Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 755: Foreign aid and structural transformation: Micro-level evidence from Uganda
Pelle Ahlerup ()
Additional contact information
Pelle Ahlerup: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O. Box 640, SE 40530 GÖTEBORG, Sweden
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
49 pages, March 2019
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