Analysis of total factor production and official development assistance relationship in developing countries

The objective of this paper was to analyze the relationship between official development assistance (ODA) and total factor production (TFP) in developing countries to allow a better allocation of aid. We used a panel of 69 developing countries, 29 low-income and 40 middle-income countries, from 2005 to 2019. System GMM and fixed effects were used both with time, and country fixed effects to get rid of unobserved heterogeneity and possible aid endogeneity. For more precision, we disaggregated aid by sector to assess their effect on the main parts of TFP. The results found showed no significant impact of ODA on TFP. However, for low-income countries, aid in the sector of agriculture had a positive impact on human capital, employment, and real GDP. Aid in the sector of industry had a positive impact on human capital, the share of labor compensation, and the real GDP. For middle-income countries, Aid in the sector of education had a positive impact on employment and capital stock. Aid in the sector of economic infrastructure had a positive impact on human capital, employment, and capital stock. We recommend that donors direct most of the aid to low-income countries in the agropastoral sector and in the sector of industry and mining. In addition, we recommend that donors direct a significant part of their support to middle-income countries in the sectors of economic infrastructure and education. Furthermore, very good coordination between donors and institutions in receiving countries is a priority to adapt assistance to the policies of receiving countries.