Foreign Aid – Economic Growth Nexus: A Systematic Review of Theory & Evidence from Developing Countries

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.

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