Foreign aid—Economic Growth Nexus in Africa: Does Financial Development Matter?

Isaac Appiah-Otoo*, Alex O. Acheampong, Na Song, Camara Kwasi Obeng, Isaac K. Appiah

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

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 relationship 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 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.

Original languageEnglish
JournalInternational Economic Journal
DOIs
Publication statusE-pub ahead of print - 6 Jun 2022
Externally publishedYes

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