Working Paper
Foreign Aid, Public Sector and Private Consumption

a Cointegrated Vector Autoregressive Approach

This paper employs a cointegrated vector autoregressive model to assess the growth effect of aid in Uganda over the period 1972-2008. Results show that aid in Uganda has had both direct and indirect beneficial association with growth; that it is the productivity and not the stead state level of investment that contributes to achieving target growth rates; and that consumption spending is more beneficial to growth because it contributes to private incomes and consumption. In terms of policy, it is crucial to strengthen fiscal response to aid receipts and ensure aid funded projects are closely monitored and contract specifications are strictly enforced. Moreover, donors need to accept the politically unpalatable fact that aid has an important role in supporting consumption spending.