FOREIGN AID AND ECONOMIC DEVELOPMENT IN SUB SAHARAN AFRICA: THE ROLE OF INSTITUTIONS (1996-2010)

ABSTRACT

This study examined the relationship between foreign aid and economic development in sub Saharan Africa. The study seeks to examine the role of institutions in aid effectiveness and economic development in Sub Saharan Africa. The study adopted a theoretical framework similar to the Endogenous or New Growth model, as well as; the system generalized method of moments (GMM) technique of estimation was adopted in order to overcome the challenge of endogeneity perceived in the institutions variables and Aid growth argument. It was observed that foreign aid significantly influence Real GDP Per Capita (the proxy for economic development) in Sub Saharan Africa. Also, variables like gross fixed capital formation, rule of law, control of corruption (which are proxy for institutions) and Human capital had a significant effect on Economic development in sub Saharan Africa while labour had no significant effect on economic development in Sub Saharan Africa.

TABLE OF CONTENTS

Table of contents

List of Tables

Abstract

CHAPTER 1: INTRODUCTION

1.1       Background to the Study

1.2       Statement of Problem

1.3       Research objectives

1.4       Research Questions

1.5       Research Hypothesis

1.6       Significance of study

1.7       Scope of study

1.8       Justification of Study

1.9       Limitations of study

1.10     Research methodology

1.11     Outline of Work

CHAPTER 2: LITERATURE REVIEW

2.1  Review of definitional issues

2.1.1 The concept of foreign aid

2.1.2 Advantages and Disadvantages of foreign aid

2.1.3 Forms of foreign aid

2.1.4 Organizations that give foreign aid

2.1.5 Trends of foreign aid in sub Saharan Africa

2.2: Review of theoretical issues

2.3: Review of Methodological and empirical issues

CHAPTER 3: RESEARCH METHODOLOGY

3.1       Introduction

3.2       Theoretical framework

3.3       Specification of Model

3.4       Description of variables

3.5       Sources of data and measurement

3.6       Technique of estimation

3.7       Method of analysis

CHAPTER 4: EMPIRICAL ANALYSES AND RESULTS

4.1 Introduction

4.2 Data Analysis

4.2.1 Descriptive analysis

4.2.2 Econometric analysis

4.3       Findings and economic implications

4.4       Conclusions

CHAPTER 5: SUMMARY AND CONCLUSION

5.1       Summary

5.2       Policy recommendations

5.3       Conclusions

5.4       Limitations to study

5.5       Suggestions for further study

REFERENCES

APPENDIX

CHAPTER ONE

INTRODUCTION

1.1  Background To Study

Most African countries are characterized by massive poverty, high death rate, slow GDP growth, high population growth rate and increased income inequality, increased absolute poverty rate, low educational standards, low human development index to mention a few. According to development statistics, in Africa, about 1.2 billion people live on less than $1 a day and another 2.8 billion people live on less than $2 a day. This is also a similar case in health as the mortality rate has sky rocketed over the years as declared according to the UNICEF who stated that more than 10 million children die each year from preventable disease such as malaria, polio to mention a few (Emmanuel, 2012; Ogundipe and Ogundipe, 2013). Another scenario in developing countries is that the child mortality rate remains more than 10 times higher than those found in the rich countries and this is as a result of diseases that can be treated easily like dehydration (Todaro and Smith, 2011).

In examining human capital development via education, Africa is in deteriorating conditions. The average child in sub Saharan Africa can expect to spend less than 5 years in school, without even considering absenteeism of teachers and lack of resources like books. This is in deep contrast with a child in Europe who is sure to get at least 12 years of schooling. Also, the education gender gap is especially great in developing countries in Africa, where female literacy rates can be less than half of men’s in countries such as Nigeria, Mali, Guinea, Benin to mention a few. Sub Saharan Africa and even Africa as a whole have been seen to exhibit relatively low levels of income despite the fact that they are heavily populated. Sub Saharan Africa received just two percent of total shares of Global income in the year 2008. According to Todaro (2011), In the case of income inequality and absolute poverty which is a major topic in development economics, the incidence of extreme poverty is very high as released by the World Bank’s estimate that the share of the population living on less than $1.25 per day is 41.1% in sub Saharan Africa. Population growth rate of developing countries especially in Africa continue to grow in leaps and bounds. From 1990 to 2008, population in the low income countries grew at an average of 2.2% per year. The main issue is that there has been a case of heavy debt servicing and it has been observed that most funds in Africa go into servicing debts. (Todaro and Smith, 2011)

Also, literature reviews have shown that during the 80s, averagely, in sub Saharan Africa, per capita income fell at an annual rate of 2.2 percent. According to Bakare (2011), Per capita private consumption also dropped by 14.8 percent, import volume rose at an annual rate of 4.3 percent with export volume remaining constant with terms of trade falling by 9.1 percent. Given the high population growth rate, annual real GDP per capita growth rate between 1981 and 1990 was –0.9% which was contrary to East Asia’s performance of GDP per capita growth rate of 6.3% during that period. Still the economic performance of Sub Saharan Africa did not improve in the early 90s as confirmed that between 1991 and 1993, real per capita GDP was 2.3% annually. In 1994, it still remained negative at -0.7%. Luckily, in 1995, this became positive reaching 1.1% which was still lower than the 8.0% growth rate testified by East Asia. The World Bank classified 74% of the countries of SSA as low income economies while the United Nations Development Programme classified 79% of SSA as low human development countries. Lastly, according to World bank (1998), out of the 41 countries in the world classified as heavily....

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