Foreign Aid and Economic Development in Sub-Saharan Africa: The Mediating Role of Governance Effectiveness

Abstract

This paper aims to analyse the effect of foreign aid, moderated by governance effectiveness variables, on economic development in sub-Saharan Africa. Data on foreign aid, gdp and governance variables were from the World Bank governance archives covering five sub-Saharan African countries. The paper applied the ols and fixed effect panel multiple regression analysis. From the first analysis, findings show a negative link between external aid and gdp per capita in sub-Saharan Africa. In the second analysis with governance moderating variables, findings indicate a positive relationship between foreign aid and gdp with rule of law providing a positive boost to foreign aid and gdp growth, but corruption and governance have a negative relationship with economic growth. The paper highlights policy implications for the need to bridle corruption and to strengthen governance institutions to enable foreign aid to function effectively toward economic growth. The paper suggests an agenda for further research to apply more governance institution variables in further analysis of aid effectiveness in sub-Saharan Africa economic growth.