Foreign aid and economic performance during crises in Sub-Saharan Africa

Chisi, Joyline M

Foreign aid and economic performance during crises in Sub-Saharan Africa

Thesis / Dissertation

2025

Publisher

Universiy of Cape Town

Department

Graduate School of Business (GSB)

Faculty

Faculty of Commerce

Abstract

Globally, for the past 50 years the Sub-Saharan African (SSA) region has been recorded as the largest recipient of foreign aid. However, it remains the least developed continent of all. It is characterised by extreme poverty and scores very low on rule of law, transparency and openness, public accountability, and ethical leadership. These observations have led to much debate on the effectiveness of foreign aid in alleviating poverty and catapulting development in less developed economies. Proponents of foreign aid as a tool for development such as Sachs (2005) believe that many African economies may well be trapped in the vicious cycle of poverty from which they cannot pull themselves out since all their earnings are fully committed for the purposes of mere survival. Critics of foreign aid believe that extending aid to SSA is a waste of resources since this has been the norm for more than 50 years, but the region is seemingly regressing economically. Some researchers have cited that providing foreign aid to the SSA region is akin to throwing money into a bottomless pit as it only incentivises government inefficiencies, and corruption which adversely affects productivity. Owing to the poverty plaguing the SSA region, the region is never fully prepared for crises and disasters that emerge, which leaves foreign aid as the key lifeline for the region. The question of whether foreign aid stimulates economic performance in the SSA region is critical, especially during crises due to the level of desperation into which the region falls. This research seeks to understand whether foreign aid stimulates economic performance, especially after witnessing the Covid-19 pandemic. The purpose of the research is to inform policymakers in both donor and recipient countries on how best to address the issue of foreign aid as perceptions of inefficiency, corruption, and embezzlement are attached to the recipients of foreign aid. Dynamic panel was generated on 41 SSA countries from the Eastern, Central, Western, and Southern sub-regions for a 21-year period running from 2001 to 2021. The generalised method of moments (GMM) model was used to investigate the relationship between foreign aid and economic performance. The investigation of the relationship between foreign aid and economic performance was done for the whole SSA region as well as the four sub-regions. The research found that foreign aid indeed positively affects economic performance for the composite SSA region both during crises periods and non-crises periods. However, for the sub regions, the Eastern SSA region showed a positive relationship between financial aid and economic performance during the global financial crisis (GFC), while the Southern African region had a significant positive effect during the Covid-19 pandemic. Importantly, each of the sub-regions showed a positive relationship between financial aid and economic performance over the 21-year period running from 2001 to 2021. The research recommends that recipient countries improve their governance systems to ensure that foreign aid can catapult economic activity that stimulates take-off of these economies. Failure to do may adversely affect their prospects of breaking the vicious cycle of poverty in which they are entangled should donor countries be discouraged. The research also recommends that donor countries modify their control measures to ensure that foreign aid is used for the intended purposes. One such way would be to engage with the bidding process for the different projects being funded to ensure that the contractors do qualify and are of a high corporate governance standard. This is mostly applicable for the Eastern and Southern SSA regions which portrayed a positive relationship during crises periods. Efforts to stimulate economic performance through foreign aid for the Central and Western regions may need further investigation as it appears that such aid has no effect during crises periods.