Aid and economic growth in Sub-Saharan Africa: the role of institutions

Abstract

Sub-Saharan Africa is one of the regions receiving the most foreign aid. Still, African countries are far from reaching the levels of wealth developed nations have. In fact, it is considered one of the poorest regions in the world. This paper aims to study the relationship between the economic growth of sub-Saharan Africa and foreign aid, as measured by Official Development Assistance from European institutions. Through a statistical study of 48 sub Saharan African countries over the recent period from 1996 until 2020, the results suggest that aid has a significant negative impact on economic development unless mediated by good institutions. This implies that when good institutions are present, then the effect of foreign aid on economic growth is positive whereas, without the presence of good institutions, the effect of aid on growth is negative. The result, consistent with previous papers in the literature, indicates the need to rethink assistance and consider changes in aid allocation policy to allow a more effective distribution of the monetary resources directed towards aid.