Does Foreign Aid Promote Financial Development in the Economic Community of West African States (ECOWAS)?

Abstract

This article analyzes relationship between foreign aid and financial development in ECOWAS countries. These countries receive aid flows from developed countries and from international financial institutions. The article’s idea is to evaluate this aid effects on financial development and to assess role of governance on this relationship. The analysis uses panel data from ECOWAS countries over the period 1984-2016. The estimations’ results, based on Dynamic ordinary least squares (DOLS) estimator, show that aid is negatively and significantly linked with financial development indicators used. These results suggest that aid is an obstacle to financial development. Governance role tests do not change the negative effect of aid on financial development. However, the magnitude of the negative effect of interactive variables (with governance variables) is less than aid direct effect on financial development. These results suggest that an additional effort to improve governance in these countries would reduce aid negative effect on financial development, or even reverse this effect.