Foreign Aid And Economic Growth In Sub-Saharan African Countries

This study investigates the effect of Official Development Assistance (ODA) on economic growth in Sub-Saharan African (SSA) countries using a panel of 24 countries over 38 years, extracted from the World Development Indicators, African Development Bank and the Penn World Tables 9.0. (2006). We employ the moment moment quantile regression approach to establish whether the effect of ODA varies along the conditional economic growth distribution. Quantile estimates show that ODA is positively related to economic growth in the Sub-Saharan Africa (SSA) region. Moreover, our study finds that the positive impact of aid is bigger in the countries with high levels of economic growth-- the results show a positive statistically significant effect at 75th and 95% quantiles for 5% and 10%, respectively. Controlling for social infrastructures and institutions quality, the results also show a positive and statistically significant relationship between this control variable and economic growth in 50th quantile, 75th quantile and 95th quantile, suggesting that improvement in institutions quality brings much benefit to the countries within those quantiles compared to those in the lower quantiles. Incorporating institutions quality institutions variable and interaction terms into the model influences the effect of aid on economic growth. With those variables ODA is only effective in countries located within the 25th and 50th quantiles, implying that aid has significant effect on economic growth net of institutions quality and other control variables. The implication of our findings is that aid can be strategically employed as a central instrument for stimulating economic growth in SSA countries, particularly low-income countries.