The short-run effects of health aid in low-income countries: evidence from panel data analysis

Abstract

The effectiveness of health-targeted aid in improving health outcomes in developing countries remains a subject of debate. This paper investigates the short-run impact of health aid on health status in low-income countries globally. A panel dataset was constructed from 34 low-income countries spanning 2000 to 2017, with Infant Mortality Rate (IMR) serving as the primary proxy for health status. To estimate the short-run effect, First Difference GMM and System GMM estimators were employed, with a preference for System GMM due to its robustness against weak instrument problems in dynamic panel data models. The model incorporated log transformations for Health Development Aid (HDA), GDP per capita, and cereal yield, while exponential transformations were applied to human capital and governanceindices, alongside adolescent fertility rate and elderly dependency rate. The System GMM estimation revealed a statistically significant and beneficial short-run effect of health aid on health status. Specifically, a doubling of health aid is associated with a reduction of 2 infant deaths per 1,000 live births. Other significant findings include the positive impact of GDP per capita, human capital, and governance, and the negative impact of adolescent fertility rate and elderly dependency rate on infant mortality. The Sargan test confirmed the validity of the over-identifying restrictions (p=0.2279), and the Arellano-Bond test for AR(2) indicated no serial correlation in the idiosyncratic errors (p=0.158). The findings strongly suggest that health aid serves as a potent instrument for narrowing the health status gap between high and low-income countries, thereby contributing to the achievement of Universal Health Coverage. However, recipient countries should also prior-itize fostering domestic factors that positively influence the health sector to reduce persistent reliance on external resources.