Assessing the economic impacts of foreign aid expenditure in West Africa: An empirical analysis of the effects of aid expenditure on economic growth

Abstract

The economic impacts of foreign aid expenditure in developing countries remain a debatable topic in economics. Although extensive research has been conducted on this topic, no theoretical or empirical conclusion has been reached. Empirical studies conducted on this topic mostly suffer from endogeneity problems and failed to capture the effects of armed conflict on the efficiency of aid expenditure. Using Seemingly Unrelated Regression and Instrumental Variable technique to address problems of endogeneity, this paper assesses the effects of aid expenditure on economic growth in West Africa while controlling for institutional quality and armed conflict. Data was obtained for the period 1985-2019. The study finds aid expenditures to have positive and significant effect on economic growth while conflict retards growth and undermines aid efficiency in West Africa. Institutional quality matters for economic growth as the empirical estimations show strong institutions enhance the efficiency of aid expenditure and spur growth in West Africa.