Abstract
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 Democratic Republic of Congo, Tanzania, Kenya, Cote d’Ivoire, Mozambique, Nigeria, Ghana, Uganda and Malawi. We find that aid by itself does not have significant impact on economic growth. However, the variable aid interacted with the policy index was found to be statistically significant and positive, which means that aid tends to increase growth rate in a good policy environment. Subsequently, when we include the institutional quality index and its interaction term in the model, we find that institutional quality has a positive and significant impact on growth; however, none of the aid variables was significant. We also test the two-gap growth model which states that foreign aid enhances economic growth through investment and imports. The results show that foreign aid is a good ingredient for supplementing investment and imports requirements in these ten countries. We believe that given foreign aid is conditional on the economic, political and institutional environment of the recipient country, this can explain why aid effectiveness is insignificant in the Sub Saharan Africa region where bad governance is a core issue on the region. Therefore, respective governments, donor agencies, and policy makers should take into consideration these multiple aspects when undertaking aid-financing activities.
Highlights
The role of foreign aid in developing countries has become a subject of heated debate among economists and development specialists over the past decade
This study aims at understanding the impact of foreign aid on the economic growth of the Sub Saharan African region
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
Summary
The role of foreign aid in developing countries has become a subject of heated debate among economists and development specialists over the past decade This has been generated in large part by international attention towards the Millennium Development Goals (MDGs). The United Nations Millennium Declaration clearly recognises that foreign aid, better termed as Official Development Assistance (ODA), is a necessary and complementary source of finance for better development and achieving the MDGs. The Organisation for Economic Co-operation and Development (OECD) defines ODA as government aid designed to promote the economic development and welfare of developing countries. Total aid since 1990 amounts to USD 58 billion in current terms, which work out to approximately USD 96 billion in real terms using 2011 prices These huge amounts of financial assistance to developing countries amply justify the strong debate among scholars on the real contributions of foreign aid on economic growth—sometimes with claims that it is wasted. With a large portion of foreign aid injected in the Sub-Saharan Africa, we expect to see much improvement in the aggregate growth and standards of living in the region
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
