| Abstract: | This study examines the effect of foreign aid on economic growth in 12 selected sub Sahara developing
countries. Using panel data from 12 countries from 1993 - 2019, in to fixed effect model and random
effect models. The key variables of this study are GDP, foreign aid, measured by the official amount of
foreign aid as a percentage of GDP by the recipient countries, Exports of goods and services, capital
formation, population growth rate and domestic savings. Several potential variables that can impact
economic growth are controlled for to assess the foreign aid-growth relationship. The study finds that,
after controlling for other factors, foreign aid has positive effect on economic growth. The insignificant
variables in the regression are Gross Domestic Savings as a percentage of GDP and export of goods and
services as a percentage of GDP. The effect of population growth and gross capital formations are
statistically significant on real GDP growth rate. It means that foreign aid and economic growth have
statistically significant relationship. These findings suggest two lessons for policymakers. First, foreign
aid should be used in expectation of increasing economic growth of recipient countries. Second, foreign
aid may be effective in improving the developments of those countries. This suggests that future research
should focus on in-depth, country-specific, sector based, case studies. |
