Foreign aid and economic growth in sub-Saharan Africa (original) (raw)
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Foreign Aid and Economic Growth: A Cointegration Analysis of the Six Poorest African Countries
Economic Analysis and Policy, 2008
After more than thirty five years of development assistance, the people in the poorest African countries are still living in poverty. Their real per capita income since 1965 has either declined or remained stagnant. The obvious question is: why could these countries not break the poverty trap despite receiving large inflows of foreign aid? This paper examines the effectiveness of foreign aid for economic growth in the six poorest and highly aid dependent African countries, namely the Central African Republic, Malawi, Mali, Niger, Sierra Leone and Togo. Using cointegration analysis, we have found that a long run relationship exists between per-capita real GDP, aid as a percentage of GDP, investment as a percentage of GDP and openness. However, the long run effect of aid on growth was found to be negative for most of these countries. * I am grateful to the anonymous referees and Professor Anis Chowdhury and Professor John Lodewijks of the University of Western Sydney for their helpful comments. However, the usual caveats apply.
Foreign Aid and Economic Growth: Empirical Evidence from Nigeria
Growth, 2019
This study explored the relationship between foreign aid and economic growth in Nigeria from 1984 to 2017. The Autoregressive Distributed Lag Bounds method to cointegration was employed for this study. The results revealed that foreign aid did not contribute to economic growth in Nigeria. Also, the macroeconomic policy environment did not contribute to economic growth in both the short-run and long-run. Furthermore, the results revealed that the impact of foreign aid on economic growth in Nigeria was contingent on the quality of the macroeconomic policy environment. Hence, the claim that the effectiveness of aid is dependent on the q policy environment was valid for Nigeria. The study, therefore, recommends that the policymakers of the government should put in place a sound macroeconomic policy environment that is stable to stimulate domestic saving and ensure the effective utilization of foreign aid. Besides, there is a need for the diversification of the economy through viable alternatives such as agriculture, industrialization and trade to lessen heavy reliance on foreign aid as a major means of stimulating economic growth. Furthermore, the Economic and Financial Crimes Commission and Independent Corrupt Practices and other Related Offences Commission, established to fight corruption should be effective in their job and convince development partners and other aid donors that it is no longer business as usual for those that divert public resources including foreign aid funds for personal gains and the government should provide incentives to private investors and good enabling environment for the thriving of private businesses.
Aid, investment and growth in sub-Saharan Africa
10th General Conference of EADI, …, 2002
This paper is a contribution to the literature on aid and growth. Despite an extensive empirical literature in this area, existing studies have failed to specify the mechanisms via which aid should affect growth. We identify investment as the most significant transmission mechanism. With the use of residual generated regressors, we achieve a measure of the total effect of aid on growth, accounting for the effect via investment. Pooled panel results for a sample of 25 sub Saharan African countries over the period 1970 to 1997 point to a significant positive effect of foreign aid on growth, ceteris paribus. On average, each one percentage point increase in the aid/GNP ratio contributes one-quarter of one percentage point to the growth rate. Africa's poor growth record should not therefore be attributed to aid ineffectiveness.
Foreign Aid and Sectoral Growth in Sub-Saharan Africa
The Journal of Developing Areas, 2021
The effectiveness of foreign aid in promoting growth has been a subject of intense debate among donors, policy makers and researchers. On the one hand, foreign aid can promote growth and investment by filling the savings gap and the foreign exchange gap. On the other hand, foreign aid may have an adverse effect on growth and investment due to disincentives and moral hazard issues associated with the strategic interactions among donors and recipients and its negative effect on the tradable sector and the competitiveness of the economy through the Dutch Disease. In this paper, we examine long-run effects of foreign aid on output and prices of tradable and non-tradable sectors in twenty-two sub-Saharan African (SSA) countries using cointegrated vector autoregressive (CVAR) analysis. The SSA countries have been major recipients of foreign aid. The CVAR methodology has a number of advantages over single equation estimation and panel data estimation method used in current studies. Unlike these methods, it allows for the dynamics of aid and its effect to differ across countries. For each country, we estimate 5X5 CVAR model using annual data. Our variables comprise of foreign aid, tradable output, non-tradable output , price of tradable goods, and price of non-tradable goods. We find that aid has a heterogeneous effect on sectoral output and prices. It has a significant negative effect on tradable output in fifteen countries, but has a significant positive effect on the tradable output in four countries. Similarly, aid has a significant positive effect on non-tradable output in five countries, but a significant negative effect in six countries. Only in four countries foreign aid has both a negative effect on tradable output and a positive effect on non-tradable output. We also find that aid has an inflationary effect in six countries, while it has a deflationary effect in five countries. We do not find evidence of Dutch disease. Aid does not lead to deterioration in the terms of trade for tradable goods.
Mediterranean Journal of Social Sciences, 2013
The study examined the impact of foreign aid on economic growth using a sample of 26 HIPC countries from the Sub-Saharan Africa over the period 1980 to 2006. Using Random Effects method, the results show that firstly the initial level of income, investment, growth in labour force, government size, debt service and aid intensity are the main determinants of growth in SSA. Secondly the study finds evidence of a direct positive impact of aid intensity on economic growth being significantly different from zero. However, this direct impact does not compare favourably with the impact exerted by investment and government size on economic growth. Thus while the findings support moves by the G8 to double aid to developing countries including Africa, the need for Africa to industrialize remains a necessary precondition for the growth impact of aid to be meaningful.
Foreign Aid and Economic Growth in Developing Countries: Evidence from Sub-Saharan Africa
Theoretical Economics Letters
This study aims at understanding the impact of foreign aid on the economic growth of the Sub Saharan African region. Despite being the largest foreign aid recipient in the world, the region is the poorest with the lowest Human Development Index (HDI) and Gross National Income (GNI) per capita. This raises serious questions about the effectiveness of foreign aid to the economic growth and development of the region. As such, we examine the relationship between foreign aid, determined by the official development assistance (ODA), and the economic growth rate of the Sub Saharan Africa's ten largest recipients of foreign aid, for a 23-year period from 1990 to 2012. These ten countries include Ethiopia,
The Effect of Foreign Aid on Economic Growth in Ghana
2016
This paper uses time series data from 1972 to 2012 on Ghana to test the hypothesis that foreign aid can promote growth in developing countries. The ARDL approach to cointegration (bounds test) was employed to examine both the long run and short run relationships between aid and economic growth. The results of the bounds test showed that there is cointegration between foreign aid and economic growth in Ghana. This was further confirmed by the error correction term which was very significant and correctly signed. The error correction term showed that the speed of convergence to long run equilibrium is moderate. From the results, labour, capital and government expenditure have positive impact on economic growth in Ghana in both the long run and the short run whereas foreign aid and interest payment on external debt have negative impact on growth. In order to derive a positive benefit of foreign aid, we recommend the provision of economic aid which is geared towards capital formatio...
2013
This study provides evidence of the effectiveness of aid through the use of a sample of 34 sub-Saharan African countries over the period 1990-2010. After considering the endogeneity of aid, the results of the estimation reveal that aid has a positive effect on growth only when the estimation is controlled for governance. The comparative analysis shows in turn that governance and education are the main channels through which aid is transmitted to growth in a stable environment. In a post-conflict environment, on the other hand, aid affects growth via investment in public capital (infrastructure). Finally, the OaxacaBlinder decomposition approach shows that the difference in terms of amounts of aid received does not explain the differences in growth observed between stable countries and countries in postconflict situations. Based on those results, the economic policy implications are discussed in the conclusion.
Foreign Aid and Economic Growth in Ethiopia: A Cointegration Analysis
Economic Research Guardian, 2011
Poor countries lack sufficient domestic resources to finance investment and the foreign exchange to import capital goods and technology. The existing situation in Ethiopia is a living example of the scenario which binds economic growth. In this paper the unresolved question of aid effectiveness (usually measured by its impact on economic growth) in Ethiopia using a time series data covering the period 1970 to 2009 is addressed by employing multivariate cointegration technique. Foreign aid entered alone has a positive role in enhancing growth. However, the aid-policy interaction term has produced a significant negative effect on growth implying the deleterious impact of bad policies in constraining aid effectiveness. The overall effect of aid on economic growth over the period considered turns out to be negative due to lack of good policies. This paper indicates also that the country has no problem of capacity constraint as to the flow of foreign aid.
Does Foreign Aid Accelerate Economic Growth? An Empirical Analysis For Nigeria
International Journal of Economics …, 2012
This paper analyses the impact of foreign aid on economic growth in Nigeria during the period of 1970-2010. The empirical analysis rests on the neo-classical modelling analytical framework and combined several procedures in modern econometric analysis/estimation techniques. Our findings shows that aid flows has significant impact on economic growth in Nigeria: domestic investment increased in response to aid flows and population growth has no significant effect on aid flows. Aid flows also provides free resources to increase domestic investment, thus confirming the aid-policy growth hypothesis. Therefore, donor governments should be aware of the political situations in recipient countries, and work with international bodies to ensure as much stability as possible. Finally, foreign aid transfers should henceforth pledge to abide by the oath to of doing no harm.