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

Abstract

Over the years, many African countries have largely been depending on foreign assistance officially known as the Official Development Assistance (ODA) to enhance economic growth and alleviate poverty. In fact, according to OECD, the region is one of the major recipients of ODA. In the face of the high inflows of ODA into SSA countries, it remains one of the poorest regions in the world. This prompted many researchers to dig into this topic to find answers. It appears that the positive effect of foreign aid to this region is not, if there is any, visible. Many critics of this aid, including Dambisa Moyo (2019), argued that foreign aid is doing more harm than good to SSA. Though, it is fair to understand that aid is not the only determinant of economic growth, so even if aid positively affects growth and other factors negatively affect it with a greater propensity, the economy may not realize growth. Having in mind the different literatures reviewed on this subject, this paper joins the many past studies on aid-growth relationship, to empirically study and find out if there exists any relationship between aid and economic growth in Sub-Saharan Africa between 2000 and 2021 using a sample of 46 countries from the region. The study uses an econometric model of fixed effect panel data to do the regression analysis, using Stata, and it carried out several econometric tests, such as heterogeneity, Hausman tests, etc., to control disturbance to the analysis. After running the regression analysis, the study finds that there a exist a positive relationship between aid and economic growth in SSA during the period under review. That is to say: the higher the aid sub-Saharan African countries receive, the more the economic growth they experience, vice versa. On average any 1 percent increase in aid to the region leads to a 2.2 percent increase in economic growth, even though this increase in growth is statistically not significant.