Moderating effect of institutional quality on relationship between foreign aid and economic growth in Africa

Abstract

Africa has received considerable amounts of external aid over the last two decades without significant improvements in socio-economic conditions on the continent. This study, therefore, examines the effects of foreign aid on growth in Africa, and how institutional quality can moderate these effects. The study used the system generalized method of moments estimation technique and a panel of forty-two African countries over the period 2010–2018. Interestingly, the study established that even though foreign aid impacts negatively on growth in Africa, improving the quality of institutions on the continent can reverse this negative effect. In fact, the study computed a threshold value of institutional quality beyond which foreign aid would be a blessing to Africa. This implies that for foreign aid to contribute meaningfully to growth in Africa, the quality of institutions should improve beyond this threshold. Unfortunately, the average level of institutional quality in Africa is presently below this threshold. The study concluded that policymakers in Africa should take urgent steps to strengthen the quality of institutions on the continent as a means of exploiting the continent’s huge foreign aid to drive growth and reduce the excruciating effects of poverty plaguing more than half of its population.