The Impact of Foreign Aid on Economic Growth: Evidence from Sub-Saharan Countries

Sub-Saharan Africa has been the largest recipient of foreign aid since the 1960. But the issue of aid effectiveness in the region is highly debatable among scholars. Taking a panel of 34 countries and employing regression with Driscoll and Kraay (DK), panel corrected standard error (PCSE), and feasible generalized least square (FGLS), this study investigates the impact of foreign aid on economic growth in Sub-Saharan African (SSA) countries. The study covers a period of 28 years from 1990 to 2018. The main objective of the study is to examine the impact of foreign aid on economic growth in SSA countries by dis-aggregating foreign aid. Accordingly, foreign aid was dis-aggregated into multilateral assistance, bilateral assistance from big donors and bilateral assistance from small donors. The results of the study show that all of the aid components are contributing negatively to the economy of SSA countries. The results also suggest that there is no strong evidence that aid interacted with corruption promotes economic growth in SSA region. Only multilateral assistance was found to be positive and significant when interacted with the control of corruption index. The result further shows that in the investment model, the coefficients of all the aid variables was statistically insignificant suggesting that foreign aid was not augmenting saving and financing investment as it was intended by the aid model. The study recommends that since Africa needs more assistance in governance before financial assistance donor countries have to reconstruct their foreign aid policy.