The Impact of Foreign Agricultural Aid and Total Foreign Aid on Agricultural Output in African Countries: New Evidence from Panel Data Analysis

Official Development Assistance may play an important role in increasing the resources to finance the agriculture sector and improve agricultural outcomes in African countries. Although this is a relevant issue, very few studies have investigated the link between foreign agricultural aid and national agricultural output. Using advanced econometrics techniques, this paper examines the impact of foreign agricultural aid and foreign aid on agriculture output in the panel data set of 29 African countries over the period of 1975–2013. In particular, we employed two estimation methods: Augmented Mean Group and Common Correlated Effects‐2SLS. The first method accounts for heterogeneous slope coefficients across group members and cross‐sectional dependency among variables, whereas the second method accounts for endogenous regressors. Our main findings indicate a small and positive impact of foreign agricultural aid and total foreign aid on agricultural output for low‐ and middle‐income countries. Furthermore, the Pairwise Dumitrescu‐Hurlin Panel Causality test shows evidence of a bidirectional causal relationship between agricultural aid and agricultural output for the full sample, noting that the result changes at the different group income level. Based on the empirical results, recommendations for future policy are given.