The Impact of Foreign Aid on Economic Growth in Africa: Empirical Evidence from Low Income Countries

Abstract

This paper aims to shed some insights on the ongoing debate on the aid-growth nexus by examining whether sources of aid matters for explaining aid effectiveness. In doing so, we consider three main proxies for bilateral aid based on the three sources of aid such as total aid (TA); Traditional Donors aid (TDA) and Non-Traditional Donors aid (NTDA) as independent variables in a dynamic panel growth model within a system GMM framework. It uses a panel dataset from 25 Low-Income Countries (LICs) in Africa over the period 2000-2017. The main findings show that the impact of aid on growth appears to be negative and significant for TA and TDA proxies while it is positive but insignificant when the aid proxy is NTDA. A relatively larger share of TA and TDA disbursement away from the direct growth-enhancing productive sectors towards the unproductive sectors seem to have contributed to their strong negative impact on growth. The key policy implication is that governments in LICs in Africa and donors should work in collaboration to design effective ways for ensuring that TDA should target the direct growth-enhancing sectors.