Foreign aid distorting effects: An empirical assessment for sub-saharan africa

Abstract

Sub-Saharan Africa (SSA) is a key region for the success of the 2030 Agenda for Sustainable Development. However, there is no consensus about the contribution of Official Development Assistance (ODA) in the promotion of economic growth and the reduction of extreme poverty in this region. We therefore build an analytical framework of the distorting effects of foreign aid, and make the subsequent estimations during the period 1991–2014 for SSA. We find four main results: i) ODA to SSA has exerted both distorting and stimulating effects on growth but the latter effects were larger than the former; ii) increasing both aid grants and aid loans, and increasing the ratio of loans to grants, may induce higher growth; iii) however, such a reallocation may only be positive in countries with sustainable debt burdens; and iv) although ODA was effective in aggregate terms, it did not significantly boost the mean income corrected from inequality, which reveals a grave distributional deficiency.