AID-Growth Nexus Debates in Selected African Countries: A Methodological Exposition

Abstract

Aims: This study examines the effectiveness of foreign aid in selected African countries. Also, it investigates the relevance of SEM system in gauging the relationship among multiple variables like foreign aid, economic growth, investment and human capital using multiple techniques such as SURE, 3SLS and OLS. This is to provide methodological exposition and contributions in aid-growth nexus debates, especially in the sample countries. Study Design: Case Study. Place and Duration of Study: Africa. Panel data ranging from 1987-2010. Methodology: Simultaneous Equations Model (SEM) using balanced panel data approach was adopted and three techniques of estimation i.e. OLS, 3SLS and Seemingly Unrelated Regressions Estimate (SURE) were utilized. This adoption is in line with the dominant view in the literature that the best model for gauging the relationships among multiple variables like foreign aid, economic growth, investment and human capital as the case in this study is through SEM system. Results: Our finding supports the popular view on aid effectiveness hypothesis in Africa. This is because our finding reveals that foreign aid impacts on economic growth through investment as a major transmission channel and it also impacts on human capital. Also, our findings indicate that SURE method proved to be the most efficient method for the estimation of SEM among the three techniques adopted; while OLS proved to be an Original Research Article British Journal of Economics, Management & Trade, 4(5): 724-742, 2014 725 appropriate technique for the estimation of SEM. Conclusion: Essentially, the application of SURE method on SEM using Africa as a case study, is indeed a major empirical contribution from this study. Hence, due to our choice of appropriate model and estimation techniques, our finding becomes consistent with the leading view on aid effectiveness in Africa. We therefore recommend that more foreign aid should be allocated to investment and human capital. In the same vein, we suggest that subsequent studies on aid-growth nexus in Africa should take a clue from this study, especially in the area of methodological contributions.