Is Aid Really Dead? Evidence from Sub-Saharan Africa

Abstract

This study examined the relationship between foreign aid and economic development in Sub-Saharan Africa. The study seeks to examine the role of macroeconomic policy in aid effectiveness in SSA countries by adopting a theoretical framework similar to the Endogenous/New Growth model and the System Generalized Method of Moments (GMM) technique of estimation in attempt to overcome the challenge of endogeneity perceived in the institution variables and aid-growth nexus. It was observed that foreign aid does not significantly influenced Real GDP Per Capita in Sub-Saharan Africa, but the relation reverses after controlling for the role of economic policy; though the response of real GDP per capita tends to be infinitely inelastic. Subsequently, capital stock, labour force, institutional quality and human capital meaningfully contributed to economic development in SSA.

Keywords: Foreign aid, Economic Development, Institutions, System GMM

JEL Classification: F35, C23, G18, O1, P48