Development Aid: Economic Growth, Poverty and Inclusion Nexus in Africa

Main Article Content

Mesfin Mulugeta Woldegiorgis
Worku Tessema
Jiregna Tadese Terfa

Abstract

The paper aims to scrutinize the nexus between development aid, economic growth, poverty, and inclusion in Africa in the short and long run. After compiling the theoretical and empirical foundation of aid effectiveness literature, the statistical analysis is conducted in three scenarios. First, a panel data analysis was conducted from 1977 to 2018 for 34 African countries to explore the interface between Official Development Assistance (ODA) and economic growth in the long run. The second scenario presents ODA's short-term and long-term marginal effects on poverty reduction. The last scenario examines the direct effect of ODA on inclusive development. The statistical results show that aid effectiveness varies across nations. In the short-run, out of the 34 countries, only five countries have a positive marginal efficiency of ODA in terms of economic growth. However, only in one country (Nigeria) is the marginal efficiency of ODA arguably found to be positive in the long-run. The poverty elasticity of ODA is found to be negative in all countries. Finally, the random effects regression shows that ODA arguably contributes negatively to inclusion. Multiple factors may cause statistically negative relationships and should not be ignored due to the suspicion of an endogeneity problem. This is the unique selling point of this paper, as it discusses the potential causes. Statistical findings may not fully explain aid effectiveness because benefits and drawbacks may differ from national interests and project to project. Furthermore, aid may have different long- and short-term consequences. Given all the limitations, the statistical analyses in this paper show that development aid should have strategic crosscutting focus areas inter alia human development, technology, environment, demographic change, good governance, trade, and economic equity.


JEL Classification: F35, F59, O20, P45

Metrics

Metrics Loading ...

Article Details

How to Cite
Mesfin Mulugeta Woldegiorgis, Worku Tessema, & Jiregna Tadese Terfa. (2024). Development Aid: Economic Growth, Poverty and Inclusion Nexus in Africa. PanAfrican Journal of Governance and Development (PJGD), 5(2), 27-58. https://doi.org/10.46404/panjogov.v5i2.5701
Section
Articles
Author Biographies

Mesfin Mulugeta Woldegiorgis, University of Jena, Germany

Dr. Mesfin Mulugeta Woldegiogis is an economist who holds a doctorate degree (Ph.D.) from Friedrich-Schiller University, Jena, Germany. He has authored several scientific works in the broad thematic area of African governance and inclusive development studies. In particular, the concepts of inclusive development, governance institutions, social structure, economic inequality, justice and mobility, demographic dividend, regional integration, and the landscape of international development aid are central to his research interests.

Worku Tessema, Hawassa University

Dr. Worku Tessema Engeda holds a doctorate in economics (Ph.D.) from the Norwegian University of Life Sciences, AS, Norway. He has co-authored scientific articles in development economics, natural resource management, and value chain analysis. With a broad academic background, his research interests include economic valuation of environmental goods and services, value chain analysis, poverty reduction, food security, development aid, and rural smallholder studies (policies and smallholder decisions). He was the former Dean of the Business and Economics College at Hawassa University and Senior Policy Advisor to the Embassy of the Netherlands in Addis Ababa.

Jiregna Tadese Terfa , Alice Salomon University of Applied Science, Germany

Jiregna Tadese Terfa is a development consultant and researcher with a Master's degree in regional and local development studies from Addis Ababa University and a Master's degree in intercultural conflict management from Alice Salomon University of Applied Sciences in Berlin, Germany. He has produced numerous scientific articles within the broad thematic areas of sustainable development and poverty reduction. His primary research interests include sustainable development, development aid, environmental governance, transboundary water governance, humanitarian governance, and famine and war studies.

References

Acemoglu,D., Robinson, J.A.(2012). Why Nations Fail: The Origins of Power, Prosperity and Poverty.1st Ed. New York: Crown.
Adekunle,I.A.,Ogunade, A.O.,Ayantola,A.N., Alabi,M.O.(2019). Aids Effectiveness and Developmental Outcomes in Nigeria. African Journal of Economic Review, 7(1): 206-218.
Alesina, A., Dollar,D.(2000). Who Gives Foreign Aid to Whom and Why?Journal of Economic Growth 5: 33–63.
Andersen, J.J, Ross, M.L. (2020). Elite Capture of Foreign Aid: Evidence from Offshore Bank Accounts, Policy Research Working Paper 9150.Washington, D.C. World Bank Group.
Asongu,S. (2013). On the Effectiveness of Foreign Aid in Institutional Quality. European Economic Letters, 2(1): 12-19.
Banerjee, A., Esther,D.(2011). Poor economics: A radical rethinking of the way to fight
global poverty. New York: Public Affairs.
Barder, O. (2005). Reforming Development Assistance: Lessons from the UK Experience, Working Paper Number 70. Washington DC: Center for Global Development.
Beegle, K.,Christiaensen, L., Dabalen, A., Gaddis, I.(2016).Poverty in a Rising Africa.
Washington DC:International Bank for Reconstruction and Development / The World
Bank.
Beynon, J. (2003),Poverty Efficient Aid Allocations Collier/Dollar Revisited.ESAU
Working Paper 2. London:Overseas Development Institute.
Bourguignon,F., Sundberg,M.(2007). Aid Effectiveness: Opening the Black Box. American
Economic Review97(2): 316–321.
Burnside, C., Dollar,D.(1997).Aid, Policies and Growth. The World Bank Policy Research Department Policy Research Working Paper 1777.Washington DC:The World Bank.
Burnside, C., Dollar, D. (2000). aid, policies, and growth, in: American Economic Review,
90(4):847–868.
Burnside, C., David, D.(2004): Aid, policies, and growth: reply, in: American Economic
Review, 94(3): 781–784.
Chenery, H.B., Strout, A.M. (1966). Foreign Assistance and Economic Development.
American Economic Review, 56 (4): 679–733.
Collier,P., Dollar,D.(1999a). Aid Allocation and Poverty Reduction, Policy Research
Working Paper2041.Washington, DC, World BankDevelopment Research Group.
Collier,P., Dollar, D.(1999b). Aid Allocation and Poverty Reduction, Development.
Washington DC: World BankResearchGroup.
Collier,P., Dollar,D.(2002). Aid Allocation and Poverty Reduction. European Economic
Review46 (8): 1475-1500.
Collier, P.(2007). The Bottom Billion: Why the Poorest Countries are Failing and What Can
Be Done About It.Oxford, Oxford University Press.
Davies,P.(2007). China and the End of Poverty in Africa – towards Mutual Benefit?Sundbyberg, Diakonia.
Dreher, A., Nunnenkamp,P., Thiele, R. (2011). Are 'New' Donors Different? Comparing the Allocation of Bilateral Aid Between Non-DAC and DAC Donor Countries. World Development 39(11): 1950-1968
Doucouliagos, H., Paldam,M.(2008). Aid effectiveness on accumulation: A meta study. European Journal of Political Economy24 (1): 1-24.
Doucouliagos, H., Paldam,M.(2009). The Aid Effectiveness Literature: The Sad Results of 40 Years of Research. Journal of Economic Surveys23(3): 433–461.
Dreher, A., Fuchs,A.(2011). Rogue Aid? The Determinants of China’s Aid Allocation.Discussion Paper No. 93.Göttingen: Courant Research Centre.
Drometer, M. (2018). Institutional Quality and Foreign Aid.IFO Working Papers.Mucnich: IFO Institute.
Dupuy, K.E., Ron,J., Prakash,A.(2014). Who survived? Ethiopia’s regulatory crackdown on foreign-funded NGOs. Journal-Review of International Political Economy22(2): 1-38.
Edwards,S. (2014). Toxic Aid – Economic Collapse and Recovery in Tanzania: economic Collapse and recovery in Tanzania.Published Online, Oxford University Press,
Edwards,S. (2014b).Economic Development and the Effectiveness of Foreign Aid: A
Historical Perspective.NBER Working Paper 20685.Cambridge:National Bureau of Economic Research.
Easterly,W. (2006). The White Man’s Burden: Why the West’s Efforts to Aid the Rest
have done so much Ill and so little good. New York: Penguin Press.
Easterly,W.,Levine, R., Roodman, D. (2003).New Data, New Doubts: A Comment On Burnside And Dollar’s “Aid, Policies, And Growth” (2000). Working Paper 9846.Cambridge: National Bureau of Economic Research.
Empter,S., Shupe,C.(2012). Index of Modern Social Market Economies. Gütersloh:
Bertelsmann Stiftung.
Fei,J.C.H., Paauw,D.S.(1965). Foreign Assistance and Self-Help: A Reappraisal of
Development Finance. Review of Economics and Statistics 47: 215–267.
Ferraro,V.(1996). Dependency Theory: An Introduction. South Hadley MA: Mount Holyoke
College.
Führer,H.(1996).A History of the Development Assistance Committee and the Development Co-Operation Directorate in Dates, Names and Figures. Paris: Organisation for Economic Co-Operation and Development.
Gomanee,K., Girma,S., Morrissey, O. (2005). Aid and growth in Sub‐Saharan Africa: accounting for transmission mechanisms. Journal of International Development: Special Issue: Aid to Africa 17(8): 1055-1075.
Goulet,D.(1996).A new discipline: Development Ethics. Notre Dame: The Helen Kellogg Institute for International Studies.
Hansen,H., Tarp,F. (2001). Aid and Growth Regressions. Journal of Development Economics64 (2): 547-570.
Hee, Y.T., Lau, E. (2018). Does Foreign Aid Contribute to or Impeded. Journal of International Studies 11(3): 21-30.
Hynes,W., Scott,S.(2013).The Evolution of Official Development Assistance:
Achievements, Criticisms and a Way Forward, WP 12/2013. Paris: OECD Publishing.
Kabonga, I.(2017).Dependency Theory and Donor Aid: A Critical Analysis: Journal of
Development Studies 46(2): 1-11.
Kalyvitis, S., Vlachaki,I.(2012). When does more aid imply less democracy? An empirical examination. European Journal of Political Economy28(1): 132-146.
Kuziemko, I., Werker, E. (2006). How Much Is a Seat on the Security Council Worth? Foreign Aid and Bribery at the United Nations. Journal of Political Economy 114(5): 905-930.
Lancaster,C. (1999). Aid effectiveness in Africa: the Unfinished Agenda. Journal of African Economies 8(4). 487–503.
Loewe,M.(2008). The Millennium Development Goals: Chances and Risks. Discussion Paper 6/2008. Bonn: Deutsches Institut für Entwicklungspolitik.
Loxley,J., Sackey, H.A. (2008).Aid Effectiveness in Africa. African Development Review,
20(2): 163-199.
Mavrotas, G. (2005). Aid heterogeneity: looking at aid effectiveness from a different angle.International Journal of Development Special Issue: Aid to Africa 17(8): 1019–1036.
Mavrotas,G.(2009). Introduction: Development Aid—Theory, Policies, and Performance.Review of Development Economics13(3): 373–381.
McGillivray,M. (2005). What Determines African Bilateral Aid Receipts? Journal of International Development: Special Issue: Aid to Africa17(8): 1003-1018.
Moyo,D.(2009). Dead Aid: Why Aid Makes Things Worse and How Thereis Another Wayfor Africa. New York: Farrar, Straus and Giroux.
Mustafa, D.A.,Abdul-Hakeem, A., Akanbi,S..A (2015). Corruption and Foreign Aid Nexus in the African Continent: An Empirical Analysis for Nigeria. Journal of Economics and Sustainable Development 6(13): 98-108.
Naím, M.(2007). Rogue Aid. Foreign Policy,159: 95–96.https://www.jstor.org/stable/25462153.
Neumayer,E.(2003). What Factors Determine the Allocation of Aid by Arab Countries and Multilateral Agencies? In: Journal of Development Studies39(4): 134–147.
Osei,R., Morrissey,O., Lloyd,T.(2005). The fiscal effects of aid in Ghana, inJournal of International Development: Special Issue: Aid to Africa17(8): 1037-1053.
Pickbourn, L., Ndikumana, L. (2016).The future of aid effectiveness in Sub-Saharan Africa – a Research Agenda. Hampshire College, Amherst: University of Massachusetts.
Prokopijević, M. ( 2007). Why Foreign Aid Fails, in: Panoeconomicus54(1): 29-51.
Quartey,P. (2005). Innovative ways of making aid effective in Ghana: tied aid versus direct budgetary support. Journal of International Development: Special Issue: Aid to Africa. 17(8): 1077–1092.
Quibria,M.G. (1978). Foreign Resources and Economic Development: A Multi-Sector
Planning Model Applied to Bangladesh, Ph.D. Dissertation, Princeton University. Available at: https://www.academia.edu/726556/Two_Gap_Models_of_Foreign_Aid_A_Survey (Accessed: 15 May 2020).
Rajan, R.G., Subramanian,A.(2009). Aid, Dutch Disease and ManufacturingGrowth, in:
Journal of Development Economics 94(1): 106-118.
Riddell,A., Niño-Zarazúa,M.(2015). The effectiveness of foreign aid to education: What can be learned? International Journal of Educational Development 48 (c): 1-14.
Sachs,J. (2005). The End of Poverty: Economic possibilities for our time. New York: The
Penguin Press.
Sen,A.(1981). Poverty and famines: An Essay on Entitlement and Deprivation. Oxford:
Clarendon Press.
Sen,A.(1999). Development asFreedom. New York: Alfred A. Knopf, a Division of
Random House, Inc.
Sharples,N., Jones, T., Martin, C. (2014). Honest Accounts? The True Story of Africa’s Billion Dollar Losses. Philadelphia: Curtis Research.
Taylor, L. (1994). Gap Models,in: Journal of Development Economics 45(1): 17–34.
Todaro, M.P., Smith,S.C.(2012). Economic Development. 11th Edition. New York:
Addison-Wesley.
UNDP. (2018). What does it mean to leave no one behind? A UNDP Discussion Paper and
Framework for Implementation. New York: United Nations Development Programme.
United Nations.(1987). Report of the World Commission on Environment and Development:
Our Common Future. New York: United Nations.
United Nations.(2016).Leaving No One Behind: The Imperative of Inclusive Development
Report on The World Social Situation. New York: Department of Social and EconomicAffairs.
United Nations. (2018). Leaving No One Behind. New York: Committee for Development
Policy.
Wako, H.A. (2011). Effectiveness of foreign aid in sub-Saharan Africa: Does
disaggregating aid into bilateral and multilateral components make a difference? Journal of Economics and International Finance3(16): 801-817.
Woldegiorgis,M.M. (2019a). Modelling Institutional Reengineering for Inclusive
Development (IRID) in Africa. PanAfrican Journal of Governance and Development
1(1): 102-132.
Woldegiorgis, M.M.(2020b).The Social Market Economy Model in Africa: A Policy Lesson
in the Pursuit of an Inclusive Development, in PanAfrican Journal of Governance and
Development1(2): 100-125.
Woldegiorgis, M.M. (2022a). Inequality, social protection policy, and inclusion: pertinent
theories and empirical evidence. J Soc Econ Dev.
https://doi.org/10.1007/s40847-022-00185-1
Woldegiorgis, M.M. (2022b). Social structure, economic exclusion, and fragility? Pertinent t
heories and empirics from Africa. In: AlDajani IM, Leiner M (eds) Reconciliation, Heritage and Social Inclusion in the Middle East and North Africa. Springer, Cham.
https://doi.org/10.1007/978-3-031-08713-4_23
Woldegiorgis, M.M. (2022c). The Effect of Official Development Assistance on Inclusive
Development: Evidence for Sub-Sahara Africa. Journal of Economic Cooperation and
Development 43 (4): 193-226.
Woldegiorgis, M.M. (2023a). Drivers of demographic dividend in sub-Saharan Africa. Rev
Evol Polit Econ. https://doi.org/10.1007/s43253-023-00094-x
Woldegiorgis, M.M. (2023b) Towards inclusive development through harnessing
demographic dividend? Empirics for Africa. J. Soc. Econ. Dev.
https://doi.org/10.1007/s40847-023-00243-2
Woldegiorgis, M.M. (2023b). Towards inclusive development through harnessing
demographic dividend? Empirics for Africa. Journal of Social and Economic
Development. HYPERLINK "https://doi.org/10.1007/s40847-023-00243-2" https://doi.org/10.1007/s40847-023-00243-2
Woldegiorgis, M.M. (2024). Social innovation of Awra Amba utopian co-immunity: A lesson
for peacekeeping. In: AlDajani IM, Leiner M (eds) Reconciliation, Conflict
Transformation and Peace Studies. Springer, Cham.
https://doi.org/10.1007/978-3-031-47839-0_21
World Bank.(1994).Governance: The World Bank's Experience.Washington DC:
International Bank of Reconstruction/The World Bank.
World Bank. (1998).Assessing Aid: What Works, What Doesn't, and Why. Washingon,
D.C.: Oxford University Press.
World Bank Group. (2018).CPIA Africa: Assessing Africa's Policies and Institutions.Washington DC:Office of the Chief Economist for the Africa Region.
Yelognisse-Alia,D., Romuald, E., Anago, K. (2014). Foreign Aid Effectiveness in African Economies: Evidence from a Panel Threshold Framework, UNU-WIDER Working Paper 15.Helsinki: World Institute for Development Economics Research.