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.