The effect of foreign aid on growth in sub-Saharan Africa - a panel data study on sectoral aid flows

Abstract: Foreign aid and its success in generating economic growth is a heavily debated issue. Even though the primary goal of foreign aid might be to reduce poverty, generating economic growth is likely to be an important component in this matter. Widespread poverty in the sub-Saharan African region despite fifty years as recipients of foreign aid might indicate that aid has not been successful in promoting growth. The academic achievements points in various directions. There is no real consensus on neither methodological strategy to determine the aid and growth relationship nor on the impact of foreign aid on growth. The current policymaking debate on foreign aid does circulate around how measurable results could be ensured as an outcome of the Paris declaration (2005). This study investigates whether different types of sectoral aid flows do affect growth differently in different time settings. The analysis is carried out on a data sample of the Sub-Saharan African countries for the years 1995-2011. By using a database of sectoral aid flows it is found that different aid flows do not only varies by impact on economic growth but also that the impact of the aid flows affects economic growth differently in different time spans. Therefore, it is of relevance to, when evaluating the growth effects from aid, to not only determine the type of aid flow and its potential impact on growth but also to adjust the aid flow to the time for which it could be expected to achieve an impact on economic growth.