Foreign aid allocation, governance and spatial interactions in Sub-Saharan Africa

This study aims to capture cross-country foreign aid allocation externalities and spillovers on governance effectiveness dynamics in Sub-Saharan African countries from 2002 to 2023. To address this, we have used the spatial econometric model. Our results show strong geographical clustering in governance quality, with well-governed and poorly governed nations frequently neighboring each other. The study demonstrates that while foreign aid can strengthen governance in recipient nations, it may have unforeseen negative consequences for governance in neighboring countries. These spillover effects can be attributed to aid dependency, reduced incentives for local reforms, and resource competition, which can erode governance in adjacent countries. This study emphasizes the need for foreign aid programs to consider geographical interdependence, as changes in the governance of one nation can affect regional outcomes. A geographically integrated approach to assistance distribution might improve governance throughout Sub-Saharan African countries, promoting regional stability and sustainable development.