The effects of grants and loans on economic growth in Sub-Saharan Africa: Considering different types of income level

Abstract

This paper investigates the question of aid's effects on economic growth in Sub-Saharan Africa (SSA) by disaggregating aid into grants and loans during 1994-2015. The estimation results indicate that grants have a positive and statistically significant effect on economic growth, while loans have a negative but insignificant effect on it. When we break down the panel data into Low Income Countries (LICs) and Middle Income Countries (MICs) in order to gain further insight, grants have been effective in spurring growth in both LICs and MICs, while loans have had positive and significant impact on economic growth in neither LICs nor MICs. Accordingly, the main findings of this study provide a consistent evidence in support of the grants-effectiveness on growth in both MICs and LICs, contrary to the ineffectiveness of loans. The other supplementary results show that the domestic investment (GCF) and education (SEC) which are basically public policy variables have significantly positive impacts on economic growth in MICs, while they are not statistically significant in LICs.