DYNAMIC RESEARCH JOURNALS (DRJs)

Journal of Economics and Finance (DRJ-JEF)

Volume 2 ~ Issue 7 (July, 2017) pp: 01-16
ISSN (Online); 2520-7490
www.dynamicresearchjournals.org

Foreign Aid Economic Growth Nexus: A Systematic Review of

Theory & Evidence from Developing Countries
1
Thabani Nyoni and 2Wellington G. Bonga
1nyonithabani35@gmail.com ; 2sirwellas@gmail.com

Abstract: What is the relationship between foreign aid and economic growth? This is probably one of the most
famous questions in the foreign aid economic growth debate. Whether this question has been sufficiently
answered remains to be known. Developing nations have been and continue to be known to receive help from
developed countries. Now, the reason for which the developed countries give aid is another aspect on its own. In
this study, we look at the foreign aid - economic growth nexus by systematically reviewing both theory and
evidence from 33 studies carried out in over 100 developing countries around the world. Theory and evidence
reveals that the foreign aid - economic growth nexus is ambiguous. However, our analysis indicates that foreign
aid is positively related to economic growth in most developing countries and therefore developing countries
cannot afford to turn a blind eye at the donor community. We also note with kin interest that in developing
countries where there is excessively bad governance and rampant corruption, recipient governments
paradoxically lament over aid ineffectiveness. What a scenario! The study, amongst other policy prescriptions,
advises recipient governments to use aid for its intended purposes and stop playing the blame-game at the
expense of their poor and the ailing economies.
Keywords Aid Policy, Developing Countries, Economic Growth, Foreign Aid.
JEL Codes: E21, E22, F21, F34, F35, F42, F43, G28, H54, H81, H84, I22, O24, O43, P33, P35, P45, R53.

I. INTRODUCTION
Foreign Assistance is not an end1 in itself. The purpose of aid must be to create the conditions where it is
no longer needed Former United States President, Mr. Barrack Obama, 2009
Foreign aid can be defined as the international transfer of public funds in the form of loans and grants
directly from a government or international financial institution to another government for welfare purposes.
Briefly, they take two forms such as loans at concessional terms (constitutes 25% of grant amount) and grants
such as non-refundable in nature (World Bank, 2015; OECD, 2015). Foreign aid consists of all resources
physical goods, skills and technical know-how, financial grants (gifts), or loans (concessional rates) transferred
by donors to recipients (Riddell, 2007). Foreign aid forms one of the largest components of foreign capital flows
to low-income countries (Radalet, 2006). It is no secret that developing countries are characterised by resource
starved economies, with crucial constituents of these resources being capital related. This much needed capital
to boost economic growth and welfare is largely inadequate domestically, which consequently warrants the need
for external capital. And most of low income countries lack the necessary impetus to attract substantial FDI, the
ONLY external capital readily available to support development undertakings has to come from foreign aid
(Kargbo, 2012).
The existence of foreign aid has been on the global scene as it has been in existence since the creation of
national states and republics. Developed countries have always helped developing countries to the reduce
suffering of mankind. Foreign aid, as highlighted by Pallage & Robe (2001), is a significant source of income to
developing countries, especially in Africa, where it averages 12.5% of gross domestic product (GDP) and
establishes by far the important source of foreign capital. Therefore, foreign aid has the potential to play a key
role in promoting and sustaining both economic growth and development in developing countries all over the
world.
It is imperative to highlight the ambiguity on the nature of the relationship between foreign aid and

1
Perhaps, the main mistake, should we say, with most developing countries governments; is that they want to engage foreign aid in order to
clear their problems. This should not be the case. Aid should be there to close those gaps that exist as a result of lack of domestic
resources, not as a result of poor governance, greed and so forth. When aid is continuously needed, in most cases; that is a sign that, the
recipient government is not using aid for the intended purpose. Why, for example, would Zimbabwe, Nigeria, Pakistan, India, Ethiopia etc
continuously need foreign aid? Food for thought. Unfortunately, politicians and other politically connected citizens in recipient
countries, after misusing and or facilitating the misuse of aid; have a tendency of blaming the donor community. It is imperative to note that
when aid is properly used, there should be a point when the recipient country would be self-sufficient and would need no more aid.
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 Foreign aid Economic growth Nexus: A Systematic Review of Theory & Evidence from Developing Countries
economic growth. In fact, mainstream foreign aid literature is generally torn between two rival schools of
thought, the aid-skeptics and the aid-optimists. Foreign aid-skeptics2; in support of the Dutch Disease (the
idea that high levels of aid inflow may generate undesirable effects on the economy), argue against the
proponents of the aid-effectiveness hypothesis, the aid-optimists; and apparently assert that, foreign aid; rather
than helping poor countries to grow richer, crowds out both private sector investment and innovation and leads
to increased government corruption and rent-seeking, undermining both economic and political development,
enabling governments to remain unaccountable to their citizens, encouraging dependency on donors and
therefore effectively reducing incentives for recipient countries to adopt good policies.
However, on the other side of the same coin; several aid-optimists3, vehemently argue against the Dutch
Disease popularized by aid-skeptics; and rather maintain that there is a positive relationship between foreign
aid and economic growth. This is primarily attributed to the debatable fact that foreign aid complements
domestic resources, supplements domestic savings, helps to close the foreign exchange gap, provides access to
modern technology and managerial expertise and allows easier access to foreign markets.
Foreign aid, as averred by the World Bank (2013), has been relatively considered as a stable source of
foreign exchange earnings in comparison to the other sources of foreign capital such as Foreign Direct
Investment (FDI) and Foreign Portfolio Investment (FPI). The Monetary Declaration of 2002 notes that foreign
aid, in the form of Official Development Assistance (ODA) plays an important role by complementing other
sources of financing required for development, especially for those developing countries where private direct
investors are reluctant to invest with the fear of low profit.
Furthermore, foreign aid also stimulates economic development by providing the necessary infrastructure,
strengthening basic social services such as health and education, providing humanitarian assistance during crisis
periods as well as rejuvenating distressed economies such as the Samalian, Angolan, Malian, DRC, Niger,
Burundi, Nigerian, Indian, Mozambican, Pakistan and Kenyan economies. For bed-ridden economies like
Zimbabwe, aid cannot be avoided! In this consciousness, this study seeks to systematically review both theory
and evidence on the relationship of foreign aid and economic growth in the context of several developing
countries around the world.

Relevance of the Study

Although foreign aid plays a pivotal role in developing countries, it is alarming to note that developing
countries continue to lament over uncountable socio-economic problems such as unemployment, high degree of
indebtedness and absolute poverty. GDP growth in most developing countries is very low despite relatively
significant aid inflows as portrayed in figures 1 & 2 below. This debatable scenario has prompted the researchers
to systematically scrutinize the nexus of foreign aid and economic growth in developing countries. Furthermore,
sustaining economic growth is a top priority for most developing countries and yet domestic resources in most
low-income countries are far from adequate. This could be attributed to that fact that in most developing
countries savings rates are usually very low. Such disproportionate gaps between the countries exports and
imports frequently result in trade deficits; and these scenarios of two gaps, savings gap and trade gap; can be
closed using foreign aid if developing countries are to sustain economic growth. Therefore, the present study
seeks to investigate the relationship of foreign aid and economic growth in developing countries.

Statement of Objectives

The main objective of this study is to systematically examine the nexus between foreign aid and
economic growth in developing countries.
Other objectives are:

To investigate other factors that also exist to affect economic growth in developing countries.

2
such as Chandrasekhar (1965), Rhaman (1968), Jalee (1968), Frank (1969), Griffin (1970), Griffin & Enos (1970), Hayter (1971), Bauer
(1972), Bauer (1976), Wood (1980), Hayter (1981), Bauer (1982; 1984), Krauss (1983), Hayter & Watson (1985), Mbaku (1993), Pack &
Pack (1993), Boone (1994), Pedersen (1996), Svensson (1998), Dollar & Easterly (1999), Knack (2000), Lensik & Morrisey (2000), Hudson
& Mosley (2001), Gong & Heng-fu (2001), Knack (2001), Easterly et al (2003), Brautigan & Knack (2004), Mallick & Moore (2006),
Roodman (2007), Mallick (2008), Rajan & Subramanian (2008), Ngang (2008), Moyo (2009), Christensen et al (2010) and Safdari &
Mehrizi (2011) amongst others
3
such as Rostow (1960), Rosenstein-Rodan (1961), Chenery & Bruno (1962), Chenery & Strout (1966), Papanek (1973), Gulati (1975),
Over (1975), Gupta (1975), Mosley (1980), Singh (1985), Hudson & Horrel (1987), Mosley et al (1987), Levy (1988), Islam (1992), Islam
(1995), Snyder (1993), Fayissa & El-Kaissy (1999), Burnside & Dollar (2000), Henrik & Tarp (2000), Hansen & Tarp (2001), Morrisey
(2001), Lu & Ram (2001), Collier & Dollar (2002), Chauvet & Guillamount (2003), Lloy et al (2003), Gomanee et al (2003), Kosack
(2003), Easterly et al (2004), Dalgaard et al (2004), Burnside & Dollar (2004), Clemens et al (2004), Ghulam (2005), McGillivray (2005),
Hatemi & Irandoust (2005), Addison et al (2005), Karras (2006), Pattillo et al (2007), Bearce & Tirone (2008), Minoiu & Sanjay (2009),
Salish & Ogwumike (2010), Arndt et al (2010), Sakyi (2011), Herzer & Morrissey (2011), Clement et al (2012), Juselius et al (2014) and
Arndt & Jones (2015) amongst others
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 Foreign aid Economic growth Nexus: A Systematic Review of Theory & Evidence from Developing Countries
II. FOREIGN AID INFLOWS TO DEVELOPING COUNTRIES: FACTS &
FIGURES
Top 17 recipient countries of gross ODA inflows are Myanmar, Afghanistan, India, Vietnam, Indonesia,
Kenya, Egypt, Nigeria, DRC, Morocco, Mozambique, South Sudan, Uganda, Ethiopia, Pakistan, Tanzania and
Syria. Amongst the top 10 countries, according to the OECD (2015), the first top 5 countries constitutes 15% of
the total gross ODA whereas the top 10 countries constitutes 23% of gross ODA inflows. Below is a pie chart
showing the share of both bilateral and multilateral aid in total ODA inflows provided by the DAC countries
where multilateral ODA constitutes 31% and the rest 69% ODA inflows provided by the bilateral institutions:
Figure 1

31%
Bilateral ODA
69% Multilateral ODA

Source of Data: OECD, 2015

Top 10 ODA donors in 2014

Table 1
Donor ODA (USD million) %
United States 9338 17
EU Institutions 6737 12
IDA 6386 12
United Kingdom 4346 8
United Arab Emirates 3787 7
Germany 3016 6
France 2929 5
African Development Bank 2042 4
Global Fund 1957 4
Japan 1558 3
Other donors 12098 22
Total 54193 100
Source of Data: OECD, 2016
Table 1 above shows that in 2014 the United States provided 17% ODA in developing countries while
the UK, Germany and France provided 8%, 6% and 5% ODA respectively. Other donors accounted for 22% of
ODA.

Top 10 ODA recipients by recipient USD million, net disbursements in 2014

Table 2
Country ODA (USD million) %
Ethiopia 3585 7
Egypt 3532 7
Kenya 2665 5
Tanzania 2648 5
Nigeria 2476 5
DRC 2398 4
Morocco 2247 4
Mozambique 2103 4
South Sudan 1964 4
Uganda 1633 3
Other recipients 28 941 53
Total 54 193 100
Source of Data: OECD, 2016
Table 2 above shows that in 2014, top 10 ODA recipients consisted of Ethiopia, Egypt, Kenya,
Tanzania, Nigeria, DRC, Morocco, Mozambique, South Sudan and Uganda. It is clear that all of these countries

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 Foreign aid Economic growth Nexus: A Systematic Review of Theory & Evidence from Developing Countries
in the top 10 category are African countries. This could be attributed to the various socio-economic problems in
Africa.

ODA by income group in 2014 (net disbursements in USD millions)

Figure 2

ODA

Least Developed
6% 12% Countries
Other Low Income
21% 55% Lower Middle Income

6%
Upper Middle Income

Unspecified

Source of Data: OECD, 2016

The figure above confirms the fact that most aid-recipient countries are developing countries (least
developed countries, low incomes countries etc). Such countries are in need of aid in various forms, e.g
humanitarian, developmental etc., to help them rejuvenate their struggling economies.

ODA trends (Constant, 2007 US $ millions) in developing countries since 1960s

Figure 3

All Developing Countries Total

1063670

744565
676552
481688
414711

1960s 1970s 1980s 1990s 2000-2012

All Developing Countries Total

Linear (All Developing Countries Total)

Source of Data: OECD 2015

Figure 3 above shows the trends of ODA in developing countries over a period of 5 decades. The thin
dark trend line confirms the fact that foreign aid has been and continues to increase in developing countries.
However, it is surprising to notice that with such incremental aid inflows, most developing continue to lament
over various socio-economic ills. What could be the problem? Is there a relationship between foreign aid and
economic growth? What is the nature of such a relationship (if it exists)? Does foreign aid really help? The
present study seeks to answer these questions through an extensive systematic review of theory and evidence in
developing countries around the world. To provide more relevant information, the study will be biased towards
recent studies.
III. METHODOLOGY
In order to gather up all the necessary information on the foreign aid economic growth nexus in
developing countries, the study employed a systematic review of literature. Purposive sampling was used to
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 Foreign aid Economic growth Nexus: A Systematic Review of Theory & Evidence from Developing Countries
select the representatives of the sample. It is quite imperative to note that the criterion of selection was based on
relevance of study topic as well as the geographical area of the studies. It is also important at this stage, to
highlight the fact that most developing countries are from Africa as compared to other continents around the
world and therefore special preference has been directed towards African studies. The variables of the study are
collected from 33 studies conducted in more than 100 different developing countries around the world.

Studies Selected for Review

Table 3. Studies Selected for Review
Author (s) Year Country/Countries Title of Study
Boone 1995 96 countries Politics of the effectiveness of foreign aid
Ramesh 1998 Several developing countries The impact of foreign aid on growth and savings in
developing countries
Economides et al 2003 75 aid recipient countries Do foreign aid transfers distort incentives and hurt
economic growth? Theory and evidence from 75 aid-
recipient countries
Cuberes & Tsui 2004 136 countries Does foreign aid induce population growth?
Amanja & Morrisey 2006 Kenya Foreign aid, investment and economic growth in Kenya:
A Time Series Approach
Ekanaye & Chatma 2007 Asia, Africa, Latin America, The effect of foreign aid on economic growth in
Caribbean developing countries
Veiderpass & Anderson 2007 60 countries Foreign aid, economic growth and efficiency
development
Obaydullah 2007 Bangladesh Impact of foreign aid on development in Bangladesh
Kabete 2008 Tanzania Foreign aid and economic growth: the case of Tanzania
Andrews 2009 Africa Foreign aid and development in Africa: What the
literature says and what the reality is
Chheang 2009 67 developing countries The effect of foreign aid on economic growth and
corruption in 67 developing countries
Minoiu & Reddy 2009 Developing countries Development aid and economic growth: a positive long
run relation
Dimanche 2010 79 developing countries Foreign aid and economic growth
Asirvatham 2010 Several developing countries Foreign aid and development
Tadesse 2011 Ethiopia Foreign aid and economic growth in Ethiopia
Kiumbe 2012 Kenya The impact of foreign aid on economic growth in Kenya
Daud 2012 African Muslim Countries The effectiveness of IDBs foreign aid on economic
growth: an empirical study of African Muslim Countries
Sohail 2012 Several developing countries Assessing foreign aid: the case of foreign aid to the
education sector
Fasanya & Onakaya 2012 Nigeria Does foreign aid accelerate economic growth? An
empirical analysis for Nigeria
Kargbo 2012 Sierra Leone Impact of foreign aid on economic growth in Sierra
Leone
Kolawole 2013 Nigeria Foreign assistance and economic growth in Nigeria: The
Two-Gap Model Framework
Deerfield 2013 Several developing countries A study of corruption, foreign aid and economic growth
Ojiambo 2013 Kenya Effects of foreign aid predictability on investment and
economic growth in Kenya
Dayanath & Chihashi 2013 Sri Lanka Fiscal policy and economic growth in the presence of
foreign aid (the Sri Lankan experience)
Hossain 2014 Bangladesh The effect of foreign aid on economic growth in
Bangladesh
Ahmed 2014 Sub-Sahara African countries The effect of foreign aid on economic growth
Trinh 2014 Vietnam Foreign aid and economic growth: the impact of aid on
determinants of growth the case of Vietnam
Abdu 2015 India Impact of saving, foreign aid on economic growth in
India (1981-2011): A perspective of the dual gap model
Girma 2015 Ethiopia The impact of foreign aid on economic growth: empirical
evidence from Ethiopia (1974-2011) using ARDL
approach
Hotouom 2015 Tanzania The effect of foreign aid on economic growth in
Tanzania
Mwanamanga 2015 Malawi Does foreign aid promote growth?
Simplice & Jellal 2016 53 African countries Foreign aid and fiscal policy: theory and evidence
Sahoo 2016 South Asian Economies Foreign aid and economic development: empirical
evidence from selected South Asian Economies
Source: Reviewed Literature (2017)

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 Foreign aid Economic growth Nexus: A Systematic Review of Theory & Evidence from Developing Countries
IV. RESULTS & DISCUSSION
Description of Reviewed Literature
The table below shows a brief description of reviewed previous studies
Table 4.
Author (s) Year Country/Countries Nature of Data Period Model (s)
Boone 1995 96 countries Panel 1960-1990 Panel Least
Squares Estimation
Method (PLSEM)
Ramesh 1998 Several developing Cross-sectional 1970-1993 OLS
countries
Economides et al 2003 75 aid recipient countries Panel 1975-1995 PLSEM
Cuberes & Tsui 2004 136 countries Panel 1973-2004 PLSEM
Amanja & Morrisey 2006 Kenya Time Series 1964-2002 Vector
Autoregression
(VAR) & Vector
Error Correction
Model (VECM)
Ekanaye & Chatma 2007 Asia, Africa, Latin Panel 1980-2007 PLSEM
America, Caribbean
Veiderpass & Anderson 2007 60 countries Panel 1995-2000 PLSEM
Obaydullah 2007 Bangladesh - - Correlation &
Critical Analysis
Kabete 2008 Tanzania Time Series 1990-2004 OLS
Andrews 2009 Africa - - Systematic Review
Chheang 2009 67 developing countries Panel 1986-2005 PLSEM
Minoiu & Reddy 2009 Developing countries Cross-sectional 1960-2000 OLS & 2SLS
Dimanche 2010 79 developing countries Cross-sectional For the year 2000 OLS
Asirvatham 2010 Several developing Time Series 1980-2007 OLS
countries
Tadesse 2011 Ethiopia Time Series 1970-2009 VECM
Kiumbe 2012 Kenya Time Series 1970-2010 OLS
Daud 2012 Africa Muslim Countries Panel 1987-2010 Simultaneous
Equation Model
(SEM), ARDL,
OLS & 3SLS
Sohail 2012 Several developing Cross-sectional 1973-2007 Pooled OLS,
countries Logistic approach
& Generalized
Methods of
Moments (GMM)
Fasanya & Onakaya 2012 Nigeria Time Series 1970-2010 OLS
Kargbo 2012 Sierra Leone Time Series 1970-2007 ARDL approach
Kolawole 2013 Nigeria Time Series 1980-2011 Error Correction
Model (ECM)
Deerfield 2013 Several developing Cross-sectional 1969-1997 OLS
countries
Ojiambo 2013 Kenya Time Series 1966-2011 OLS
Dayanath & Chihashi 2013 Sri Lanka Time Series 1962-2011 3SLS & 2SLS
Hossain 2014 Bangladesh Time Series 1980-2012 OLS
Ahmed 2014 Sub-Sahara Africa Cross-sectional 2000-2012 OLS
Trinh 2014 Vietnam Time Series 1993-2012 ARDL
Abdu 2015 India Time Series 1981-2011 VAR
Girma 2015 Ethiopia Time Series 1974-2011 Autoregressive
Distributed Lag
(ARDL) approach
Hotouom 2015 Tanzania Time Series 1987-2013 VAR
Mwanamanga 2015 Malawi Time Series 1960-2012 OLS
Simplice & Jellal 2016 53 African countries Panel 1996-2010 Two Stage Least
Squares (2SLS)
Sahoo 2016 South Asian Economies Cross-sectional 1970-2013 VECM
Source: Reviewed Literature (2017)

Foreign-Aid Economic Growth Nexus

There is no consensus as to the relationship between foreign aid and economic growth. The table below
is a summary of the major findings of various previous studies considered in this investigation.

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 Foreign aid Economic growth Nexus: A Systematic Review of Theory & Evidence from Developing Countries
Table 5.
Author (s) Year There is a Foreign Aid Foreign Aid Other findings
relationship affects affects Economic
between Economic Growth negatively
Foreign Aid & Growth
Economic positively
Growth
Boone 1995 * - *  The study also found out that the
impact of aid does not vary
according to whether recipient
governments are liberal democratic
or highly repressive
Ramesh 1998 * * - -
Economides et 2003 * * *  Foreign aid is negatively affected
al by adverse effects of associated
rent-seeking activities
Cuberes & Tsui 2004 * - *  Foreign aid induces population
growth
 Foreign aid reduces mortality rate
and increases life expectancy
Amanja & 2006 * - *  Private investment, public
Morrisey investment and imports positively
affect economic growth
Ekanaye & 2007 * * * -
Chatma
Veiderpass & 2007 * * - -
Anderson
Obaydullah 2007 * * - -
Kabete 2008 * - *  Total debt service has a negative
impact on GDP growth in Tanzania
 Export growth and net national
savings have positive impact on
growth
Andrews 2009 * * * -
Chheang 2009 * - *  Foreign aid is positively related to
corruption in the sense that the
more aid a country gets the better
the corruption ranking of the
country is
Minoiu & 2009 * * - -
Reddy
Dimanche 2010 * - * -
Asirvatham 2010 * - *  There is an insignificant
relationship between the interaction
term (Aid) and growth
Tadesse 2011 * * -  However, volatility of aid by
creating uncertainty in the flow of
aid has a negative influence on
domestic capital formation activity
 The aid-policy interaction term has
produced a significant negative
effect on growth implying that bad
policies can constrain aid
effectiveness
 Rainfall variability has a significant
impact on economic growth
 The study also revealed that
Ethiopia has no problem of capacity
constraint as to the flow of foreign
aid
Kiumbe 2012 * - *  There is a positive relationship
between investment and growth
Daud 2012 * * -  There is long run and short run
causality between corruption and
aid
 The study also establishes that
countries like Morocco and Nigeria
are victims of the corruption trap
Sohail 2012 * * - -
Fasanya & 2012 * *  Domestic investment increased in

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 Foreign aid Economic growth Nexus: A Systematic Review of Theory & Evidence from Developing Countries
Onakaya response to aid flows and
population growth has no
significant effect on aid flows
Kargbo 2012 * * -  The effect of foreign aid during the
war is found to be weak or non-
existent
Kolawole 2013 - - -  No causality between aid and
growth
 Negative relationship between FDI
and growth
 ODA has no impact on real growth
in Nigeria
Deerfield 2013 * - * -
Ojiambo 2013 * * -  Foreign also has a positive effect on
public investment
 Private investment positively
affects economic growth
 Macroeconomic policy
environment positively affects
economic growth
Dayanath & 2013 * - * -
Chihashi
Hossain 2014 * * -  However, the study also revealed
that foreign aid generates
decreasing returns in Bangladesh
because of capacity constraints of
Bangladeshi institutions to utilize
the foreign aid effectively
Ahmed 2014 * - *  Education and FDI positively and
significantly affect growth
Trinh 2014 * * - -
Abdu 2015 * * -  There is a unidirectional causality
running from savings to economic
growth
Girma 2015 * *  However, the coefficient of aid
policy index interaction shows that
aid has positively contributed to
economic growth in Ethiopia if
supplemented with stable
macroeconomic policy environment
Hotouom 2015 * * -  Population growth, investment and
aid policy contributed positively to
economic growth
Mwanamanga 2015 * - *  The study indicates that aid
effectiveness is circumstantial,
conditional on countries having
supportive governance structures,
sound policies, and strong political
will
Simplice & 2016 * * - -
Jellal
Sahoo 2016 * * -  Aid volatility has shown a
significant negative impact on
economic growth of Pakistan and
Sri Lanka
SUMMARY - (32/33)=97% (19/33)=58% (16/33)=48% -
STATISTICS
Source: Reviewed Literature (2017)

As shown in the table above, the nexus between foreign aid and economic growth is indeed ambiguous.
However, most studies reviewed (58%) generally confirm the aid effectiveness hypothesis while 48% of the
studies reviewed; generally reject the aid effectiveness hypothesis. It is imperative to note that almost all the
studies reviewed (as shown by 97%) confirm that there indeed exists a relationship between foreign aid and
economic growth. Only Kolawole (2013) found that there is no causality between aid and growth and that in the
case of Nigeria, Official Development Assistance (ODA) has no impact on real growth. It is also worth to
highlight that the nexus between foreign aid and economic growth has also been found to be mixed (in the sense
that in as much as it can be positive, it can also be negative) in Asia, Africa, Latin America & Caribbean
(Ekanaye & Chatma, 2007), Africa (Andrews, 2009) as well as in 75 Aid recipient countries studied by

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 Foreign aid Economic growth Nexus: A Systematic Review of Theory & Evidence from Developing Countries
Economides et al (2003). However, reviewed literature also indicates that there are other factors which also
exist to affect economic growth in developing countries and these include but are not limited to private
investment, public investment, imports, exports, savings, FDI and so on; these factors are shown in the table
below:
Table 6
Other factors that affect economic growth in developing Source
countries
Private investment Amanja & Morrisey (2006), Ojiambo (2013)
Public investment Amanja & Morrisey (2006)
Imports Amanja & Morrisey (2006)
Savings Kabete (2008), Abdu (2015)
Rainfall variability Tadesse (2011)
Aid policy Girma (2015), Hotouom (2015)
Population growth Hotouom (2015)
Domestic investment Kiumbe (2012), Hotouom (2015)
FDI Kolawole (2013), Ahmed (2014)
Education Ahmed (2014)
Aid volatility Sahoo (2016)
Total debt service Kabete (2008)
Export growth Kabete (2008)
Macroeconomic policy environment Ojiambo (2013)
Source: Reviewed Literature (2017)

Discussion of the Impacts of Change in Foreign Aid and other factors (shown in table 6 above) on
economic growth in developing countries
Foreign aid: There is no straight forward consensus on the nature of the aid-growth nexus. Literature is
basically divided between aid optimists and aid skeptics. Each side is supporting its ideas strongly. However, in
this study, it has been shown that most studies e.g Economides et al (2003), Ekanaye & Chatma (2007), Tadesse
(2011), Kargbo (2012), Abdu (2015) and Shoo (2016) amongst others; support the idea that foreign aid is
positively related to growth. This proposition has been upheld by most theories. For example, the McKinnon
Foreign Exchange Constraint Model (MFECM), which basically argues that foreign aid, is a catalyst for higher
economic growth for all developing countries that experience trade bottlenecks. The MFECM further asserts
that foreign aid helps to remove trade bottle necks available in developing countries by providing strategic
commodities in which they are unable to produce. The MFECM is hinged on the principles of the Chenery-
Bruno (1962) model, that was followed by the famous dual gap model (the Two-Gap Model [TGM])
propounded by Chenery & Strout (1966); which basically argues that a developing country may need foreign aid
inflows in order to help close the savings gap and or the foreign exchange gap (the trade gap), if its own
investment is below the desired level. In this case foreign aid positively affects economic growth. The Public
Interest Theory (PIT), also supports our analysis in the sense that it asserts that foreign aid is necessary for
growth because it helps in closing the investment gap in the recipient country.
In the same line of thinking, the Harrod-Domar, Solow, and Endogenous growth models also confirm
that foreign aid is only there to supplement inadequate domestic resources in developing countries. In particular,
the Harrod-Domar model argues that developing countries need foreign aid to help attain a steady rate of
economic growth in the long-run. The Solow growth is just a revised version of the Harrod-Domar growth
model and basically acknowledges that foreign aid helps complement inadequate savings in developing
economies. The Endogenous growth model, which is a well-known reaction to the Solow-Swan neoclassical
growth model; argues that endogenous factors are inadequate to spur the development process and therefore
foreign aid is there to assist developing countries on the grounds that most developing do not have enough
resources for spurring real growth. Moreso, the Big Push Theory (BPT) is another important theory that
supports our analysis. The BPT basically proposes that a big investment package (a big push), is required to
overcome the obstacles of economic development in developing countries. But the problem is that developing
countries are usually not able to arrange such huge amounts of capital to invest. In this regard, according the
PBT, foreign aid facilitates the capital deficit problems of theses developing countries via the provision of
adequate amount of foreign exchange reserves at a concessional rate. In consensus with BPT, the Poverty Trap
Model (PTM), states that a developing country requires a one-time infusion of aid to spur economic growth and
development.
The fact that developing countries do not have adequate resources is indisputable. Therefore, foreign
aid cannot be ignored in such economies. In Zimbabwe, for example, there are a plethora of natural resources
and yet there is no enough financial resources and capital (plant & machinery) to help make meaningful use of
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 Foreign aid Economic growth Nexus: A Systematic Review of Theory & Evidence from Developing Countries
these abundant natural resources. Today Zimbabwe is lamenting over many problems, most of which can be
easily solved by provision of foreign capital inflows. Nigeria, just like any other developing country, continues
to receive its share of aid. However, the main problem of Nigeria is corruption and bad governance (as is the
case in Zimbabwe and many other developing countries). This tendency of misusing aid is number one factor
that militates against aid-effectiveness and developing countries should see to it that it comes to a halt or else
they remain poor!
However, our investigation is not without scholarly objections. There are many authors, e.g Boone
(1995), Svenson (2000), Amanja & Morrissey (2006), Williamson (2008), Djankov et al (2008), Chheang
(2009), Kiumbe (2012) and Girma (2015) amongst others; who have already shown that foreign aid is useless to
the recipient countries in the sense that it affects economic growth negatively. These aid-skeptics are
theoretically backed by the Public Choice Theory (PCT), which argues that foreign aid ineffective and virtually
malicious to the recipient countries. According to the PCT, foreign aid has no effect whatsoever on development
or any poverty indicator, therefore, developing countries do not need foreign aid to improve their economies.
Savings: The relationship between savings and economic is obvious in these sense that there is
overwhelming consensus that savings and economic growth are positively related. Many theories e.g the Solow
growth model, the Harrod-Domar model, the Keynesian theory of saving, as well as the Neoclassical theory of
saving and investment amongst others; support the view that savings are positively related to growth.
Furthermore, many studies e.g Mphuka (2010), Festus (2011), Mandishekwa (2014), Mohamed (2014), Turan &
Olesia (2014), Jagadeesh (2015) confirm this relationship. Therefore, developing countries should promote a
savings culture in their economies. Unfortunately, most developing countries are either instant gratifiers or
they cannot save simple because they do not have anything to save. In latter scenario, foreign aid is critically
needed as a matter of emergency; otherwise the electorate (the civilians) will continue to live in abject poverty
until they die!
Population growth: The relationship between population growth and economic growth is ambiguous in
the sense that it can be positive one country and be negative in another. Having said this, it follows that
available literature is also torn between those who argue for and those who argue against population growth.
Main theorists in the population growth dynamics, Malthus (1798) and Solow (1956) argue that population
growth is a real problem and has a negative effect on economic growth. On the other side of the same coin,
orthodox theorists such as Ahlburg (1998) and Becker et al (1999) argue that population growth is not a real
problem, but rather an opportunity for growth. In our investigation, we find that in Tanzania, as shown by
Hotouom (2015); population growth is positively related to economic growth. Similarly Nyoni & Bonga
(2017h) found that population growth is positively related to economic development in the Zimbabwean
scenario. This is true for some Africa countries eg Tanzania, Nigeria, DRC, Zimbabwe amongst others where
there are abundant natural resource endowments, most of which are either not being used or are currently being
misused. In such cases, an increase in population growth is an opportunity for increased markets (increase
aggregate demand for commodities) and apparently means more supply of labour which is one of the major
factors of production. However, our analysis is already being opposed by many authors who support the
mainstream population growth ideas postulated by Malthus (1978) and these include but are not limited to
Adetiloye & Adeyemo (2012), Wako (2012), Zhang (2015) as well as Ali et al (2015).
Investment: There is consensus among economists and policy makers that investment (private or
public) plays a pivotal role in economic growth of any nation. In fact, there is an undeniably strong relationship
between investment and the rate of economic growth (Nyoni & Bonga, 2017f). In our analysis Amanja &
Morrissey (2006) and Ojiambo (2013) found that private investment is positively related to economic growth in
Kenya. This is very reasonable because investment is a source of multiplier effects in the economy, especially
given the fact that most developing countries have abundant resources but lack the capacity to exhaust those
resources in an economically meaningful manner. Sustainable economic growth, according to Nyoni & Bonga
(2017f), mainly depends on a nations ability to invest and make efficient and productive use of the resources at
its disposal. Without investment of sufficient amount and quality, as warned by Nyoni & Bonga (2017f), there
cannot be growth. Economic theory (e.g Accelerator theory; Neoclassical theory) supports our finding that
investment is indeed the backbone of growth and development. Various other authors e.g Ellis et al (2010), Sial
et al (2010), Riley (2012) and Uthman (2015) also support our analysis.
FDI: The nature of the link between FDI and economic growth is ambiguous in the sense that there is
no universally accepted position on this issue. Some authors say the relationship between FDI and economic
growth is positive while others argue that it is negative; and yet extremists actually assert that there is no
relationship whatsoever, between FDI and economic growth. In this study, we find that FDI is positively related
to economic growth. This is probably the most accepted idea in the FDI literature as shown by many authors e.g
Nair-Reichert & Weinhold (2001), Yao & Wei (2007), Vu et al (2008), Tang et al (2008), Brooks et al (2008),
Nunnenkamp et al (2009), Zhao & Zhang (2010), Wang (2010), Lean & Tan (2011), Wu et al (2012), Lipsey et
al (2013), Pegkas (2015), Tan & Tang (2016), Vogiatzoglou & Thi (2016). This is especially true in developing

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 Foreign aid Economic growth Nexus: A Systematic Review of Theory & Evidence from Developing Countries
countries where domestic resources are always not enough to stimulate real growth. In such situations, FDI
becomes a good source of foreign capital inflows that can help host countries make meaningful use of their
domestic resources. FDI, in excess of financial resources and capital (plant & equipment); is well known for
bringing in expert technical know-how and creating employment opportunities in the host country. In this regard
FDI positively impacts on economic growth. However, on the other side of the same coin, some researchers e.g
Kholdy (1995), Duasa (2007), Tomohara & Takii (2011), Mohamed et al (2013) as well as Sothan (2017) have
found that FDI has a negative impact on economic growth. This may be true in the sense that foreign companies
may compete against local companies and result in their failure and closure, and that foreign companies usually
remit most of their profits back to their home countries and have a tendency of bringing try & error (obsolete
and or sub-standard or dumped) technology in the host country. In such circumstances FDI is a burden on
growth and development. Furthermore, others e.g Kakar & Khilji (2011), Ludosean (2012) as well as Mutafoglu
(2012), think that there is no relationship between FDI and economic growth and thus FDI has virtually no
impact on growth, whatsoever!
Education: The Human Capital Theory proposes that there is a positive relationship between education
and economic growth, via the labour productivity transmission mechanism. This is, of course, attributed to the
fact, education improves human capital efficiency in production, which; in the long run increases the level of
growth in the economy. As indicated by Bonga (2016), education increases labor productivity, increases
innovative capacity and also helps in facilitating diffusion and transmission of knowledge and to successfully
implement new technologies. In this study, Ahmed (2014); also found out that education is another factor that
positively affects economic growth. These results are acceptable in the sense that more educated workers are
likely to be more productive than their uneducated counter-parts. It is indeed imperative to mention that most
developing countries now have a relatively reasonable level of literacy. For example, Zimbabwe literacy rate is
currently over 90%. Other developing countries such as Cuba, Nigeria, Kenya, India, Pakistan, have literacy that
are well above 50%. This shows that developing countries are now realizing the importance of education in the
economy. Many previous studies e.g Mankiw et al (1992), Schultz (2009), Kim & Terada-Hagiwara (2010),
Adiqa (2011), Hawkes & Ugur (2012) as well as Afzalet et al (2012) support our analysis.
Aid volatility: Aid volatility is a cause for concern. Various authors such as Bulir & Hamann (2001;
2003; 2005), Eifert & Gelb (2005) and Fielding & Mavrotas (2005), amongst others; have already
acknowledged this fact. Aid volatility is one of the factors that give birth to macroeconomic instability and it is a
factor of vulnerability on its own. Aid volatility has its most devastating effects in developing countries which
are usually vulnerable and where the prospects of aid increase mainly apply. In our investigation, aid volatility
has been shown [by Sahoo (2016)] to have a negative impact on growth. Many authors that include but not
limited to Chauvet & Guillaumont (2008), Neanidis & Varvarigos (2009), Arellano et al (2009) and Lane &
Lipschitz (2009) support these findings.
Total debt service: Total debt service negatively impacts on growth, many researchers e.g Muhta
(2004), Kabete (2008), Hameed et al (2008), Safia & Shabbir (2009), Reinhart & Rogoff (2010), Gohar et al
(2012), Ajayi & Oke (2012), Uma et al (2013). Developing countries should be financially disciplined in order
to minimise debts.
Export & Import growth: Exports are very important in any economy because they are a source of
foreign exchange reserves which can then be used to import those commodities which are relatively scarce in
the home country. Kabete (2008), in line with Ullah & Asif (2009), Uman et al (2011), Khan et al (2012),
Zaheer et al (2014), Bonga et al (2015) and Nyoni & Bonga (2017h) found that export growth is positively
related to economic growth. On the other side, imports are equally important as found by Wong (2008), Kogid
et al (2011) and Khan et al (2012); since they also affect economic growth positively. Developing countries
should import only those resources and or products that they do not have in the home country. The tendency of
importing already existing commodities is economically suicidal to the local industry and should be avoided at
all costs.
Macroeconomic policy environment: Sound macroeconomic policy is compulsory for all economies,
whether developing or developed. Without sound macroeconomic policy, there cannot be growth. According to
various authors such as Fischer (1991; 1993), Easterly & Rebelo (1993), Durbarry et al (1998) as well as
Ojiambo (2013) sound macroeconomic policy is associated with higher growth. Most developing countries,
especially in Africa, are regrettably well-known for poor macroeconomic policy environment that continues to
militate against aid effectiveness and growth.

V. RECOMMENDATIONS
The study recommends the following:
1. If developing countries still require foreign aid to support their developmental processes, then they
need to make proper plans on the productive use of aid. Many donors are increasingly selective, they
no longer want their resources on countries that continuously misuse aid, especially developmental aid.
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 Foreign aid Economic growth Nexus: A Systematic Review of Theory & Evidence from Developing Countries
In the case of economically distressed economies such as Zimbabwe, Nigeria, Kenya, Somalia and
Gambia, we recommend that the respective governments should devote foreign aid on developmental
activities such as health, education an infrastructure, where private investors are reluctant to invest.
2. Developing countries should maintain good working relations with the donor community and sign long
term agreements relating to foreign aid inflows, primarily to reduce the problem of fluctuations in aid
flows.
3. There is need to increase export growth in developing countries as the study has also shown that export
growth has a positive effect on economic growth.
4. Since foreign aid has been shown to have its own weaknesses such as the Dutch disease, corruption and
policy conditionality; governments of developing countries should work in partnership with the donor
community in order to properly address the weaknesses of foreign aid. In this regard, developing
countries are advised to institute effective sterilization measures by channeling aid funds into
investments rather than increasing government expenditure.
5. In recognition of the fact that good governance and policies matter in the aid-growth nexus, policy
makers in developing countries ought to promote measures of good governance including strong fiscal
discipline and sound social policies. This may facilitate prudent management of public resources
including aid.
6. Developing countries are encouraged to maintain stable macroeconomic policy environments in order
to reap the full benefits of aid inflows.

VI. CONCLUSION
Foreign aid is one of the most important sources of capital for most developing countries. In fact
developing countries, especially in Africa, can refuse aid at their own peril. However, it has been noticed with
kin interest that in most cases recipient governments, if not closely monitored, end up misusing aid and at the
end of the day claim that aid is not effective! Despite the overwhelming fact that the aid-growth nexus is
ambiguous, most studies confirm a positive relationship and most foreign aid theories such as the McKinnons
Foreign Exchange Constraint Model, Harrod-Domar Model, Solow Model and many others, re-affirm the
proposition that aid is positively related to economic growth. However, our analysis also indicates that foreign
aid is not without its woes. Foreign aid, especially, if misused; can produce unintended results such as
corruption and the Dutch disease. It is thus imperative to note that developing countries must use aid for its
intended purpose, if aid-effectiveness is anything to go by.

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