Foreign aid and economic growth in South Africa: An empirical analysis using bounds testing

Abstract

South Africa is classified as one of the wealthiest countries in Africa, yet half of its population lives below the poverty line and over a quarter of its labour force is unemployed. Foreign aid was one of the major sources of capital for the country. It poured in from many developed countries and it was very successful in promoting a stable society, especially during the first few years after apartheid ended in 1994. Thus, South Africa is a good case study for determining the relationship between and the effect of foreign aid on growth. The data on aid flow as a percentage of gross domestic product (GDP) in South Africa was only available from 1980, thus limiting the data from 1980 to 2009. Given the limitations in the data, a co-integration analysis of the autoregressive distributed lag (ARDL) was adopted, using the method of the conditional unrestricted error correction model (UECM), which accommodates small samples. The result shows that the relationship between aid and growth is negative both in the short and the long run.