The essence of international aid is to strengthen fragile or strategic states and improve trade relations with the West. By this, it aims at improving the standard of living of people living in the recipient states. Thus the empirical review looks at what other scholars have studied about foreign aid in relation to poverty and the economy of the recipient countries.
Abiola and Olofin (2008), studied on foreign aid, food supply and poverty reduction in Nigeria using econometric analysis. Based on their report, only growth rate of rural population and food supply are significant in explaining rural development and they contributed positively although this is not much.
However with reference to the model specification, they observed a negative relationship between total aid and rural development but if all aid is not lumped together, some aid such as multilateral aid impacts positively on rural development, although with non significant t-statistics.
Moreso, they showed that multilateral and total grant aid are negatively related to life expectancy but only total grant aid is significant in explaining mortality rate. While neither multilateral aid nor total grant aid is significant in explaining real per capita income in the Nigerian economy.
Vu Minh Duc (2008) in his research on foreign aid and economic growth in the developing countries based his model on the endogenous growth theory as developed by Barro (1991) and this incorporated foreign aid as an additional explanatory variable, he studied 39 countries, 5 countries from East Asia, 3 from South Asia, 2 from Europe and Central Asia, 13 from Latin America and the Caribbean, 5 from the Middle East and North Africa and 11 from Sub-Saharan Africa. Using sub periods 1975 and 1992 – 2000 as well as the overall period from 1975 – 2000 he noticed that economic growth in developing countries has a negative relation with foreign aid and it is highly insignificant. He further argued that in countries where the institutional environment is distorted, aid could be fungible into financing governments consumption instead of being effectively invested.
Fayissa and El-Kaissy (1999) in a study of 77 countries over sub periods 1971 -1 980, 1980-1990, and 1971 – 1990, show that foreign aid positively affects economic growth in developing countries. Using modern economic growth theories, they point out that foreign aid, domestic savings, human capital and export are positively correlated with economic growth in the studied countries.
Pederson (1996) assets that it is not possible to conclude that aid affects growth positively. Using game theory, he argues that the problem lies in the built-in incentive of the aid system itself. The aid conditionality is not sufficient and penalties are not hard enough when recipient countries deviate from their commitment. In fact, he argues that there are incentives for aid donating agencies to disburse as much aid as possible. This he says hinders the motivation of recipient countries and raises the aid dependency, which in turn distorts their development.
A recent research by Furuoka (2008) studied the determinants of aid allocation, which he adopted Arellano and Bond Generalized Method of Moment (GMM) type of estimator for 152 developing countries for the period 2000-2005. The empirical findings revealed a complex nature of foreign aid allocation with a dynamic panel model, but the static panel model indicated that aid donors tended to provide larger amounts of foreign to poorer countries. The study specifically examined four determinants vis-à-vis: gross national product per capita, total debt services, net barter terms of trade and total population of recipient countries.
Burnside and Dollar (2000) studied the interactions among choice of macroeconomic policies and growth and revealed that aid is beneficial to countries that adopt appropriate and stable policies. However, the study revealed no evidence that foreign aid encourages the adoption of good macroeconomic policies. The study then showed that foreign aid is a waste to counties without appropriate and stable domestic policies.
Akonor (2008) examined foreign aid impact to Africa using theoretical and descriptive quantitative analyses revealed that aid is not a panacea for Africa’s development woes. He said foreign aid has so far created a welfare continent mentality and has become the hub around which the spokes of most African economies turn. The study further stated that dependency on foreign aid has compromised the sovereignty of African countries and that it is very unfortunate that aid has taken >50% of Sub-Saharan African countries’ budgets and 70% of their public investment.
Singh (1985) examined the impact of interventionist state policy on economic growth. The study using cross-sectional OLS method revealed that both the savings rate and the rate of foreign aid were positive and significant. However, when an index of state intervention was introduced into the model, foreign aid became insignificant. With savings as the response variable, foreign aid was negative and significant when the index of state intervention was introduced into the model.
Ahmed and Ahmed (2002) studied the impact of foreign capital inflow on domestic saving in Pakistan by applying three variants of co-integration techniques to time series data for the 1972-2000 periods. The study revealed in every case a valid long run relationship among the variables. The three variants of co-integration technique also revealed an inverse relationship between saving rate and foreign capital inflows and short run relationship between these two variables was also found to be negative.
Salop
et al (2007) evaluate in the context of continuing debate about the role of the IMF in aid to low income countries, what and how well, the IMF has done on aid to Sub-Saharan Africa. The study focuses on the IMF policy and practice in operations supported by the Poverty Reduction and Growth Facility (PRGF), being the IMF’s main instrument for operational work in low income countries during the 1999-2005 review periods. The study finds that PRGF-supported macroeconomic policies generally accommodate the use of incremental aid in countries whose recent policies have led to high stocks of reserves and low inflation; in other countries additional aids are programmed to be saved to increase reserve or to retire domestic debt. It also finds that IMF communications on aid and poverty reduction have contributed to do more on aid mobilization and poverty reduction analysis.
Finally, most studies on poverty make use of monetary poverty measures such as head count. However, to measure poverty effectively, there is need to go beyond money metric measures and employ multi-dimensional approach in which income and non-income indicators of poverty are used to asses the impact of foreign aid in Nigeria.
Be the first to comment