Role of sectoral foreign aid in transition

This study examines how sectoral foreign aid influences the transition of 85 lower-middle-income countries (LMCs) to upper-middle-income countries (UMCs) over 1990–2023, using Cox and extended Cox regression models. The analysis distinguishes between three major categories of Aid: Social and Governance Aid, Economic Development Aid, and Infrastructure and Energy Aid. The Cox and extended Cox results demonstrate that institutional quality, structural factors, and conditional policy environments drive economic transition. Strong governance, particularly control of corruption, significantly accelerates transition, while a large agricultural sector and higher education levels are associated with slower, more gradual transitions, reflecting deeper structural adjustment processes. The presence of time-varying effects indicates that the influence of key determinants evolves across stages of development, requiring adaptive policy responses. Importantly, foreign aid does not exert strong direct effects but operates through complementary conditions such as governance, economic structure, and openness. Overall, the findings highlight that successful transition depends on aligning institutional reforms, structural transformation, and targeted external support to ensure both the speed and sustainability of development outcomes. The results indicate that low-aid countries experience faster transition, while high-aid countries exhibit slower transition dynamics, reflecting differences in absorptive capacity and institutional efficiency.