Foreign Aid and Economic Growth 1

Does Increased Aid Availability Lead to Increased Economic Growth?

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 Foreign Aid and Economic Growth 2

Does Increased Aid Availability Lead to Increased Economic Growth?

Introduction

Countries today have embraced advanced forms of liberalism expressed through intensive

globalization. Interlink between various economies in the world has prompted companies to

undertaken various action plans to ensure economic, political and social wellness of each

countries partnering (Amadi, 2020, para. 2). Since globalization and liberalism aims at ensuring

countries attain prosperity to sustain a mutually beneficial relationship, support for each other on

different levels is a pre-requisite for that (Kornprobst & Paul, 2021, para. 4). For instance, for

effective international trade and other inter-country partnerships, it is integral for countries to

have a certain pedigree of economic, social, and political success. The rationale behind the

intuition is that, remarkable political, economic, and social prosperity among countries facilitates

exchange of resources and partnership.

Developed countries engage in partnerships and trade with developing countries in the

world governed by common interests. Developed countries have sought to support developing

countries by channeling resources in the form of aid to facilitate economic growth and

development of developing countries (Mahembe & Odhiambo, 2019, para. 2). As guided by one

of United Nations Sustainable Goal of Development – eradication of poverty (United Nations,

2014, para. 3), aid from developed countries is aimed at boosting the standards of living of

citizens in developing countries. Therefore, rich developed economies have made it their concern

to increase aid commitments to developing countries by 0.7% (Mahembe & Odhiambo, para. 2).

However, such developments bag the question and discussion of whether aid contributes to

economic growth in developing countries or further plunges these countries into severe
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dependency. The aim of this paper report is to adopt a dual approach of discussing the impacts of

aid on economic growth by assessing the pros and cons of aid to developing countries.

Understanding Aid

The definition of aid does not take a solemn approach but rather can be identified and

defined on different forms. According to Ahmed & Blomskog (2014, pp.6), foreign aid exists as

bilateral, multilateral, non-governmental aid, humanitarian aid, emergency aid, aid given as food,

and technical aid. Foreign aid can be defined as an international advancement of payment that is

in the form of either a loan or a grant from one country to another. The payments may fall under

the categories bilateral, multilateral, or private aid from a non-governmental institution (Ahmed

& Blomskog, 2014, pp. 6). Consequently, understanding the two main forms of aid (bilateral and

multilateral aid) is integral in assessing the impacts of aid on economic growth and quantifying

the effectiveness of aid. Bilateral aid is payment streams from one country two another while

multilateral aid is payment advanced from a conglomeration of countries/governments to another

singular specific country/government. Therefore, the forms of aid define the aims of the aid

advanced from one country to another.

Ahmed & Blomskog (2014, pp. 7) argue that bilateral aid subtly presents self-interest

motives especially from the donor country. A country may advance aid as means of achieving

future strategic and economic plans especially when the recipient country has valuables that may

elevate the donor country. Consequently, bilateral aid may indicate a connection between the

donor and recipient countries in terms of common interests, political, cultural, economic, and

social similarities. On the other hand, pro-multilateral aid scholars have indicated that

multilateral aid is more effective in helping eliminate various challenges faced by developing

countries (Biscaye et al., 2016, para. 1). Milner & Tingley (2013, pp. 331 – 341), indicate that
 Foreign Aid and Economic Growth 4

multilateral aid is effective since it does not incline to self-interests of donor countries but rather

aims to show global togetherness and contributions towards uplifting developing countries.

OECD (2013, para. 4) indicates that multilateral aid is governed by tenets of developmental and

accountability orientation hence pointing out its effectiveness in contributing towards economic

growth and development.

The strategies implemented to ensure aid created and maximized value for recipient

countries were stipulated in the Paris – declaration under five essential principles of foreign aid

(De Vylder, 2007, pp. 217 – 220). The principles are; ownership, alignment, harmonization,

managing for results, and mutual accountability (De Vylder, 2007, pp. 2017 – 220). Ownership

tenets dictates that partnering countries have to take effective measures and action plans towards

exercising value adding leadership, by taking charge of development policies and coordinate

developmental projects (OECD, 2009, pp. 3). Alignment as a principle stipulates that donor

countries dovetail their support to recipient countries with national development strategies and

goals (OECD, 2009, pp. 3). Under this particular component, donors have the free will to draw

conditions to the aid with the aim of ensuring the payment advanced is channeled towards

economic growth and development of developing countries. Harmonization entails that donor

countries have their actions transparent and collectively effective and influence partner/recipient

countries to collaboratively work together to ensure that set developmental strategies and goals

are attained through aid advanced (OECD, 2009, pp. 6). Managing for results ensure that

resources are managed and properly allocated through improved decision making. Both donor

countries and partner countries seek to channel their efforts towards strengthening the country

abilities and capacities for growth and development and ensure management is goal and result

oriented (OECD, 2009, pp. 7). Lastly, mutual accountability ensures that both donor countries
 Foreign Aid and Economic Growth 5

and partners are accountable for developmental results (OECD, 2009, pp. 10). The implication of

this principle is that donor countries and partners should monitor results generated from aid

provided and proactively work together to mitigate challenges and risks that may jeopardize

attainment of desired results. Mutual accountability ensures that effective transfer of

communication between donors and partners is attained. The principle minimizes inappropriate

use of aid resources and cultivates the urgency to stick to the goals of obtaining and advancing

the aid.

Based on the evaluation and analysis of aid as a component, the debate on the

contributions of aid towards economic growth obtain ground for further evaluation. What

remains clear is that different forms of aid have their different levels of effectiveness. The

principles of aid in the Paris – declaration, act as a guide to value maximization for the partner

countries directly and indirectly for donor countries.

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Relationship between Foreign Aid and Economic Growth

Countries aim to attain different levels of economic growth with the purpose of

empowering their citizens. Therefore, governments of these countries come up with various

strategies that are geared towards attaining various developmental goals. Consequently,

economic growth and development within these countries is used a bargaining chip for inter-

country partnerships and engagements in the sense that there has to be exchange of value. A

country is only able to benefit from such an exchange and engagement with partners if it depicts

pedigree in its approach towards economic growth and development.

Borrowing from the concept of absolute and comparative advantage, a country has to

have strength and prowess in using its resources to produce and sell a certain type of valuable

commodity/service. Debates on the impacts of economic growth have undertaken a two facet

approach with one approach proving evidence of positive impacts of foreign aid to economic

growth, on the flip side, other scholars have adopted an antagonistic outlook of the nexus

between economic foreign aid and economic growth (Hongxing et al, 2021, para. 3). The

subsequent sections of this paper aim at evaluating past and present studies that are in support of

the positive contributions of foreign aid to economic growth and development of developing

countries and negative contributions of aid towards economic growth

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Foreign Aid and Economic Growth

Internal resources mobilization and use among countries is the stepping stone towards

economic growth and development. However, limitation inhibit maximization of a country’s

resources due to several factors such as inadequate capabilities and capacities to fully create

wealth for their citizens necessitate governments to seek assistance from other better off

governments (Kirkkaleli et al. 2021, pp. 1). Rich economies play a crucial role in narrowing the

resource and budget gaps aimed at helping developing countries attain their developmental goals

and objectives. African countries remain to be huge beneficiaries of foreign aid in their quest to

eradicate poverty and elevate their economic status for sustainable exchange of value between

various global players (Kirkkaleli et al, 2021, pp.2). Despite being benefactors of huge streams

of aid, it is essential to evaluate the economic feasibility of the aid advanced towards these

countries.

Studies conducted by Kirkkaleli et al (2021, pp. 1) with the aim of establishing the

impact of foreign aid on Chad’s economic growth indicated that foreign aid had an insignificant

contribution towards Chad’s economic growth. Notably, the factors that led to the country’s

economic growth were; exports and imports – international trade, contributed significantly and

positively towards economic growth. This is because through international trade value was

directly created through influence of internal country structures to support and promote value

added international trade. The studies further indicated that the country’s economic growth and

development was attributed to its endowment in oil resources that propelled the oil industry

toward heights of attracting foreign direct investment. The finding imply that a country can attain

growth and development through effective mobilization and use of its resources to lay a

foundation for further growth and development while minimizing dependence on foreign aid.
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In a study conducted by Saddique et al (2018, pp. 37), aimed at establishing the nexus

between foreign aid and economic growth in South and East Asian countries, the results of the

findings indicated a positive statistically significant relationship between foreign aid and

economic growth and development of these countries. The studies further stated that te positive

and significant relationship between foreign aid and economic growth and development was

supported by remarkable fiscal and monetary policies. These findings are expected since they

reflect the five elements of foreign aid effectiveness. Putting in place the right fiscal and

monetary policies that align to the goals and objectives of foreign aid translate to positive

impacts on economic growth. For instance, aid resources channeled towards expanding

government expenditure on social and economic empowerment represent expansionary fiscal

policy to enable wealth creation and sharing in the country. Consequently, funds from aid can be

used as incentives to promote favorable interest rates that stimulate borrowing for investment

and consumption thus accelerating economic growth. The intuitions are supported by Murshed &

Khanaum (2013, pp. 35) who establish that foreign aid is effective in countries with remarkable

and high quality institutions. These institutions are the stem of proper developmental strategy

formulation in a country hence effective and proper use of foreign aid is a guarantee.

In a quest to establish the impacts of foreign aid flows and economic growth in Nigeria,

Fasanya & Onokoya (2012, pp. 1) made use of annual time series data of foreign aid flow and

the gross domestic growth of the country between 1970 – 2010. The findings of the study

strongly pointed towards a positive relationship between aid flows and economic growth. The

growth was attributed to channeling of the resources towards domestic investment and

formulation of policies that guided and aided the country in attaining economic growth and

development. Subsequently, the studies noted that donors considered the political and economic
 Foreign Aid and Economic Growth 9

condition of the country before advancing aid and actively participated in ensuring that the

country had strategies to support the goals and objectives of aid being provided.

Foreign aid fails to be effective and non-beneficial to some countries despite the

frequency and volume of obtaining foreign aid funds. It is expected that with high volume and

frequency of foreign aid flows, a country gains adequate resources to engage in sustainable

growth and developmental projects. This is contrary to Yemen’s example. According to Elayah

(2016, pp 87), approximately 95% of capital and expenditure for operational purposes in the

country is made up of foreign aid and gains from oil. Between 1995 and 2012, the state received

a cumulative amount of US $18 billion in form of aid and has been reliant on foreign aid to try

and attain its developmental goals and objectives. However, the aid resources have not been

effective in steering the country towards the desired levels of economic growth and development.

The stagnation is attributed to poor internal governance structures and systems that fail to

translate the aid into value for the country. The findings are further supported by the remarks of

Thapa (2020, pp. 4), who indicates that a country with poor institutional policies and structure

that are required to support the goals and objectives of aid, are prone to be tied down into

dependency on foreign thus creating high levels of debt and stagnant economic growth and

development. Examples provided indicate that many low income African countries have made it

a norm to rely heavily on foreign aid to attain their developmental goals. Such dependencies

lower the urgency of these countries to establish strong internal systems and processes that can

mobilize internal resources to support growth and development.

Further evidence from previous studies continue to discredit the contributions of foreign

aid towards economic growth of countries. Fatima (2014) aimed at establishing the nexus

between foreign aid and economic growth while using the case study of Pakistan. Pakistan has
 Foreign Aid and Economic Growth 10

been dependent on foreign aid for its development due to low levels of resource mobilization,

hence the study was aimed at establishing whether continued use of foreign aid would create

economic value for the country. Statistical analysis results indicated a positive relationship

between foreign aid and economic growth conditioned to sound fiscal and monetary policies. On

the flip side, there was a negative relationship between foreign aid and real gross domestic

product. The results are expected since without proper policies that guide allocation and use of

foreign aid, registering economic growth becomes a challenge to countries dependent on foreign

aid for economic empowerment.

A pro-foreign aid take on the relationship between aid and economic growth is explained

by Tang & Bundhoo (2017, para. 20), who indicate that economic growth and development

attributed to aid does not show immediately especially when aid is pumped into projects such as

provision of education, infrastructure, health, and long – term investment projects. Therefore, the

argument is that foreign aid should not be criticized on basis of need to provide quick short-run

benefits. Growth and development impacts of aid require lag periods between investment time

and expected period of value generation and sharing. Tang & Bundhoo (2017, para. 1) further

base their findings on a sample of 10 Sub-Saharan Africa countries who receive foreign aid

(Ethiopia, Democratic Republic of Congo, Tanzania, Kenya, Cote d’Ivore, Mozambique,

Nigeria, Ghana, Uganda, and Malawi). The findings indicated that these countries there was a

positive and statistically significant relationship between foreign aid and economic growth and

development of these countries, especially where effective policies in use of aid and leadership

of various institutions was used as a key ingredient in allocation of foreign aid resources. These

countries attempted to adjust their monetary and fiscal policies to align to the goals and
 Foreign Aid and Economic Growth 11

objectives of debt hence accounting for a positive relationship between economic growth and

foreign aid use.

The analysis of a two-sided literature review indicates that foreign aid is a major source

of resources/income to aid boost developing countries’ economies. Undertaking a two sided

analysis approach is effective in guiding policy decision making at national and global levels on

whether to use or advance aid to create economic growth and development.

Conclusion and Recommendations

The paper report indicates that studies point towards the good and the bad side of aid.

The beneficiaries of foreign aid are developing countries in their quest to attain economic growth

and empowerment and create a foundation to engage in regional and global exchange and share

of value. It is evident that internal growth and development of these countries is a pre-requisite to

fit into the contemporary liberalized and globalized world. Subsequently, maximum benefits can

only be obtained through globalization when a country invests in economic, political and social

strength to gain a bargaining chip for mutually beneficial international engagements and

partnerships.

The main recommendations for developing countries as they seek to use foreign aid for

their developmental projects is as follows; first, developing countries should invest in internal

resource mobilization first and only use a certain percentage of foreign aid to augment its

resources and budgets for development. This proposition ensures that developing countries are

not over – dependent on foreign aid for economic growth and development. Secondly,

developing countries should first develop and strengthen internal institutional structures and

policies and create an alignment between aid goals and the goals of the institutions established.
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Proper leadership is one of the integral ways that a developing country can adopt to create

effective, sustainable, and remarkable institutional structures and systems. Lastly, foreign aid

should only be channeled towards projects that would guarantee maximum value and returns to

the partner countries. Such projects ensure that economic growth and development attained is

used cushion developing countries from overdependence on foreign aid.

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Biscaye, P.E., Reynolds, T.W., & Anderson, C.L. (2016). Relative Effectiveness of Bilateral and

Multilateral Aid on Development Outcomes.’ Review of Development Economics, 21(4),

pp. 1425 – 1447. https://doi.org/10.111/rode.12303

Elayah, M. (2016). ‘Lack of foreign aid effectiveness in developing countries between a hammer

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