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AEC 2010 - External Finance and Structural Changes for the 18 Sub-Saharan African Post-MDRI Countries

12-oct-2010

Using a homogenous subset of 18 post-MDRI SSA countries, the paper highlights different estimates of external financing with the existing databases. Against this background, we construct a new database that shows that net external resources to post-MDRI SSA countries have substantially increased before the financial crisis. Indeed, total aggregated net inflows financing both the public and private sectors increased by 11.4 percentage points of 2007 GDP, to reach 17½ percent of the GDP in 2007. While the increase was broad-based, the private sector was the largest beneficiary. A surge of foreign direct investment (FDI) and higher current private transfers drove the spectacular rise in private-sector financing. The increase in public-sector external financing reflected both the provision of grants and higher net transfers. Cross-country analysis shows that inflows to the private sector are higher for countries that had (i) a relative higher level of income; (ii) stronger quality of institutions and policies; and (iii) higher quality of social and physical infrastructure. The quality of institutions appears to be a determinant of long-term capital flows to the public sector. The analysis of the heterogeneity in aid allocation through quantile regression shows that donors were more selective when allocating aid to countries with a better quality of institutions.

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