Target at the right level: aid, spillovers, and growth in sub-saharan Africa

Previous aid effectiveness literature is subject to aggregation bias and does not discuss aid spillover effects. Using spatial analysis and data from geocoded World Bank aid projects, this article investigates international aid effectiveness and aid spillovers at the sub-national level in 3,764 second-order administrative divisions (ADM2) in 48 countries in Sub-Saharan Africa over the period of 1995-2014. The empirical analysis is based on an instrumental variable approach and relies on nightlights data as a proxy for economic activity. The empirical results reveal three previously undocumented findings on aid effectiveness. First, we find that aid at the local level (ADM2) promotes economic growth at an economically and statistically significant level. Second, we uncover significantly positive aid spillovers across adjacent localities (ADM2). Third, aid flows at more aggregate levels (ADM1 and country level) have the opposite effect and reduce economic growth. The net effect of all aid variables is near zero and is within the range of coefficient estimates reported at the country level by previous papers. These results suggest that targeted aid projects can be effective in promoting economic growth.