Foreign aid and economic growth nexus in Africa: Evidence from low‐income countries

Abstract

AbstractThe enormous volume of literature has widely discussed the aid–growth correlation while identification of their causal relationship remains elusive and mixed. The main objective of this article is to investigate whether aid sources matter for explaining the aid–growth causal nexus among African low‐income countries (LICs) during 2000–2017. A novel feature of this study is that it takes into account three proxies of aid (i.e. total aid [TA], traditional donors’ aid [TDA], non‐TDA [NTDA]), unlike most studies that use aid solely from TDs (TDA). It employs a dynamic panel causality model in a multivariate setting using investment and consumption as key conditioning variables to account for omitted variable bias. The study found a short‐run bidirectional causality between aid and growth for TA and TDA proxies but not for NTDA in neither direction. In the long‐run, the study found unidirectional causality from growth to aid for TA and NTDA aid but not for TDA. The overall result shows that the aid–growth causality among African LICs depends on the aid proxies used and the time horizon assessed. A key policy implication is that donors’ aid allocation decisions in LICs should take into account the specific causal relationship between aid and growth by aid sources and time periods.