs, extension services, rural development, credit, institutional, and trade and price stabilization policies. We use the system two-step Generalized Method of Moments to examine whether official development assistance (ODA) for agriculture and rural development is helping to boost agricultural productivity. We find a positive relationship between ODA and agricultural productivity. However, when broken down into the main agricultural ODA recipient sectors, there is a substitution effect between food crop production and industrial crop production. While there exists a positive relationship between ODA for industrial and export crops output per worker (agricultural productivity), ODA for food crops has a negative relationship. Better public institutions and economic freedom are also found to enable agricultural productivity growth and to increase the ODA effectiveness. We correct the results for spurious correlation assuming that more ODA might be allocated where agricultural productivity is already increasing due to some other factors. Concerning the determinants of ODA allocation, we find that the allocation of ODA for agriculture is primarily determined by agricultural need, and that the expected effectiveness increases the ODA receipts. Finally, there is a weak ODA-led structural economic change effect in SSA. Labor released from agriculture to the urban sector(s) has a positive market effect on agriculture but is not engendering significant structural economic transformation