Aid, Political Business Cycles and Growth in Africa

Abstract

This paper develops a model of opportunistic behaviour in which an incumbent government resort to expansionary fiscal and/or monetary stimuli to foster economic growth and thus, maximize the probability of re-election. Using a panel dataset of 51 African countries covering the period 1980 to 2012, we test first, whether aid and institutional quality factors have an effect on growth. We find evidence to support the most recent studies showing that aid has a positive impact on growth. We however, do not find evidence to support the proposition that institutional quality is a sine qua non conditional for aid to achieve impact on growth. Second, we test whether donor aid facilitates political business cycles, and investigates their effect on growth. We find evidence that donors, through guaranteeing support to incumbent governments, unwittingly do instigate political business cycles. Forbearance, and sometimes complicity by donors, aid seems to allow incumbent governments to instigate macroeconomic stimuli that ensure electoral victory with no fear of losing aid