AID AND GROWTH: ACCOUNTING FOR TRANSMISSION MECHANISMS IN SUB-SAHARA AFRICA Karuna Gomanee, Sourafel Girma and Oliver Morrissey Abstract This paper is a contribution to the literature on aid and growth. Despite an extensive existing empirical literature in this area, studies have not paid much attention to the importance of transmission mechanisms in determining the influence of aid inflows on growth rates. In other words, existing studies have failed to specify the mechanisms via which aid should affect growth. We identify investment as the most significant transmission mechanism, and also consider effects of aid via government spending and imports. With the use of residual generated regressors, we achieve a measure of total effect of aid on growth, accounting for the effect via investment. Pooled panel results for a sample of sub Saharan African countries over the period 1970 to 1997 point to a highly significant positive effect of foreign aid on growth. On average, each one percentage point increase in the aid/GNP ratio adds one-third of one percentage point to the growth rate. The results are robust to issues of endogeneity, outliers and country-specific effects. Africa’s poor growth record should not therefore be attributed to aid ineffectiveness. JEL: F35, O40, O55 Keywords: Aid, Growth, Investment, sub-Saharan Africa The Authors Karuna Gomanee is a Research Student, Sourafel Girma a Research Fellow and Oliver Morrissey is Reader in Development Economics and Director of CREDIT, all in the School of Economics, University of Nottingham.