The Effect of Foreign Aid on Economic Growth of Sub-Saharan Africa

Abstract

The study of economic growth under the field of development economics is a trending area of research in social sciences. Considering Sub-Saharan Africa as one of the largest recipients of foreign aid, examine the relationship between aid and economic growth in this region will be a great interest to both the donors and recipients. The outcome of such kind of research dictates for efficient allocation of aids. As such, this dissertation theoretically and empirically investigates the effect of Foreign Aid on Economic Growth of Sub-Saharan African countries from 2000 to 2020. Panel Data for the sample of Forty-six Sub-Saharan Africa has been collected to run the econometric model of the regression.

Using panel data of the selected Sub-Saharan countries to employ fixed effect models in order ascertain underlying forces among the variables under consideration. I carry out various econometric tests to control other factors that might affect the empirical analysis. Amongst these are heterogeneity test in order to control for all variables that vary over the cross-sectional units, testing the presence of serial correlation in the error terms in fixed effects regression model to avoid inefficient estimates and biased standard errors etc. The empirical results of correlation matrix find that there exists a s positive relationship between the principal variables (i.e economic growth and foreign aid) over the period under consideration. That is, the more aid Sub-Saharan Africa countries gets the better the economic growth of the region is, ceteris paribus. On average, each one percentage increase in the foreign aid (i.e ODA) expected to increase economic growth with $ 2.45842.

thus, Sub-Saharan Africa poor economic growth may be contributed by other factors such as political condition of the region therefore not attributed to aid ineffectiveness. These findings suggest lesson that, there should be formidable economic development plans adopted by government of considering countries in order to efficient and effective allocate aid so as to achieve sustainable economic growth.