The Impact of Foreign Agricultural Aid and Total Foreign Aid on Agricultural Output in African Countries: New Evidence from Panel Data Analysis

• Author: Karim Barkat,Mouyad Alsamara
• DOI: http://doi.org/10.1111/saje.12224
• Published date: 01 September 2019
• Date: 01 September 2019

© 2019 Economic Society of Sout h Africa.

South African Journal of Economics Vol. 87:3 September 2019

doi : 10.1111/ saje .122 24

354

THE IMPACT OF FOREIGN AGRICULTURA L AID AND

TOTAL FOREIGN AID ON AGRICULTURAL OUTPUT IN

AFRICAN COUNTRIES: NEW EVIDENCE FROM PANEL

DATA A NALYSIS

KARIM BARKAT * AND MOUYA D ALSAM ARA†

Abstract

Official Development Assistance may play an important role in increasing the resources to finance

the agriculture sector and improve agricultural outcomes in African countries. Although this

is a relevant issue, very few studies have investigated the link between foreign agricultural aid

and national agricultural output. Using advanced econometrics techniques, this paper examines

the impact of foreign agricultural aid and foreign aid on agriculture output in the panel data

set of 29 African countries over the period of 1975–2013. In particular, we employed two

estimation methods: Augmented Mean Group and Common Correlated Effects-2SLS. The first

method accounts for heterogeneous slope coefficients across group members and cross-sectional

dependency among variables, whereas the second method accounts for endogenous regressors.

Our main findings indicate a small and positive impact of foreign agricultural aid and total foreign

aid on agricultural output for low- and middle-income countries. Furthermore, the Pairwise

Dumitrescu-Hurlin Panel Causality test shows evidence of a bidirectional causal relationship

between agricultural aid and agricultural output for the full sample, noting that the result changes

at the different group income level. Based on the empirical results, recommendations for future

policy are given.

JEL Classification: Q10, F35, C23

Keywords: Foreig n agricultural aid, agricult ural output, African countries, pan el data

1. INTRODUC TION

In the past several yea rs, the development of African agriculture has once again become

a priority for African governments and the international community. In June 2014, the

African Union summit entitled “Agriculture and Food Security in Africa” was held in

Malabo (Equatorial Guinea) to give new impetus to the agricultural sector, which is

essential for the African economy and employs two thirds of the continent’s population.

Indeed, many economists argue t hat agriculture plays an important role in achieving the

development objectives’ aim to promote growth and reduce poverty in developing coun-

tries (Kanwar, 2000 ; Thirtle et al., 2001; Timmer, 2002; Irz and Roe, 2005; Wichm ann,

* Corresponding author: Fina nce and Economics Department, College of Busines s and

Economics, Qatar Universit y, P.O. Box: 2713, Doha, Qatar. Tel: +97433702637. E-mail:

kbarkat @qu.edu.qa

† Finance and Economics De partment, College of Business and Economics, Q atar University

South African Journal

of Economics

355South African Journal of Economics Vol. 87:3 September 2019

© 2019 Economic Society of Sout h Africa.

2012). Bravo-Ortega and Lederma n (2005) explored the contribution of agricultura l

GDP to the income of different quintiles of 42 developing countries. They exami ned the

impact of output per worker in agriculture and non- agriculture on the income per capita

of each quintile. Their results show that GDP generated from agricultural labour pro-

ductivity is on average 2.9 times more effective in increa sing the incomes of the poorest

quintile than a simila r increase in output per worker in non-agriculture sectors.

According to the African Development Bank (2010), agriculture supports the liveli-

hoods of 80% of the African population. Furthermore, it provides employment for over

60% of the economically active population and about 70% of the poorest in the region.

Investing in this sector helps both groups to susta in jobs and reduce hunger and pov-

erty, which corresponds with the first MDG. However, the recent food crises, droughts,

increasing food prices, poverty in r ural areas and ru ral-urban migration have caused a

disaster for the agricultural sector in developing countries and in particular in African

countries where the incidence of rural poverty is t he highest in the world (IFAD, 2011).

Agriculture in A frican countries still provides a relatively large sha re of GDP and plays

a crucial role in terms of employment. Although there has been an important amount

of foreign aid to the agricultural sector from OCED countries and international institu-

tions, the productivity in this sector remains weak in comparison with other countries.

For instance, foreign aid to the agricultural sector has achieved great succe ss in Asian

countries and plays a substantial role in A sia’s green revolution and its impact on reduc-

ing poverty and transforming their economies (Sachs, 2005).

There has been a debate on the use of foreign aid to support the agricultural sector

in developing countries. Some sceptics, such as Ulbricht (1993), argue that aid leads to

improvement in the agriculture output in developing countries and therefore reduces

developed countries farm exports. I n contrast, others arg ue that an increase in income in

developing countries due to agricultural g rowth leads to an increa se in their imports and

hence the exports of donor countries (Bachman and Paulino, 1979; Kellogg et al., 1986;

Lee and Shane, 1987; De Janvry and Sadoulet, 1988). But this result is valid only under

the assumption that foreign aid has a positive impact on productivity a nd agricultural

growth. This hypothesis, however, has not been tested by the earlier mentioned stud-

ies. Furthermore, little is known about this question in the recent empirical literature.

Indeed, work to date has shed light primarily on the effect of foreign aid on economic

growth in developing countries. However, less attention has been given to the effect of

foreign aid on agriculture despite the important role that foreign aid ca n play in increas-

ing the resources to fi nance the agricultural sector and improve agricultura l outcomes in

African cou ntries. Thus, the key research questions of our paper are: What is the ef fect of

aid intended to agricultural sector on agriculture output? Does foreign aid really matter

to the agricultura l sector in African countries? What are t he determinants of agricu ltural

growth? What c an be done to improve agricultural output in these cou ntries? This paper

then contributes to the literature by attempting to answer these questions. The specif ic

purpose of our paper is to empirically assess the effects of agricultural aid and total

foreign aid on agricultural output and identif y the main determinants of agricu lture

production. This is crucial for policy makers because agriculture development is part of

the development strategy of many governments since agricultura l outcomes go beyond

the agricultural sector and work to impact the overall economy by enhancing economic

growth and improving general well-being.