Foreign Aid, Infrastructure, and the Inclusive Growth Agenda in Sub-Saharan Africa

Abstract

This study examines the contingency effect of infrastructure (disaggregated into physical and digital) in the relationship between foreign aid and inclusive growth in Sub-Saharan Africa (SSA). We employ macro data for 41 SSA countries and the dynamic system GMM estimator for the empirical analysis. We find that (i) foreign aid promotes inclusive growth in SSA, (ii) whereas transport infrastructure enhances inclusive growth, energy infrastructure, sanitation infrastructure, and digital infrastructure are statistically insignificant, and (iii) only transport infrastructure amplifies the inclusive growth-enhancing effect of foreign aid. Across the digital and physical infrastructure domains, we find that the contingency effect of the latter is rather remarkable. Our threshold analysis also indicates that for digital infrastructure and transport infrastructure to condition complementary policies to foster inclusive growth in SSA, minimum thresholds of 22% and 57.8% are required. We conclude that comprehensive transport infrastructural development is key if foreign aid is to enhance inclusive growth in SSA.