Degree Name

Master of Arts (MA)

Semester of Degree Completion

2016

Thesis Director

Ahmed S. Abou-Zaid

Abstract

Taking a panel of 54 African countries and employing pooled, GLS, and panel regression, this study investigates the impact of foreign aid, policies, and their interaction on economic growth. This study covers a period of 35 years from 1980 to 2015. The key variables of this study are aid, measured by the official amount of foreign aid as a percentage of GDP by the recipient countries and policy, measured by an index created using linear estimation of various policy variables associated with political, economic and fiscal freedom; the Sachs-Warner measure of openness and World bank's Country Policy and Institution Assessment ratings. Several potential variables that can impact economic growth is controlled for to assess the aid-growth relationship. The findings of this study show that for African countries, foreign aid has positive, statistically significant but minimal effect on economic growth. The results also suggest that the aid-growth relationship is non-linear and foreign aid has diminishing returns as the volume of aid increases; African countries who have been aid-recipients for a long-time were hurt by the huge influx of aid. Also, the results confirm that better policies do not always result in aid effectiveness. Too much reliance on foreign aid creates moral hazards and the recipient countries suffer more when the governments and corrupted leaders used aid to satisfy their own best means. The reason behind the aid ineffectiveness is that most of the sampled African countries used foreign aid to service their debts so the aid never got into the proper channels so it failed to facilitate economic development. However, the findings of this study are not implying that aid can never be beneficial for the sampled countries. But it certainly proposes that for aid to be effective in driving economic development, the aid recipients need to rethink about how the aid apparatus can properly be employed to deter abuse of foreign aid.

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