Foreign aid on economic growth in Africa: A comparison of low and middle-income countries

Abstract

Previous empirical studies on the effects of foreign aid on economic growth have generated mixed results that make it difficult to draw policy recommendations. The main reason for such mixed results is the choice of a single aggregate list of countries, regardless of the disparities in levels of development. This study therefore fills the development gap by disaggregating the African data into a panel of 20 middle-income and 19 low-income African countries over a period of 15 years between 1995 and 2010, and employing a dynamic generalized method of moments (GMM) model to address the dynamic nature of economic growth as well as the problems of endogeneity. The results of this study support the theoretical hypothesis that a positive relationship between aid and GDP growth exists, but only for low-income African countries, not middle-income ones. On the other hand, the study reveals that middle-income African countries tend to experience a greater impact on their economic growth from foreign direct investment (FDI) and natural resources revenues, mainly oil exports. This implies that the frequent criticism that foreign aid has not contributed to economic growth is flawed, at least in the case of low-income African countries. In fact, foreign aid has played a critical role in stimulating economic growth in such countries through supplementing domestic sources of finance such as savings, thus increasing the amount of investment and capital stock in them.

The effects of foreign aid, foreign direct investment and domestic investment on economic growth in African countries: Nonlinearities and complementarities

“…It shows that an increase of 1% in the AID, FDI, and DI leads to an increase in economic growth by 0.092, 0.146, and 0.118%, respectively. However, the positive relationship that is founded between AID and economic growth is in line with the prior studies of Alemu and Lee (2015), Dalgaard et al (2004), Jena and Sethi (2019), Karras (2006), Ndambendia and Njoupouognigni (2010), Sethi et al (2019), Sothan (2018), and Tait et al (2015), but contrary to Mallik (2008), Liew et al (2012), Niyonkuru (2016), and Yiew and Lau (2018), who found a negative impact of AID on growth in recipient countries. Besides, the positive nexus between FDI and economic growth is similar to previous empirical studies of Borensztein et al (1998), Emmanuel (2014), Olawumi and Olufemi (2016), Umoh et al (2012), Onuoha et al (2018), and Zekarias (2016), suggesting that FDI is an important vehicle for the transfer of technology, which contributes to technological progress and creates a spillover effect, and thereby raises the long‐term growth rate.…”

“…Their empirical results showed that AID was positively associated with growth, whereas the volatility of AID hurts it. Alemu and Lee (2015) investigated the dynamic relationship between AID and economic growth for 39 African countries over the period 1995-2010 and found that AID promotes economic growth only in the low-income countries. Tait et al (2015) found that AID has a significant positive long-run effect on economic growth for 25 SSA countries over the period 1970-2012.…”

Does economic growth reduce childhood stunting? A multicountry analysis of 89 Demographic and Health Surveys in sub-Saharan Africa

“…In the context of some developing countries, political reforms, influx of foreign aid and foreign direct investments are bringing unprecedented opportunities for growth, employment, education and improvement in public health indices 34–38. At the same time, significant challenges remain in an effort to sustain the growth trajectories, reduce the prevalence of extreme poverty, and cut child stunting and mortality rates.…”

Effect of Foreign Aid on Educational Development in Nigeria

“…Dreher et al (2015) pointed out that many of the developing countries receiving aids, poverty still looms large, and underdevelopment persists while concluding that there is no robust evidence that aid affects growth. On the other hand, Alemu and Lee (2015) in their work on the comparative analysis of the impact of foreign aid on Middle and Low-Income African countries concluded that aid has a significant positive impact on low-income countries arguing that criticisms of foreign aid is flawed. Galiani et al (2014) also pointed out that foreign aid has a sizable positive effect on economic growth.…”