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Jonathan Munemo, Subhayu Bandyopadhyay and Arabinda Basistha

The effect of foreign aid on economic activity of a country can be dampened due to potentially adverse effects on exports through a real exchange rate appreciation. In…

Abstract

The effect of foreign aid on economic activity of a country can be dampened due to potentially adverse effects on exports through a real exchange rate appreciation. In this study we examine the long-term relationship between export performance and foreign aid in developing countries while accounting for other factors. The estimates of direct effect of foreign aid on exports are imprecise. However, the effect of the quadratic term of foreign aid on exports is negative and precise. This implies large amount of foreign aid does adversely affect export performance. The results are robust to the use of two different export performance measures and different sub-samples.

Details

Theory and Practice of Foreign Aid
Type: Book
ISBN: 978-0-444-52765-3

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Article

Nihar Ranjan Jena and Narayan Sethi

The purpose of this paper is to empirically examine the effectiveness of foreign aid in improving economic growth prospects in the South Asian region from 1996 to 2017.

Abstract

Purpose

The purpose of this paper is to empirically examine the effectiveness of foreign aid in improving economic growth prospects in the South Asian region from 1996 to 2017.

Design/methodology/approach

A sample of eight South Asian countries for the period 1996–2017 is being considered for this study. This study uses various econometrics tools such as Pedroni and Johansen–Fisher panel cointegration test, panel fully modified ordinary least square and panel dynamic ordinary least square (PDOLS) to ascertain the long-run and short-run dynamics among the variables under consideration.

Findings

The empirical results found that long-run, as well as the short-run relationship, exist among foreign aid, economic growth, investment, financial deepening, price stability and trade openness of the South Asian economies. The authors also found unidirectional causality running from foreign aid to economic growth. Both the long-run relationship as well as short-run causality between foreign aid and economic growth is unequivocally positive.

Originality/value

This study uses a dynamic macroeconomic modeling framework to assess the impact of aid flows on economic growth in South Asian economies. Taking into account the diversity of level of growth experienced by the eight countries in the Asian region, this study uses an appropriate regression technique, i.e. PDOLS whose results are robust. Therefore, the policymakers in these countries are well-advised to implement suitable policy measures to ensure optimum utilization of foreign capital resources garnered by way of receipt of foreign aid and build on for stronger future economic growth.

Details

South Asian Journal of Business Studies, vol. 10 no. 1
Type: Research Article
ISSN: 2398-628X

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Article

Edmore Mahembe and Nicholas M. Odhiambo

This paper aims to assess whether official development assistance (ODA) or foreign aid has been effective in reducing extreme poverty; test whether the type and source of…

Abstract

Purpose

This paper aims to assess whether official development assistance (ODA) or foreign aid has been effective in reducing extreme poverty; test whether the type and source of aid matter; and examine whether political or economic freedom enhances aid effectiveness in developing countries.

Design/methodology/approach

The study uses recent dynamic panel estimation techniques (system generalised method of moments), including those methods which deal with endogeneity by controlling for simultaneity and unobserved heterogeneity.

Findings

The main findings of the study are: firstly, foreign aid does have a statistically significant poverty reduction effect and the results are consistent across all the three extreme poverty proxies. Secondly, the disaggregation of aid by source and type shows that total aid, grant and bilateral aid are more likely to reduce poverty. Thirdly, political freedom might not be an effective channel through which aid impacts extreme poverty, but aid is more effective in an environment where there is respect for freedom of enterprise.

Research limitations/implications

As with most cross-country aid–growth–poverty dynamic panel data studies, the challenges of establishing robust causality and accounting for the unobserved country-specific heterogeneity remain apparent. However, given the data availability constraints, generalised method of moments is, to the best of the authors’ knowledge, the most robust empirical strategy when T < N. Future research could explore possibilities of individual country analysis, disaggregating countries by income and also examining the direction of causality between foreign aid, poverty and democracy.

Practical implications

The policy implications are that the development partners should continue to focus on poverty reduction as the main objective for ODA; aid allocation should be focused on channels which have more poverty-reduction effect, such as per capita income and economic freedom; and aid recipient countries should also focus on reducing inequality.

Social implications

The main social implications from this study is that it is possible to reduce poverty through ODA. Second, to enhance the effectiveness of foreign aid, ODA allocation should be focussed on channels, which have more poverty-reduction effect, and the host countries should have economic freedom.

Originality/value

This paper makes a further contribution to the aid effectiveness literature, especially the channels through which foreign aid affects poverty.

Details

International Journal of Development Issues, vol. 19 no. 2
Type: Research Article
ISSN: 1446-8956

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Article

Eric Akobeng

This paper examines the relationship between foreign aid, institutional democracy and poverty. The paper explores the direct effect of foreign aid on poverty and…

Abstract

Purpose

This paper examines the relationship between foreign aid, institutional democracy and poverty. The paper explores the direct effect of foreign aid on poverty and quantifies the facilitating role of democracy in harnessing foreign aid for poverty reduction in Sub-Saharan Africa (SSA).

Design/methodology/approach

The paper attempts to address the endogenous relationship between foreign aid and poverty by employing the two-stage least squares instrumental variable (2SLS-IV) estimator by using GDP per capita of the top five Organization for Economic Co-operation and Development (OECD) countries sending foreign aid to SSA countries scaled by the inverse of the land area of the SSA countries to stimulate an exogenous variation in foreign aid and its components. The initial level of democracy is interacted with the senders’ GDP per capita to also instrument for the interaction terms of democracy, foreign aid and its components.

Findings

The results suggest that foreign aid reduces poverty and different components of foreign aid have different effects on poverty. In particular, multilateral source and grant type seem to be more significant in reducing poverty than bilateral source and loan type. The study further reveals that democratic attributes of free expression, institutional constraints on the executive, guarantee of civil liberties to citizens and political participation reinforce the poverty-reducing effects of aggregate foreign aid and its components after controlling for mean household income, GDP per capita and inequality.

Research limitations/implications

The methodological concern related to modeling the effects of foreign aid on poverty is endogeneity bias. To estimate the relationship between foreign aid, democracy and poverty in SSA, this paper relies on a 2SLS-IV estimator with GDP per capita of the top five aid-sending OECD countries scaled by the inverse of land area of the SSA countries as an external instrument for foreign aid. The use of the five top OECD's Development Assistance Committee (OECD-DAC) countries is due to the availability of foreign aid data for these countries. However, non-OECD-DAC countries such as China and South Africa may be important source of foreign aid to some SSA countries.

Practical implications

The findings further suggest that the marginal effect of foreign aid in reducing poverty is increasing with the level of institutional democracy. In other words, foreign aid contributes more to poverty reduction in countries with democratic dispensation. This investigation has vital implications for future foreign aid policy, because it alerts policymakers that the effectiveness of foreign aid can be strengthened by considering the type and source of aid. Foreign aid and quality political institution may serve as an important mix toward the achievement of the Sustainable Development Goals 2030 and the Africa Union Agenda 2063.

Social implications

As the global economy faces economic and social challenges, SSA may not be able to depend heavily on foreign partners to finance the region's budget. There is the need for African governments to also come out with innovative ways to mobilize own resources to develop and confront some of the economic challenges to achieve the required reduction in poverty. This is a vision that every country in Africa must work toward. Africa must think of new ways of generating wealth internally for development so as to complement foreign aid flows and also build strong foundation for welfare improvement, self-reliance and sustainable development.

Originality/value

This existing literature does not consider how democracy enhances the foreign aid and poverty relationship. The existing literature does not explore how democracy enhances grants, loans, multilateral and bilateral aid effectiveness in reducing poverty. This paper provides the first-hand evidence of how institutional democracy enhances the poverty-reducing effects of foreign aid and its components. The paper uses exogenous variation in foreign aid to quantify the direct effect of foreign aid and its components on poverty.

Details

Journal of Economic Studies, vol. 47 no. 7
Type: Research Article
ISSN: 0144-3585

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Article

Nihar Ranjan Jena and Narayan Sethi

The purpose of this paper is to empirically examine the effectiveness of foreign aid in improving economic growth prospects in the sub-Saharan Africa (SSA) region from…

Abstract

Purpose

The purpose of this paper is to empirically examine the effectiveness of foreign aid in improving economic growth prospects in the sub-Saharan Africa (SSA) region from 1993 to 2017.

Design/methodology/approach

A sample of 45 SSA countries for the period 1993–2017 is considered for this study. The study uses various econometrics tools such as Pedroni and Kao’s cointegration test, Johansen-Fisher Panel cointegration test, FMOLS and PDOLS in order to ascertain the long-run and short-run dynamics among the variables under consideration.

Findings

The empirical results find that long-run and short-run relationships exist among foreign aid, economic growth, investment, financial deepening, price stability and trade openness of the SSA economies. The authors also find unidirectional causality running from foreign aid to economic growth. The policymakers in these countries are well-advised to implement suitable policy measures to build on the growth momentum created by foreign aid inflows.

Originality/value

The study uses a dynamic macroeconomic modeling framework to assess the impact of aid flows on economic growth in the SSA region. Taking into account the diversity of level of growth experienced by the 45 countries in the region, the study uses an appropriate regression technique, i.e., panel dynamic OLS whose results are robust. The finding is also supported by the Granger-causality test and robust cointegration techniques.

Details

African Journal of Economic and Management Studies, vol. 11 no. 1
Type: Research Article
ISSN: 2040-0705

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Article

Vincent Konadu Tawiah, Evans John Barnes, Prince Acheampong and Ofori Yaw

This paper has examined the effectiveness of foreign aid on Ghanaian economy under different political regimes.

Abstract

Purpose

This paper has examined the effectiveness of foreign aid on Ghanaian economy under different political regimes.

Design/methodology/approach

Using vector error correction and co-integration models on the annual data set over a period of 35 years, the authors demonstrate that foreign aid has had varied impacts on economic growth depending on the political ideology of the government in power.

Findings

With capitalist political philosophy, foreign aid improves private sector growth through infrastructural development. On the other hand, a government with socialist philosophy applies most of its foreign aid in direct social interventions with the view of improving human capital. Thus, each political party is likely to seek foreign aid/grant that will support its political agenda. Overall, the results show that foreign aid has a positive impact on the growth of the Ghanaian economy when there is good macroeconomic environment.

Practical implications

This implies that the country experiences economic growth when there are sound economic policies to apply foreign aid.

Originality/value

The practical implication of the findings of this paper is that donor countries and agencies should consider the philosophy of the government in power while granting aid to recipient countries, especially in Africa. The results are robust to different proxies and models.

Details

International Journal of Development Issues, vol. 18 no. 1
Type: Research Article
ISSN: 1446-8956

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Article

Moheddine Younsi, Hasna Khemili and Marwa Bechtini

The purpose of this paper is to examine the relationship between foreign aid and income inequality (IIQ) reduction for 16 African countries using unbalanced panel data…

Abstract

Purpose

The purpose of this paper is to examine the relationship between foreign aid and income inequality (IIQ) reduction for 16 African countries using unbalanced panel data covering the period 1990–2011. This paper attempts to answer the critical question: does foreign aid lead to IIQ reduction?

Design/methodology/approach

To examine the effect of foreign aid on IIQ, this paper uses an RE model with robust OLS regression and system-GMM estimator, which are useful in dealing with the endogeneity problems.

Findings

Results of RE model indicate that foreign aid, foreign direct investment, trade openness as well as corruption have a positive and statistically significant effect on IIQ. Government spending and inflation have a negative and statistically significant effect on IIQ, while GDP per capita growth has a negative but statistically insignificant relationship with IIQ. The results are robust by using system-GMM dynamic panel model which confirms that the coefficients of all considered variables remain same sign and significance.

Research limitations/implications

This study implies that an increase in foreign aid is associated with an increase in IIQ. As an effective strategy to foreign aid, this paper suggests that improving of financial sector development, and institutional quality and policies can reduce income inequalities and stimulate economic growth.

Originality/value

This paper is the first of its kind to empirically explore the relationship between IIQ and foreign aid measured here by net aid transfers as a share of GDP in African countries, using modern econometric techniques, time period and a variety of control variables.

Details

International Journal of Social Economics, vol. 46 no. 4
Type: Research Article
ISSN: 0306-8293

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Article

Stanley Emife Nwani

The purpose of this study is to examine the interactive role of human capital development (HCD) in foreign aid-growth relations in South Asia and sub-Saharan Africa…

Abstract

Purpose

The purpose of this study is to examine the interactive role of human capital development (HCD) in foreign aid-growth relations in South Asia and sub-Saharan Africa countries from 1985–2019.

Design/methodology/approach

The study used panel data that cut across all countries in South Asia and sub-Saharan Africa collected from The World Bank’s Development Indicators. The data were analysed using Bai and Ng panel unit root idiosyncratic cross-sectional tests and the system generalised method of moments (SGMM).

Findings

The study found that foreign aid and HCD have negative impacts on economic growth. Fortunately, the interaction of human capital with foreign aid reduces the extent to which foreign aid impedes economic growth. The presumption is that South Asia and sub-Saharan Africa economies had not reaped the potential growth effect of foreign aid inflows due to high illiteracy rates and weak social capacities. The peculiarity of these regions hinders the absorptive capacity to transform positive externality associated with foreign aid into sizeable economic prosperity.

Practical implications

It is imperative for South Asia and sub-Saharan Africa countries to not depend on foreign aid; instead, the strategic action by policymakers should be to developing sustainable social capacities with HCD as the centre-piece.

Originality/value

The highpoint of this study is its inter-regional approach and the interplay between human capital and foreign aid using the second generation panel unit root estimator and the SGMM approaches.

Details

International Journal of Development Issues, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1446-8956

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Book part

Hamid Beladi and Reza Oladi

This paper investigates the impact of foreign aid on foreign investment when foreign aid is used to finance a public consumption good. By formulating and analyzing a…

Abstract

This paper investigates the impact of foreign aid on foreign investment when foreign aid is used to finance a public consumption good. By formulating and analyzing a three-good general equilibrium model, we show that such foreign aid could crowd out foreign investment, given a factor intensity condition.

Details

Theory and Practice of Foreign Aid
Type: Book
ISBN: 978-0-444-52765-3

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Article

James H. Williams

The purpose of this paper is to provide an overview of similarities and distinctions between development and educational assistance in the USA as compared with other…

Abstract

Purpose

The purpose of this paper is to provide an overview of similarities and distinctions between development and educational assistance in the USA as compared with other countries, this paper provides a general review of relevant materials on US foreign aid.

Design/methodology/approach

The paper reviews published books and articles as well as US government budget and Congressional reporting materials and Organization for Economic Cooperation and Development statistics.

Findings

Beginning with the Marshall Plan following Second World War, the USA has always been a leader in foreign aid. In many ways, US development agencies resemble counterparts in other countries – foreign aid is part of larger network of bilateral relationships, funding requests must compete with requests from other sectors, etc. In other ways, the US stands apart. Because of US Congressional reporting requirements and for philosophical reasons, the US has been reluctant to join other countries in provision of budgetary support. The US coordinates its work with host country governments, but generally organizes its activities in project mode, relying largely on US contractors. The US Agency for International Development and the Department of State are the largest US government development agencies. Still, unlike other donors, development funding and technical assistance is provided by up to 25 agencies with relatively little coordination. US foreign aid has always included a security as well as humanitarian and development dimensions. In recent years, as development assistance is increasingly coordinated with diplomacy and defense, the military dimension has been heightened. Perhaps the most original finding is the notion that public and government support of US foreign aid has required both security and development/humanitarian rationales to remain viable.

Originality/value

The paper brings together information from a range of existing sources, but provides a unique perspective on US foreign aid in education.

Details

Asian Education and Development Studies, vol. 3 no. 1
Type: Research Article
ISSN: 2046-3162

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