Impact of foreign aid on the economic growth of Nigeria

Impact of un equivalent promote on the frugal maturation of NigeriaForeign att nullifying can be simply put to be a f kickoff of assistance which can take the form of funds, infrastructure, mountain receptiveness from high income countries to low income countries. The debate till date has been centred approximately the significance of this abet on the sparing developing of these countries. To a rotund extent, several vista fores pay off launchn a verificatory impact of contrasted aid on the frugal maturement of LDCs with the exception of a a couple of(prenominal) factors which whitethorn run into this arbitrary impact on fruit, while some polars wealthy person shown a negative impact on economic harvest of these LDCs. tally to sideburn and sawhorse (1997), the positive impact of irrelevant aid on yield in LDCs is subject to the province having good fiscal, mo dismissary and hand policies, thus, the introduction of economic policies into their econo mic equation. This was include, to see if aid was allocated to these countries in prefer of good policies. Durbarry et al (1998) argue that an important limitation of much of this writings is the incompleteness of the netherlying growth models, according to them, ir respective of the fact that Burnside and horse were among the first to take into account economic policies, they learn non been able to examine the impact of aid in general including besides aggregate nest egg and enthronization variables.Most of these look intoes have foundationd the modelling of their research on the neoclassical growth model such as the Solow growth model and the Ramsey-cass-koopmans growth model which suggests that poor countries should have a high return to seat of government and a fast growth count in transition to the steady state ( Burnside and Dollar, 1997). concord to Chenery and Strout (1966), in the case of a country seeking a transformation of its animated economy and hoping no t to rely on to a greater extent than advanced countries (i.e. international aid), such a country must be able to abut the necessary demands for her rapid growth from either her own resources or from her net exports.The case of foreign aid and economic growth has proven to be a continuous learning process, in that, while some studies base their findings on macro instructioneconomic factors such as economic policies, others have recommended the mapping of human rise being factors such as infant mortality, literacy, demeanor expectancy and employment level ( Burnside and Dollar 1997 Fayissa and El-Kaissy 1999). While the results of Durbarry et al (1998) accommodates the results of Burnside and Dollar (1997) which shows foreign aid to have a positive impact on growth where there is a good macroeconomic insurance environment, but with some exceptions which were based on income level, levels of aid parceling and geographical location. harmonise to him, aid has been tested econom etrically based on a macro and micro level, the results of some these tests by some researchers show that aid make waters at the micro level while at the macro level the results as ambiguous ( Durbarry et al, 1998). So far, most research have dwelt on macroeconomic factors as well as physical factors which in their opinions either shows that growth is fostered positively by aid or negatively by aid. One interesting contribution to the subject matter in question is the contribution by Douglas C. Dacy, which looked at foreign aid and economic growth from a totally divers(prenominal) point of view, his c all over aimed display the possibility of an aid receiving country having its post-aid growth rate to be rase than it would have been in a situation of not receiving aid under certain conditions.According to Dacy (1975), his report viewed the subject of foreign aid and economic growth with respect to use of goods and services on the side of the government as well as domestic s avings. Contrary to other researches, Dacy in his paper viewed foreign aid as a substitute for domestic savings, adage that there would not be an increment in total savings by the full amount of foreign savings. Thus, LDCs will increase consumption as well as investment if foreign aid is do available.Papanek (1973) in his paper, studied the kinship mingled with aid, savings, foreign investment and growth in thirty-four LDCs for the 1950s and fifty-one LDCs for the 1960s, applying cross-country regression analysis. Treating separately of these components as separate explanatory variables, he found out that over a third of GDP growth is explained b y domestic savings and foreign inflows. Also the act foreign aid has telling to other variables is considerably higher, his results akinly suggests no inverse blood in the midst of aid and foreign private investment as well as cover a non-correlation between growth and factors such as exports, education, country size or per cap ita income. Unlike Chenery and Strouts result which showed that Countrys size and per capita income has a positive relationship with growth, Papaneks result did not show such positive relationship as said earlier. This is because Papaneks work had savings as one of the indie variables and this was seen to be prodigiously correlated with per capita income.Concluding his paper, Papanek (1973), suggests from his results that foreign aid is distributed disproportionately to LDCs experiencing low savings rates as well as everlasting(a) balance of payments problems. And that this disproportionate aid has a more positive effect on growth than domestic savings and other sources of foreign inflows. Chenery and Strouts results be criticised by Papanek as not being very stable and in like manner in his results, foreign source of inflows atomic number 18 not disaggregated comp ard to the results of Papanek.Papanek (1973) and Burnside Dollar (2000) share similar opinions on the allocation of foreign aid to low income countries. As Papanek is of the view that foreign aid is disproportionately distributed to low income countries who are experiencing low savings rate. While Burnside and Dollar is of the view that though this is allocated to low income countries, it is also influenced by population, i.e. aid donors tend to allocate more aid to smaller countries in size within the Low Income Countries, and also there are variables that reflect their own strategies.Generally speaking, from researches done so far, it is evident that foreign aid has a positive relationship (or impact) on economic growth in LDCs. But this could show a different result when the countries are archetyped individually, such that, though aid whitethorn be positively related to economic growth based on some macroeconomic factors, it may also a negative relationship influenced by some other factors.According to Levy (1988), his paper aimed at showing some level of quantitative evidence on the impa ct of foreign aid on economic growth. This he showed using a sample of 22 Low Income Countries in Sub-Saharan Africa with the exception of a few African countries which to him had their level of development similar to that of middle income countries. Using epoch series info for his analysis, Levy found two important things which is a positively significant relationship between aid, investment and economic growth in Africa. The second important finding is that there is a significant contribution by fixed capital formation to the rate of economic growth.Although the exclusion of some African countries which he classified as similar to middle income countries from his analysis seems questionable, Levys contribution to the subject matter is very significant. According to Burnside and Dollar (1997), most researches such as that of Levy (1988) and a few others who do an attempt to measure the impact of aid on domestic savings, investment and growth in developing countries, have had re sults which confront several econometric difficulties.Taking another close look at the work of Dacy (1975) which questioned the desirability of aid, according to him, even if aid is used in a way that contributes to a decline in the broad marge growth rate, it will almost always be true that the capital ancestry income and consumption will be higher at the end of the period of aid, and for a number of years afterward, than it would have been without aid. To this end he agrees with Papanek (1973) view which argues that the inverse relationship shown in most statistical research between domestic savings and foreign aid might be greatly misleading. This view is due to Papaneks objections from his observations from previous studies, thus, Papaneks results which show that there is a positive relationship between aid and economic growth as well as aid having an inverse relationship with domestic savings is largely accepted by Dacy.Durbarry et al (1998) in their paper made reference to the work of Hadjimicheal et al (1995) as being a more advanced piece of research compared to most of the researches before it. This is because of their effort to show the potential secondary effect of foreign aid such as the Dutch Disease as well as other policy related variables that are speculated to have an effect on growth.Ekanayake and chatrna (2010) in their paper, criticised the work of Karras (2006) which concluded that there is a positive statistically significant and persistent impact of foreign aid on economic growth. In which they gave a statistical analysis by per person result as well as the growth rate of historical GDP per capita, but in all this, they did not take into favor the effect of policies. According to the research carried out by Ekanayake and Chatrna (2010), their results showed mixed effects of foreign aid on economic growth in LDCs, their research was carried out using annual selective information on a group of 85 developing countries excision acros s continents. The models that were specified in their work were estimated using panel to the lowest degree squares estimation rule.Malik (2008) described the poverty of people in the poorest African Countries to be on the increase in spite of the many years of development assistance. According to him, there has remained a stagnant or declining real per capita income since the 1960s, thus the perturbing question is why could these countries not break the poverty trap despite receiving large inflows of foreign aid?. This question he sought to state using the co-integration analysis for six poorest African Countries, the results from this analysis showed the existence of a want run relationship between real GDP, aid and investment as a percentage of GP and trade openness. But showing the effect of foreign aid on growth, the result suggestd a long run negative relationship for most of these countries.Easterly (2003) went ahead in his paper to discuss the historical research on the relationship between foreign aid and Economic growth. This he did, citing the work of Burnside and Dollar as being an early research that was widely accepted by the World slang and economies of the world, and thus, created the platform for further research. According to Easterly (2003), data availability was one of the main limitations to having a conclusive and reasonable lit on the subject matter i.e. foreign aid and economic growth in the 1960s and onwards, as well as the reasonable personal line of credits on the specific factors and ways through which foreign aid can affect growth.In his paper, Easterly (2003) cited the paper by Boone (1996) as being noteworthy for its aim to address the issues of reverse causality through the introduction of semipolitical factors that determine aid, and thus, using them as instruments in addressing these problems. He also discussed the paper by Burnside and Dollar (2000) as being well cognize for addressing the disbelief shown by Boone a nd also the lack of agreement from previous studies.In another paper by Papanek (1972) titled The Effect of Aid and other Resource Transfers on Savings and Growth in Less highly-developed Countries, he analysed the recent challenge to past assumptions with respect to aid, savings and growth, where he termed some past literatures as Revisionists. His concern is based on their argument that the contribution to economic growth by foreign aid is short(p) or insignificant, in which a number of factors were taken into consideration to support this claim. He went further to expand their argument saying Aid may ease the lot of the recipient countrys citizens by permitting higher consumption which is considered loveable if the analysts humanitarian instincts outweigh his Calvinist conviction that people should struggle for their economic salvation, but does little for growth (Papanek, 1972).Amongst these, are other literatures done by several researchers in which different methods were i mplemented such as the Autoregressive Distributed incarcerate (ARDL) model used by Gounder (2001), in which his results showed a positive relationship between foreign aid and economic growth in Fiji. at that place has been other literatures that have also tried to show this relationship in individual countries, some have found a positive relationship but a long- run negative relationship using the Co-integration and phantasm correction analysis, while others found a co-integration between saving rate, real gross domestic produce and aid therefore showing a long-run positive effects (Murty et al, 1994 Nyoni, 1998).Taking a closer look at the problem of causality which Boone tried to address, Dacy (1975) concurs that the issue of causality is a tough knot to tie. He also suggests that the debate on if foreign aid contributes largely to economic growth is one that cannot be full decided, as there would be a need to take into consideration the response of individuals as well as grou ps. Such consideration includes checking if these individuals or groups behave in a certain way where there is an increase in aid compared to where there is no aid.From the above literatures and many more, it is provable that the issue of foreign aid and its impact on economic growth is inconclusive and is also a continuous learning process. Depending on the different types of data and methodology used in previous studies, several results have been achieved some depict positive and significant relationship while others indicate negative long-run relationships based on different factors. This paper in the next section would be using time series data and applying the Ordinary Least Squares method (OLS) as well as the co-integration method to see what impact foreign aid has on the economic growth of Nigeria.Section 3. Data and MethodologyIn testing for the impact of foreign aid on the economic growth of Nigeria, I am using annual time series data which has its period from 1960 2009 a nd which is gotten from World Bank World Development Indicators. Thus, the focus of this analysis is on Nigeria as a developing country and a recipient of aid from advanced countries which are known as donors. Due to the limited availability of data with respect to the proposed variables, the observations are 49 running from 1960-2009. The table below shows the variables that are included in this piece of work as well as the source they were gotten from shelve 1VariableUnitsourceGross Domestic productGrowth RateWorld BankForeign Direct investment fundsPercentage of GDPWorld BankTrade(Openness exports overconfident imports as a percentage of GDPPercentage of GDPWorld Bank state GrowthPer Cent (%)World BankNet ODA per capitaCurrent US$World BankMost of my variables were gotten from the work of Ekanayake and Chatrna (2010), where he used things like investment as proxy for growth rate of capital stock and also population growth as proxy for take force. This study also uses populatio n growth as a proxy for labour force as well as including trade to represent openness which as shown in the table above is made up of exports plus imports as a percentage of GDP. Net ODA per capita is a proxy for aid alongside Foreign Direct Investment, as earlier said, this study would be adopting the use of Ordinary Least Squares method (OLS) for its analysis. To ensure that the study is academically robust, I will also be employing the use of co-integration tests, to check the long run relationship between Foreign aid and Economic growth in Nigeria.