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-Ã -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.