Foreign Aid and Human Development in SubSaharan Africa: Panel Data Evidence

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This paper re-examines the question of aid effectiveness in Sub-Saharan Africa (SSA) by analyzing the effect of foreign aid on selected components of HDI including economic growth, adult literacy and under-jive mortality rates. The estimation technique of Dynamic Panel Data (DPD) System-GMM has been applied to a panel data from 44 SSA countries for the period 1973- 2007. The data shows that during the period considered, SSA's share of aid inflows to the developing world is significant. However, following the global financial crisis, total foreign aid and SSA 's share is expected to decline. This requires better use of the limited aid resource. Thus, searching for ways to use the aid in an efficient manner and spending the money in those activities and/or sectors which yield better economic outcomes is seems to be imperative. The estimated results indicate that the impact of aggregate aid on economic growth is statistically insignificant, but the aid enhances economic growth when matched with good domestic macro-policies. However, the effectiveness of aid to the education and health sectors is justified irrespective of the quality of domes ti c institutions. This implies that aid to the region can bring improvement in human development if coupled with good macro policies and institutional setup. The Robustness of these results is also checked with respect to the use of different definitions of foreign aid (aid per capita and aid-to-GDP ratio) and results remained unchanged. Thus, the policy implication is that aggregate aid to the region can bring economic growth if efforts are made to improve the policy environment. Moreover, for the overall improvement in human development, foreign aid to the region should better target education and health sectors, which UN Millennium Development Goals (MDGs) target. In general, the result suggests that macro-policies would help countries of the region not only to grow but also to make aid more effective to spur economic growth. Thus, in the medium and long-term, to realize the benefits of good policy in a better way, revising and working towards appropriate institutional setup and macro polices in the region is advisable.



Panel Data Evidence, Sub-Saharan Africa