Foreign aid, human capital and economic growth nexus: Evidence from Nigeria

Oluwatoyin Abiola Fashina,Adedoyin Isola Lawal,Abiola John Asaleye,Joseph Olufemi Ogunjobi

doi:10.14254/2071-8330.2018/11-2/8

Abstract

This study investigates the link between aid and human capital in promoting economic growth of Nigeria. The study used two models; the first model was used to test the validity of the medicine model in Nigeria; while the extended model was used to investigate the effect of aid and human capital shocks on growth using Engle-Granger and Vector Error Correction Model (VECM) estimation techniques respectively. The findings from the first model suggest that persistent increase in foreign aid flows beyond a particular point (the optimal point) may adversely affect growth thus confirming the proposition of the Medicine Model. Evidence from the study’s extended model indicates that growth in Nigeria is sensitive to human capital shock via education while the response from aid shock is trivial in the long run. The mechanism through which aid impacts economies is influenced by many heterogeneous factors, notably; the role played by the recipient governments is often not considered. Our implication from the obtained results is that government expenditures on education with additional inflows of aid can promote economic growth in Nigeria. However, there is also an indication that attainment of economic growth might be challenging for this aid-dependent country.

Highlights

In the growth process of developing countries, emphases have been often placed on human capital development as the most robust source of economic growth (Teixeira & Queiros, 2016; Zhang & Zhuang, 2011)
It is evident in the study that among other factors considered responsible for growth, foreign direct investment (FDI) and trade openness (TOP) appeared the most viable for explaining growth attainment in Nigeria in the long-run
This study examined the relationship between economic growth, foreign aid and human capital in Nigeria

Summary

Introduction

In the growth process of developing countries, emphases have been often placed on human capital development as the most robust source of economic growth (Teixeira & Queiros, 2016; Zhang & Zhuang, 2011). Due to the saving gap, investment in human capital development is far below minimum requirement in many developing countries, foreign aid is often considered as an alternative instrument for the attainment of economic growth. Scholars like Dhakal, Upadhyaya and Upadhyaya, (1996); Boone (1996); Jensen and Paldam (2003) showed that aid has no significant impact on economic growth as such. Most of these and other studies measured aid in its disaggregated form such as food aid, debt forgiveness on loans and other forms which are not part of the development projects. These aid measures are not specific enough; perhaps this may be the reason for the stark contrast in the researchers' conclusions and policy suggestions

Results

Discussion

Conclusion