Islamic Development Bank, Foreign Aid and Economic Growth in Africa: A Simultaneous Equations Model Approach

Abstract

This study is an empirical investigation on the role of the Islamic Development Bank (IDB) Group through its foreign aid activities in contributing to the economic growth of African countries, especially the African Muslim Countries (AMCs). The AMCs, which are serving as the sample countries for this study, constitute more than two-third of the IDB member countries from Africa. Therefore, this study provides empirical evidences from AMCs like Algeria, Burkina Faso, Egypt, Senegal, Niger, Morocco and Tunisia among others, on the impact of IDB's development assistance (DA) on the economic growth of these countries using balanced panel data of six years average from 1987-2010. In order to accomplish the objectives of this paper, the Simultaneous Equations Model (SEM) was adopted and the Seemingly Unrelated Regressions Estimate (SURE) method was utilized for its estimation. In view of this, the findings from this study revealed that the DA of IDB has positive impact on the economic growth of AMCs through investment as the major transmission mechanism. Moreover, the impacts of the DA on human capital were more than that of investment and growth. This paper hereby recommends that the IDB should give more attention to these important transmission mechanisms, since they are among the expected gains of foreign aid to LDCs as theoretically advanced in the literature and empirically established. Evidently, this study is perhaps the first of its kind to empirically investigate the impact of the foreign aid activities of IDB in Africa, especially in AMCs.