Foreign aids and economic growth in Africa: Does third-country effect matter?

Abstract

Different regions are linked through different factors such as climate, and border sharing. Apart from this, African countries have developed significant links as a result of globalisation, economic integration, and trade liberalisation. Since any country’s economic growth is influenced by the performance of its neighbours, these ties have resulted in spatial dependence among these countries. On this basis, the significance of spatial interactions between countries cannot be overemphasised. It is for this reason that the study investigated spatial dependence between African countries. The study employed non-spatial (FE, GMM) and spatial (SDM, SAM, and SEM) econometrics techniques and data ranging from 1996 to 2019 to examine the impact of ODA on Economic growth in Africa and its spill-over effects. Based on the graphs and the Moran I test, the findings reveal that (i) there is spatial dependence among African countries (ii) The GMM results indicate that the ODA impact was positive and statistically significant but smaller in magnitude compared to the magnitude of the spatial models’ coefficients. This suggests that not controlling for space heterogeneity will possibly underestimate the real impact of ODA on GDP. Secondly, the study found that the weighted GDP was positive and statistically significant, which indicates that an increase in the GDP of a certain country has a positive and statistically significant impact on their neighbour’s economic growth. Based on the findings of the study, it is suggested that countries should improve their relationships and partnerships if they want ODA to provide the desired benefits across Africa.