Analysis of capital formation and foreign aid nexus in Nigeria

Abstract

Purpose The issue of foreign aid has continued to gain renewed economic cum political attention in the early years of the twenty-first century. At a summit, popularly known as the Millennium Summit, which took place in 2000, there was an agreement by the international community concerning some goals known as the Millennium Development Goals which were targeted to be reached by the year 2015 but have now been replaced by the Sustainable Development Goals. Against this background, it becomes pertinent to ascertain the contributions and impact of foreign aid in the form of Overseas Development Assistance (ODA) on capital formation in Nigeria. This is an area of foreign aid studies that has been ignored by many researchers. Most studies are seen delving into analyzing the aid-growth nexus without evaluating the transmission link through which foreign aid transmits to affect economic growth. There is paucity of studies on the aid-capital nexus. The paper aims to discuss these issues. Design/methodology/approach The empirical method used was autoregressive distributed lag (ARDL) model. Findings The empirical results from the ARDL model estimations show that foreign aid, which is proxied by ODA, has a positive and significant impact on capital formation in Nigeria for the years under analysis. The result of the Granger causality test shows that a bi-directional granger causality exists between foreign aid and gross fixed capital formation (GFCF). Originality/value Empirical results from the ARDL model estimations show that foreign aid, which is proxied by ODA, has a positive and significant impact on capital formation in Nigeria for the years under analysis. The result of the Granger causality test shows that a bi-directional Granger causality exists between foreign aid and GFCF. It is therefore recommended that government should make serious efforts toward the implementation and effective utilization of foreign aid. Appropriate policy measures that would monitor the maximum and effective utilization of foreign aid are also required.

Effectiveness of bilateral and multilateral concessional debts on economic growth in Africa

“…Hansen and Tarp (1999) examined the effect of aid inflows on the growth rate of GDP per capita in developing countries. The findings showed that aid is positively associated with both growth and capital formation (see also Martínez-zarzoso, 2019; 348 IJOEM 15,2 Tang and Bundhoo, 2017;Karras, 2006;Mustafa et al, 2018;Yiew and Lau, 2018;Orji et al, 2019). In a related study on the SSA, Clemens et al (2004) contended that aid has a statistically significant impact on real per capita growth.…”

Does Foreign Aid Have an Expected Role in the Economic Growth of Bangladesh? An Analysis in ARDL Approach

“…Taking seven middle-income countries of South and South-East Asia, Sharma and Kautish (2019) exposed that aid policy interaction has a significant and positive impact on economic growth in this region. Orji et al, (2019) revealed that foreign Aid has a positive and significant effect on capital formation in Nigeria. Similar results were obtained by Yahyaoui and Bouchoucha (2019) for Tunisia, Chirwa and Odhiambo (2019) for Zambia, Mehmood and Seror (2019) for Pakistan, Bhattarai (2009) for Nepal, Sakyi (2011) for Ghana, Rao et al, (2020) for South-East Asia and South Asian countries.…”

“…In this study, we are going to reveal the effect of FA on the Economic growth of Bangladesh. The theoretical foundation of our research would be based on the two-gap model (Orji et al, 2019).…”

“…It is mentioned that the two-gap model elaborates the Harrod-Domar growth model, whereas economic growth is determined by physical capital formation. According to this model, the output of a country is determined by the rate of savings and the productivity of investment (Orji et al, 2019). We know that if domestic savings are not abundant to finance the investment to achieve the targeted growth rate, there will be a savings gap.…”

“…It refers to that all investment goods cannot be produced domestically. These two gaps are incorporated to formulate the two-gap model (Orji et al, 2019).…”