Foreign Aid and Economic Growth in the Sub-Saharan African Countries

Abstract

ABSTRACT: Official Development Assistance (ODA) remains an important tool for nurturing economic growth in Sub-Saharan African (SSA) countries. This is evidenced by numerous studies that have investigated the ODA-growth nexus in SSA region. However the existing studies on the relationship between ODA and economic growth is subject to identification issues. More specifically, the issue of distributional heterogeneity has not been given the attention it deserves in this field. In other words, the issue of whether ODA-growth nexus differ among developing nations with different economic growth levels has not been meticulously explored. This study aims to examine the heterogeneous impact of ODA on economic growth across 24 SSA countries over a 38-year period. To achieve this, an attempt is made in this study to investigate how the effect of ODA varies along the conditional economic growth distribution by employing the Moment of Moments Quantile Regression (MM-QR) approach, an approach that is able to capture the diverse effects of ODA across different levels of growth distribution. Moreover, this study explores the role of social infrastructure and institutional quality in shaping this relationship. The results suggest that ODA has a positive impact on economic growth in the SSA region, with a larger positive impact in countries with high levels of economic growth. This finding is key as it underlines the important idea that though ODA positively influence growth, it doesn’t homogeneously affect all nations; but instead, it remarkably enhance it in areas with relatively robust and healthy economic conditions. The study also finds a positive and significant relationship between social infrastructures and institutions quality and economic growth, particularly in the 50th, 75th, and 95th quantiles, thereby highlighting the fact that well-developed social infrastructures and high-quality institutions play a pivotal role in nurturing economic progress, particularly at the mid to higher percentiles of economic development. The inclusion of institutions quality and interaction terms in the model influences the effect of aid on economic growth, with ODA being effective in countries located within the 25th and 50th quantiles. The findings suggest that aid can be strategically used to stimulate economic growth in SSA countries, particularly low-income countries.