THE EFFECTS OF FOREIGN AID ON ECONOMIC GROWTH IN SUB SAHARA COUNTRIES: EMPIRICAL EVIDENCE FOR PANEL DATA

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.