This paper examines the impact of aid on industrialization in 18 Sub-Saharan African countries from 1990-2018. I employ a Two-Stage Least Squares (2SLS) regression approach, leveraging a novel Shift-Share Instrumental Variable (IV) strategy to identify the effects of DAC aid. This method exploits exogenous variations in donor country aid budgets resulting from the occurrence of natural disasters within those countries. The findings suggest that DAC aid reduces the manufacturing share of employment in recipient countries, increases the agriculture share of employment, and has no effect on non-government services. On average, a ten percent increase in aid causes an estimated 0.09 percentage point decrease in the manufacturing employment share after three years. Results using a novel sub-national dataset corroborate the findings at the national level. Aid from China, a non-DAC source, does not exhibit the same deindustrializing effects observed with DAC aid.
STEG Working Paper Series
• Research Theme 0: Data, Measurement, and Conceptual Framing,
Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy
Foreign Aid and Structural Change
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