Foreign aid and structural transformation: Micro-level evidence from Uganda

Pelle Ahlerup ()
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Pelle Ahlerup: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O. Box 640, SE 40530 GÖTEBORG, Sweden, https://economics.gu.se/

No 755, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: History tells us that sustained economic growth, necessary to alleviate poverty in sub-Saharan Africa, requires growth in the fundamentals, such as infrastructure and human capital, but also structural transformation, i.e., a reallocation of labor from low-productivity to high-productivity sectors. I study whether foreign aid is a factor that helps or hinders structural transformation. I use a dataset on aid projects with precise coordinates from all major donors and match it to panel data with extensive information on labor market activities for a large representative sample of individuals in Uganda. I find consistent evidence that foreign aid reverses the process of structural transformation. More specifically, the local short-term effect of foreign aid is that people in areas with ongoing aid projects work more in agriculture and less in non-agricultural sectors. There are no significant effects on wages or household expenditures for people in the agricultural sector, but the effects on people in non-agricultural sectors are negative.

Keywords: foreign aid; structural transformation; Africa; AidData; LSMS (search for similar items in EconPapers)
JEL-codes: F35 O14 O55 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2019-03
New Economics Papers: this item is included in nep-afr and nep-dev
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