Does Foreign Aid Promote Financial Development in the Economic Community of West African States (ECOWAS)?

W Jean Marie Kébré

doi:10.22158/rem.v5n2p39

Abstract

This article analyzes relationship between foreign aid and financial development in ECOWAS countries. These countries receive aid flows from developed countries and from international financial institutions. The article’s idea is to evaluate this aid effects on financial development and to assess role of governance on this relationship. The analysis uses panel data from ECOWAS countries over the period 1984-2016. The estimations’ results, based on Dynamic ordinary least squares (DOLS) estimator, show that aid is negatively and significantly linked with financial development indicators used. These results suggest that aid is an obstacle to financial development. Governance role tests do not change the negative effect of aid on financial development. However, the magnitude of the negative effect of interactive variables (with governance variables) is less than aid direct effect on financial development. These results suggest that an additional effort to improve governance in these countries would reduce aid negative effect on financial development, or even reverse this effect.

Highlights

Foreign aid plays an important role in developing countries’ economies
With debt crisis experienced by many Sub-Saharan African economies in 1980’s, many sectors have been affected by reforms whose implementation determined foreign aid received by these countries
Can we defend the idea that aid contributes to financial deepening improvement in these economies? To what extent does institutions’ quality affect relationship between aid and financial development? This is the main interest of this paper that tests the hypothesis according to that foreign aid slacks up financial development in ECOWAS economies; weak quality of institutions contributing to worsen this relationship

Summary

Introduction

Foreign aid plays an important role in developing countries’ economies. in these countries like those from South-Saharan Africa in general and those from West Africa in particular, the importance of aid is such that we could qualify these economies as being in dependence on aid. This is the main interest of this paper that tests the hypothesis according to that foreign aid slacks up financial development in ECOWAS economies; weak quality of institutions contributing to worsen this relationship. It aims to assess aid effect on financial development in ECOWAS countries and role of governance’s quality in this relationship.

Results

Conclusion