Aid and developing regional integration

This paper examines megatrends and interdependence of the loan aid-capital investment links across developing regions. Theoretically, it contributes to the existing studies by providing a novel theoretical framework with a dual-objective donor-giving grant (driven by a benevolent objective) and loan aid (profitability motive), as well as a public–private partnership-like investment structure and multi-region feedback mechanism. Empirically, this paper adds to the literature by allowing for cross-heterogeneity and interdependencies across regions of loan aid-capital investment link. We estimate a panel structural VAR model of grant aid, loan aid, private consumption, and aggregate capital stock using data from nine developing regional country blocs covering the 1961-2017 period. Amidst a generally weak aid-investment link, we find loan aid to Granger causes capital accumulation, and among African regions, it is the most (least) productive – in terms of within- and spillover effects – in the IGAD (ECOWAS) region. In addition, our results suggest deeper regional integration between the Sub-Saharan African regions than the collective Latin American & Caribbean regions and the two Southern Asian regions (Southeast Asia and South Asia) examined.