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Testing the foreign aid-led growth hypothesis in West Africa

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  • Jones, Yakama Manty

Abstract

This paper assesses the foreign aid-led growth hypothesis in a panel of West African countries using panel cointegration techniques ( Pendroni Residual Cointegration Test, Error Correction Model, Johansen Fisher Panel Cointegration Test) and then on a country-by-country basis using time series cointegration techniques (Engle-Granger test, Error Correction Model , Johansen system cointegration test). The panel cointegration results indicate a long run relationship between aid and growth in the whole panel. For the individual countries, at least one test showed evidence of this long run relationship. Granger causality tests were done for the whole panel and then for each country individually to establish direction of causality between foreign aid and economic growth. There is evidence of unidirectional causality from foreign aid to economic growth, from economic growth to foreign aid and there are cases where both variables are independent. A simplified variation of the Chenery and Strout Two-Gap Model was estimated to test the impact of foreign aid and selected explanatory variables on economic growth in countries where aid was found to granger cause growth and this impact varied from country to country.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 50361.

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Date of creation: Apr 2013
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Handle: RePEc:pra:mprapa:50361

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Keywords: Foreign Aid; Growth; Error Correction Model; Johansen Panel Cointegration Test; Engle-Granger test; Granger causality;

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