Foreign Aid And Economic Growth In Sub-Saharan Africa

Since the end of the Second World War, developing countries have been the recipient of significant amounts of foreign aid, provided mainly with the aim of easing poverty and promoting economic growth and development. Sub-Saharan Africa, a region of forty-eight countries with a combined population of over nine hundred million as of 2013, has consistently been one of the largest recipients of foreign aid. For example, in 2012, the region received a share of over twenty five per cent of total world aid. As such, the effectiveness of aid in Sub-Saharan Africa is of particular interest to researchers and both donor and recipient countries alike. The main objective of this study is to empirically examine the impact of foreign aid on this region over the period 1970 to 2012, through fixed effect panel data analysis. A sample of twenty-five Sub-Saharan African countries is considered in the study. The findings of the study indicate that aid has a significant positive long-term impact on per capita GDP growth over the period under consideration. This significant positive effect of aid is not subject to diminishing marginal returns, nor is conditional on the level of freedom in the country. Furthermore, upon sectoral decomposition of aid commitments, certain sectors are identified as having a more significant impact on growth over the sub-period 1995 to 2012. Aid designated for social infrastructure, in particular education and health, and general budget support has a positive, significant impact on growth. Given the shorter time frame, these results are not as robust as those for the 1970 to 2012 period, but nonetheless provide a unique insight into the effect of sector-earmarked aid on growth in Sub-Saharan Africa, as well as guidance for aid allocation policy-makers.