Impact of Foreign Aid on Economic Growth in the West African Monetary Zone using Non-linear Autoregressive Distributed Lag

Abstract

This study analyses the pattern of asymmetric relationship between foreign aid and economic growth in five aid receiving countries in WAMZ using the Non-linear Autoregressive Distributed Lagged (NARDL) for the period, 1985 to 2018. Results from the NARDL estimation shows the presence of asymmetric long-run relationships. Increase in the flow of multilateral aid positively impact real per capita Gross Domestic Product (GDP) of the WAMZ at the coefficient estimate of 2.13 while decrease in multilateral shows positive but lower coefficient estimate of 1.74. Similarly, increase in the flow of bilateral aid positively impacts real per capita GDP but at a statistically insignificant coefficient value of 0.06, and interestingly, decrease in the flow of bilateral aid positively impacts real per capita GDP of the WAMZ at the coefficient estimate of 0.24. The results provide evidence that, in the long-run, increase in the flow of multilateral aid enhances the economic growth of the WAMZ while increase in bilateral aid was ineffective on growth. The granger causality estimation shows evidence of unidirectional causality running from multilateral aid to real per capita GDP, from bilateral aid to real GPD per capita and from bilateral aid to multilateral aid. The policy implication of these findings suggests that multilateral and bilateral aid inflows are useful for economic growth in the WAMZ. Overall, we conclude that multilateral aid is a much more fruitful channel through which countries within the WAMZ can stimulate economic growth in the long run. Therefore, bilateral donors should channel their assistance through multilateral organisations such as the IMF and the World Bank as multilateral aid is a more effective conduit through which foreign aid can boost the economic growth of the WAMZ.

Keywords: Bilateral aid, Economic growth, multilateral aid, Population growth rate, West Africa    monetary zone

DOI: 10.7176/JESD/13-8-04

Publication date: April 30^th 2022