ABSTRACT
This paper investigated the impact of foreign aid on economic growth in Nigeria for the period of 1981-2015. The data was collected from secondary sources from CBN statistical bulletin and World Bank report. To carry out this work, the study employed the Ordinary Least Square (OLS) estimation technique. To test for the properties of time series, the Augmented Dickey-Fuller (ADF) test was used to determine the stationarity of the variables and Johansen Cointegration test was employed to test for the long-run relationship of the variables. It was discovered that that there is no long-run relationship between the variables in the series. The empirical findings was apparent from the result of the regression analysis that foreign aid has a positive effect on GDP Per Capita which this study adopted as a proxy for economic growth in Nigeria but was statistically insignificant. However, Foreign Direct Investment (FDI) has a positive and significant effect on economic growth in Nigeria. This finding is also in tandem with that of Bakare (2011). The government should therefore, design appropriate and stable policies that would ensure more benefits from foreign aid which will enhance economic growth in Nigeria.
CHAPTERONE
INTRODUCTION
1.1 Background to the Study
The role of foreign aid in the growth process of developing countries has been an issue of intense debate. Foreign aid is an important issue given its implications for poverty reduction in developing countries. Fundamentally, two opposing views have emerged in development economics on the topic of macroeconomic effect of foreign aid on economic growth. On the one hand, from the early theoretical development, it was learnt that the traditional pro-aid view, advocated aid on the premise that it complements domestic resources, eases foreign exchange constraints, transfers modern know-how and managerial skills, and facilitates easy access to foreign markets, all of which contribute to economic growth (Chenery and Strout, 1966, Papanek 1972, 1973 etc.). On the other hand, based on the empirical evidence, the radical anti-aid view criticizes aid on grounds that it supplants domestic savings, worsens income inequality, funds the transfer of inappropriate technology, finances ineffective projects, and in general, helps sustain bigger, more corrupt and inefficient governments in the recipient countries (Griffin and Enos 1970, Weisskoff 1972 etc).
After World War II and until recently, Official Development Assistance (ODA) from developed countries was the principal source of external finance for developing countries. The principal aim of foreign aid was to help alleviate poverty, provide emergency relief, assist with peacekeeping efforts and to increase infrastructural development. Recent shifts in the global economic and political environment, notably the collapse of the Soviet Union and surge in private capital flows to developing countries, have impacted on ODA in a way that has left some questioning the viability of foreign aid. In fact, foreign aid to developing countries declined by one -third in real terms in the 1990s (world bank 1998), perhaps because donor countries assumed that it no longer achieves its desired objectives.
One of the development challenges facing Nigeria today is how to reduce the high Poverty level prevailing among her population. At the centre of the challenge is how the country will sustainably feed her over 160million people.However, observers’ opinions differ on the efficacy of foreign aid in fast tracking the process. It is noted that a prominent argument for foreign aid is that it tends to promote reduction of poverty. The importance of the development challenge of poverty reduction and hunger is aptly demonstrated as the number one goal of the eight Millennium Development Goals (MDGs).
Heller and Gupta (2002) express worry about the call by international community that to enable developing countries achieve the MDGs by 2015, there should be increase in foreign aid to 0.7 percent of industrialized countries’ GNP from 0.24 percent of GNP at present. Nevertheless, they argue that a large increase in aid flows could pose a number of challenges for the poorest countries. For example, if the industrial world is to be successful in meeting its ODA targets, financial aid will increase to about $175 billion, slightly more than three times current levels. To ensure that enhanced ODA is used efficiently in the fight against global poverty, they argue that donors need to examine closely the different possible approaches it could take in deciding how to allocate aid, both among countries and among complementary global poverty reduction programmes. While there are many reasons for giving foreign aid, a major argument for such aid is that this assistance will increase the rate of economic growth in countries, which are recipient of aid. These expectations of aid induced growth however, have often been unrealistic. The explanation is that aid largely goes to consumption rather than productive activities which crowd-out domestic savings and investment.
Recent years have seen a surge in calls for more foreign aid to Nigeria in order to eliminate the country’s poverty. Developed countries, international organizations and other Philanthropists have all made renewed pleas for a massive infusion of development aid to Nigeria. Experts who argued in favour of more aid are of the view that injecting more foreign aid would materially benefit the people of the recipient country.
The role of western assistance in alleviating Africa’s extreme poverty depends on various theories on why Africa is poor of which Nigeria is inclusive. Economists overtime have insinuated different models of poverty that have different implications for foreign aid. These include the big push models and foreign aid, project intervention (education, health and infrastructure), models of policies and growth as well as aid, institutions and development. Based on these theories and others, several researchers have examined empirically the impact of foreign aid inflow on growth.
Nigeria is a mono product economy, over depending on the oil sector. This has also been seen to be responsible for deficiency in investment capital in the country. Amadi (2002)opined,“With oil as the main source of foreign exchange, a one-product economy must be continuously deficient in investment capital. Oil is subject to the vagaries of international capitalism. Therefore, revenue from it must be subject to serious fluctuations”. As this is the case with the current fall in oil price.The above situation in the country has created savings and foreign exchange gap. This culminates in a wide gap between the actual domestic investment fund and the required investment for accelerating economic growth. So, foreign capital has been regarded as an alternative to bridging the gap. Consequently, for any country, like Nigeria, with this investment gap to achieve a desired rate of economic growth, foreign aid has to be given due consideration. This is because foreign aid provides funds from other parts of the world to bridge the investment gap.
Given the importance of foreign aid to the economies of developing countries, it is important to understand its contribution to economic growth of developing countries. Therefore, this study analyzes the effects of foreign aid on the economic growth of Nigeria.
1.2 Statement of the Problem
In spite of her abundant natural and human resources, Nigeria has been identified as one of the poorest nations in the world. This follows the successive United Nations Development Programme (UNDP) report on human development (HDR) since 2003 as observed by (Njoku, 2011). Consequently, this suggests the reason why Nigeria is one of the beneficiaries of foreign aid from the developed countries. Basically, economists have defined foreign aid as all forms of grants and loans at concessional financial terms that are aimed at transferring resources from developed to developing countries on development, poverty and income distribution grounds as opined by (Todaro and Smith, 2011).
Foreign aid flows which are in the form of official development assistance (ODA) plays a significant role as complement to domestic financing for development in the Nigerian economy as observed by (Abiola, 2008). In addition, ODA can be critical in enhancing the business environment for the private-sector and indeed quickening growth and development. Abiola (2008) further emphasized that ODA is also a crucial instrument for supporting education, health, public infrastructure development, agriculture and rural development and food security, to mention but a few. In a similar reasoning, Bakare (2011) argues that foreign aid is a means of increasing the capital available for investment and the economic growth needed to reduce poverty and raise living standards in sub-Saharan African. He further stressed that it can provide resources for industrialization, enhance efficiency of resource use, increase product diversity and generate employment, (OECD-DAC (1999). He however observed that in the absence of regulations governing natural resource extraction, or when they are weak or poorly enforced, increased openness to foreign aid can accelerate unsustainable resource use patterns. The ability of developing countries to attract foreign aid, maximize the associated benefits and minimize the risks which is a function of the conditionality of the foreign aid.
Amakom et al (2010) posits that to make sure that aid in the form of ODA in Nigeria becomes effective and efficient; Nigeria first articulated a comprehensive policy on ODA in 1995 when the National Planning Committee (NPC) launched a document entitled Technical Corporation Policy for Nigeria. The policy has its focus purely on grants and Technical assistance thus leaving out an important element of ODA in form of concessionary loans. According to them, the current Nigeria (ODA) policy benefited from comments and suggestions from stakeholders and is broadly defined to cover concessionary financial flows aimed at promoting economic growth and development. It consists of concessionary loans, grants and technical assistance therefore presenting a window of opportunities available to Nigeria to bridge the resource gap. The share of ODA in the combined Gross Domestic Product of developing countries is estimated at about 8.0 percent per annum (NPC 2007).
It is interesting to note that in recent years there has been a significant increase in aid flows to Nigeria. This is sequel to the total net aid flows from all donors that Nigeria received which amounted to US$ 152 million in 1999. In 2000, aid flows increased slightly to $185 million and by 2004, it reached $573 million. (Ayodele, et al. 2005). Aid flows thereafter rose to US1.29 billion in 2008 and has been above that till 2011 with US1.78 billion as aid flow to Nigeria. Nigeria has received foreign aid from a wide array of agencies and countries between 1960 and today.
The main role of foreign aid in stimulating economic growth is to supplement domestic sources of finance such as savings, thus increasing the amount of investment and capital stock. In Nigeria, a Sub-Saharan African (SSA) country, the problem of mobilizing savings and deposits has always been the bane of economic growth and development. Savings and investment are very minimal in Nigeria due to high inflation and constant devaluation of the local currency and this leads to dearth of credit to the economy (Uremadu, 2006, 2007). As financial resources are a very vital factor in economic growth, its mobilization will lead to increased capital formation. Capital formation or gross domestic investment (GDI) requires the release of domestic goods and services for real asset investment or the import of resources from outside (Uremadu, 2006, 2007; Agu, 1975, 1979, 1981, 1988; Okafor, 1983; Edmister, 1980 and Kevin, 2001). The average per capita income in the region has fallen since 1970 despite the high aid flows. Following the work of Feeny and McGillivray (2008), they indicate that there are diminishing returns to aid due to recipient countries having absorptive capacity constraints. Absorptive capacity relates to an aid recipient‘s ability to utilize foreign aid inflows effectively.
Despite the increased flow of foreign aids into Nigeria and the enormous potential of foreign aid in accelerating economic growth through bridging of the savings and foreign exchange gaps, Nigeria economy is still characterized by low level of income, high level of unemployment, very low industrial capacity utilization, and high poverty level as observed by Fasanya&Onakoya (2012). Consequently, Njoku (2011) highlighted reasons for the slow economic progress in Nigeria. Furthermore he suggested that the major reason why Nigeria is experiencing slow economic progress is not farfetched from the monocultural economy that is practised, high population growth rate, import dependency, political instability etc. Therefore, it is discovered that there exist a gap between the domestically available supply of savings, foreign exchange, government revenue and skills and the planned level of the resources necessary to achieve development targets that leads to poverty alleviation in Nigeria. This gap necessitates the need for external resources to augment domestic resources in the country. These external resources can be in the form of foreign aid.
The principal economic arguments advanced in support of foreign aid is that it can play a critical role in supplementing domestic resources in order to relieve savings or foreignexchange bottlenecks. The key question is whether aid has effectively played this role by its effect on Nigeria’s growth and her level of poverty. It is important to note that not only factors such as the amount and type of financial aid impact the effectiveness of available funds but also the appropriate use of these funds by the receiving country plays a vital role. It is against this backdrop that this study aims to analyse the effects of foreign aid on the economic growth of Nigeria.
1.3 Research Questions
- What is the effect of foreign aid on economic growth of Nigeria?
- Is there a sustainable long run relationship between foreign aid and economic growth in Nigeria?
1.4. Objectives of the Study
The broad objective of this study is to examine the impact of foreign aid on economic growth of Nigeria. The specific objectives however includes:
- To examine the effect of foreign aid on economic growth in Nigeria.
- To determine if there is a sustainable long run relationship between foreign aid and economic growth in Nigeria
1.5 Research Hypotheses
- H0:Foreign aid doesnot have significant effect of on economic growth inNigeria.
H1: Foreign aid has significant effect on economic growth in Nigeria.
- H0: There is no sustainable long run relationship between foreign aid and economic growth in Nigeria
H1:There is a sustainable long run relationship between foreign aid and economic growth in Nigeria
1.6. Scope of the Study
Given the importance of foreign aid to the economies of developing countries, it is important to understand its contribution to economic growth of developing countries. This study analyzes the effects of foreign aid on the economic growth of Nigeria. This analysis will cover the nature, the benefits and other wise, the challenges and prospect of foreign aid on the Nigeria’s economy. In doing this, the study will focuson the time period 1981-2015.
1.7. Significance of the Study
The role of foreign aid in the growth process of developing countries has been a topic of intense debate. Foreign aid is an important topic given its implication for poverty reduction in developing countries. Previous empirical studies on foreign aid and economic growth generate mixed results. As such, the significance of the study will arise from the fact that it will highlight the nature, impact, challenges and prospect of foreign aid as it concern Nigeria. This is further in line with the fact that the findings will provide insight and data for policy makers and equally serve as a reference point for any future study. Above all, the study will add to existing stock of knowledge.
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