Foreign aid, foreign direct investment and economic growth in Sub-Saharan Africa: evidence from pooled mean group estimator (PMG)

Abstract

In this paper we investigate the long-run relationship between foreign aid, foreign direct investment and economic growth in 36 Sub-Saharan Africa countries over the period 1980-2007. Following the recent dynamic panel data of mean group (MG), pooled mean group estimator (PMG), and dynamic fixed effect (DFE) proposed by Pesaran et al. (1999), we found strong evidence of a positive impact of foreign aid and foreign direct investment on economic growth. However, the effect of foreign aid on growth in SSA is low. For example, an increase in 1% of foreign aid induces only an increase in 0.05% of economic growth for PMG and 0.13% for DFE, while it’s ten times greater for an increase of employment in PMG and approximately six times greater in DFE. Thus, as implication of policy growth, it’s much better to focus on internal factors than external factors to boost economic growth in SSA.