The Impact of Foreign Aid on the Economic Growth of Cameroon (1960-2013) Using a Multivariate Autoregressive Model

Abstract

In spite of Cameroon’s abundant natural resources, it has continued to appear on the list of nations classified as developing countries, thus qualifying to be a beneficiary of foreign aid for over half a century now. Regardless of the increased inflow of aid and its huge potential to steer up the nation’s economic growth by bridging its foreign exchange and savings gaps, the country continues to suffer from chronic economic hardship in addition to scoring very low in its Human Development Ranking. This has thus triggered the need to undertake this study, with the goal of investigating whether foreign aid has had any potential benefit on the nation’s economic growth. Following the most recent theoretical literature, the study included other exogenous variables in the growth equation such as: investment; accumulation of human capital; population growth; the country’s economic policy environment and its interaction term with aid; etc. making use of multivariate cointegration techniques with time series data running from 1960 to 2013. It has differentiated itself from the existing theoretical literature, as far as country specific studies are concerned in that it has gone further to address the concern of potential presence of outliers and resulting shocks in the datasets. It has also made an effort to establish whether aid has been more effective in a period during which more aid was received as compared to the reverse. At the end, the results show a negative relationship between foreign aid and Cameroon’s economic growth given the period under investigation, while gross domestic investment has positively affected its growth. No evidence was also found to support the null hypothesis that aid is more effective when received in higher volumes as compared to smaller amounts. The outcome of this study thus suggests that, subsequent aid be geared towards promoting the country’s domestic investment given its positive effect and higher potential to boost its economic growth.

Keywords: Foreign aid, Real GDP growth, Economic growth, Domestic Investment, Population growth, Human Capital, Policy Environment, Vector Autoregression.

JEL Classification: 040