Foreign aid-Economic Growth Nexus in Africa: Does Financial Development Matter?
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Date
2022
Journal Title
Journal ISSN
Volume Title
Publisher
International Economic Journal
Abstract
This study explored the role of financial development in foreign aid
(measured by agriculture, humanitarian, health, economic infrastructure and services, and education aid) and economic growth relationships for 37 African countries spanning the 2002–2018 period.
Using the instrumental variable generalized method of moments
model, our findings indicated that while foreign aid impedes Africa’s
growth, financial development spurs economic growth. The conditional effect analysis showed that financial development conditions
foreign aid to spur economic growth. The country-specific analysis further showed that foreign aid has a higher growth elasticity
in countries with relatively better financial systems, such as Mauritius, South Africa, Gabon, Tunisia, and Botswana, whilst the growth
elasticity of aid is smaller in countries with a relatively weak financial system, such as Malawi, Guinea-Bissau, Sierra Leone, and the
Democratic Republic of Congo. The study recommended the need for
for policymakers in Africa to implement innovative ways to improve
domestic revenue mobilization. The study also recommended that
policymakers in Africa should create an enabling environment that
will enhance the development of Africa’s financial system to mitigate
the adverse effect of aid on economic growth.
Description
Research Article
Keywords
Foreign aid, Africa, economic growth