The Impact of foreign aid on economic growth of sub-Saharan African countries

Abstract

This paper was aimed at presenting a synthesized empirical literature on the effectiveness of foreign aid
on bringing economic growth to recipient sub-Saharan African countries. This is done by extensively
reviewing both theoretical and empirical literatures on the impact and effectiveness of official development
assistance (ODA) or foreign aid on economic growth of LDCs. Dozens of studies produced over the past
few decades have assessed the relationship between foreign aid and growth through econometric analysis
of cross-country (or “macro”) data relating the two variables. These studies have consistently turned
up inconclusive or contradictory results. In our current empirical review focusing on recent studies, we
came to know the conflict in on the effectiveness of foreign aid is still there. While majority of the current
literatures works find positive effect of foreign aid on growth, others studies recognize an inhibiting role
of foreign aid in economic growth. Still others support neither positive nor negative impact of foreign aid
on growth. On the other hand, studies conducted exclusively in Ethiopia found the foreign aid has positive
and significant effect o economic growth of the country while found negative relationship between foreign
aid and economic growth of the country. Non-econometrics indicators of aid effectiveness used by the
World Bank such as maternal mortality rate, infant mortality rate, incidence of tuberculosis, prevalence
of HIV aids show declining trend and thereby indicates aid effectiveness in Ethiopia. Evidence backed
by the empirical results, established that good economic policies and quality of institutional factors are
found essential for aid effectiveness in bringing economic growth in most of the study that found positive
relationship between aid and growth implying that governments and aid agencies should consider these
essential factors when it comes to improve aid effectiveness