Foreign Aid Targeting, Policy Conditionality and Human Development Outcomes in Sub-Saharan Africa: A Panel Data Evidence

Abstract

This paper examines the question of aid effectiveness in Sub-Saharan Africa (SSA) by analyzing the effect of foreign aid on selected components of human development indicators including economic growth, adult literacy and under-five mortality rates. Panel data evidence from 44 SSA countries shows that SSA’s share of aid inflows to developing world during the period under study was significant. However, following the global financial and economic crisis, total foreign aid and SSA’s share is expected to decline. This requires better use of limited aid resources by recipient countries, and searching for ways to use the aid in an efficient manner and spending the money in economically more responsive sectors is imperative. Dynamic Panel Data estimation employing panel data covering the period 1973 - 2007 indicate that aggregate aid had statistically insignificant effect on economic growth unless matched with good domestic macro policies. However, aid targeted to the education and health sectors was unconditionally effective for desired sectoral outcomes. Robustness of such results was checked using different measurements of foreign aid, and results remained unchanged. The results suggest that devising conducive macro polices and working towards appropriate institutional setup in the region is advisable for an effective use of foreign aid. In a situation where foreign aid is considered for a country without conducive macro policies, it should better target more responsive sectors, education and health in this case, which are being targeted by the UN Millennium Development Goals.

Keywords: Foreign Aid, Macro Policies, Sub Saharan Africa, MDGs, Dynamic Panel Data Models.