Testing the Foreign Aid-Led Growth Hypothesis in the Democratic Republic of Congo

ABSTRACT:The effectiveness of foreign aid in promoting economic growth is one of the most controversial debates yielding different results in literature. Foreign aid has fluctuated to a large extent in Democratic Republic of the Congo (DRC). However, the foreign aid-growth nexus is still inconclusive. The main purpose of this study is to explore the relationship between foreign aid and economic growth in the case of the DRC, more specifically by investigating on both short and long run relationship to test the foreign aid-led growth hypothesis. The study employs the ARDL bounds test proposed by Pesaran, Shin and Smith (2001) which can be used with variables integrated of different orders unlike other cointegration tests. The study uses annual data for the period 1980-2019 sourced from the World Bank's World Development Indicators. GDP growth is used as a proxy for economic growth while the net official development assistance as a measure of foreign aid. Inflation, population growth, exports and oil rents are selected as control variables. The bounds test confirmed the presence of cointegration between the variables while the model passes the diagnostic tests. The study found that foreign aid has a positive and statistically significant impact on economic growth in both the long-run and short-run. The main research findings support the view that foreign aid has been pro-growth in the DRC, but its contribution has been of small magnitude falling in the case of a worse scenario where foreign aid is mismanaged or dilapidated by the government of the recipient country. The control variables reported that inflation has a negative but insignificant effect on economic growth in both the long-run and short-run, oil rents and exports have a positive and significant impact on economic growth. Population growth is negatively and significantly correlated with economic growth. Considering these results, the research recommends that foreign assistance institutions continue to support DRC. A reduction in aid would negatively impact on the growth which is a major determinant of the overall development of the country. However, measures should be put in place to monitor the maximum effective utilization of foreign aid to avoid dilapidation and mismanagement.