Testing the Impact of Foreign Aid and Aid Uncertainty on Private Investment in West Africa

In this paper, the impact of aid on domestic private investment in West Africa was examined using both aggregate aid (total ODA) and disaggregated aid (multilateral and bilateral). The paper relied on the fixed effects estimation technique. The findings suggest that there is evidence of country specific effects and that the disaggregated model may perform better than the aggregated one. There is evidence that multilateral aid affects private investment positively, but not bilateral aid. Aid uncertainty has a negative impact on domestic private investment and therefore reduces the value-effect of bilateral aid on domestic private investment. Furthermore, it was established from these results that high volatility in bilateral aid is the source of the uncertainty in total aid. Emerging from the investigation on private investment issues, is the significant impact of multilateral aid on private investment in West Africa. Furthermore, our findings that there exists a strong presence of fixed effects means that any regional aid policy at the West African level can yield effective results, especially when organized and pursued within a multilateral framework. This is particularly relevant to the donor community that is grappling with aid coordination.