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

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.

Ongoing Debate Between Foreign Aid and Economic Growth in Nigeria: A Wavelet Analysis

“…Note that the 0.09 percent increase in economic growth is as a result of a 1 percent increase in gross fixed capital formation. This reveals that gross fixed capital formation impacts economic growth positively (Fashina et al, 2018;Sethi; Note: * , * * , and * * * indicate statistical significance at the 1 percent, 5 percent, and 10 percent levels, respectively. SOURCE: Authors compilation.…”

“…The opposite is true of most African economies because they remained backward given the constant flow of foreign 1 Daud (2012) , Trinh Tra (2014), Mohapatra et al (2016), Gomanee et al (2003), and Clist (2016) found aid-growth interaction to be positive. Cuberes and Tsui (2011), Kabete (2008), Ahmed (2014), Hotouom (2015), Kawthar and Mohamed (2017), and found a negative aid-growth relationship, and Fashina et al (2018), Dhakal et al (1996), Kolawole, (2013), Ramadhan et al (2016), and Tekin (2012) found no significant aid-growth relationship.…”

“…The third dimension depicts an insignificant aid-growth relationship. This implies that there is no significant relationship between foreign aid and GDP growth (Fashina et al, 2018;Dhakal, Upadhyaya, and Upadhyaya, 1996;Kolawole, 2013;Ramadhan, Jian, and Pacific, 2016;Tekin, 2012). Due to inconsistency in the literature as a result of different time frames, data frequencies, techniques utilized, variables employed, and the country or countries in focus, the aid-growth relationship remains inconclusive, thus prompting further research on the topic.…”

Forecasting and management of gross domestic product

“…Among other studies offering econometric models for the variables in question, one can also mention Dougherty, (1992), Goldberger (1990), Greene (1993), Pindyck and Rubinfeld (1991), Simionescu et al (2016), Korauš et al (2017), Kasperowicz (2014), Kaigorodova et al (2018), Fashina et al (2018).…”

Efficiency of Innovation Activity Funding as the Driver of the State's National Economic Security

“…The problem of ensuring economic security of the country is one of the key aspects in the macroeconomic policy of developed and developing countries of the world (Bednar and Halaskova, 2018;Bhowmik, 2018;Fashina et al, 2018;Lyeonov et al, 2018;Milovic and Jocovic, 2017;Nguedie, 2018;Soylu et al, 2018;Vasylieva et al, 2018). The economic security of the state characterizes the condition of the national economy, which protects national interests, resistance to internal and external threats, the ability to develop and protect the vital interests of people, society, and the state.…”