Effect of foreign aid on corruption: evidence from Sub-Saharan African countries

Abstract

Purpose – The purpose of this paper is to examine the effect of foreign aid on corruption in Sub-Saharan African (SSA) countries. Foreign aid is aimed to promote economic growth by complementing the recipient country’s shortfall of financial resource. However, if the recipient country’s quality of governance and institutions is poor, the process of growth will be undermined. Since foreign aid to SSA countries has been increasing substantially in recent years, it is imperative to explore its impact on the level of corruption in the SSA countries. Design/methodology/approach – The paper opted to use a Quantile regression (QR) approach to examine the impact of foreign aid on corruption. The data cover from the year 2000 to 2010 for 42 Sub-Saharan countries. QR is appropriate to achieve the stated objective because the method enables to examine the effect of aid on at different level of corruption. Findings – The paper provides empirical insights on the impact of foreign aid on corruption level in SSA countries. The finding indicates that foreign aid has reduction effect on the corruption level of SSA countries. The effect is likely to be greater in nations that experience a higher level of corruption. The findings further reveal that aid from different bilateral sources has different effect on corruption. As a whole, the findings are statistically significant and robust to alternative measure of corruption. Research limitations/implications – Since the study just focus on Sub-Saharan African countries, the research findings may lack generalization to the entire African countries or poor developing countries that are receiving substantial amount of foreign aid. Therefore, future research should incorporate all the African countries or all poor developing countries. Practical implications – Since the empirical findings reveals that aid reduces the corruption level and aid from different bilateral source have different effect on corruption, it is important to establish more cooperation between donor countries in allocating aid. The conditions attached to aid should be, among other things, be related with improvement of governance and institutional environment. Allocation of aid should be selective such that countries in institutional quality should be among the important criteria for a country to qualify for aid. Originality/value – This paper fulfills the need to study the relationship between foreign aid and corruption in the case of SSA countries. The aid-corruption nexus is relatively under explored issue especially in the case African countries.