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

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