The role of the EU’s ODA in fostering economic growth in Sub-Saharan African countries

Abstract

The aim of this thesis is to analyze the role of the European Union’s (EU) Official Development Assistance (ODA) in fostering economic growth of the Sub-Saharan African (SSA) countries. The EU was selected as the donor given that it is the major aid contributor to this region.

Aid, in the form of ODA, and its effectiveness have attracted considerable attention, both in terms of academic publications and policy debate. The emerging consensus seems to be that ODA should lead to economic growth if utilised well, but this might not be the case due to several factors including the governance situation in the recipient country.

This thesis tests the hypothesis that there is a positive relationship between the level of EU ODA and economic growth, keeping other factors that affect growth constant in a sample of 20 SSA countries. Besides assessing the theoretical relationship between economic growth and ODA, this thesis considers also other important elements, including the quality of ODA, aid effectiveness and aid harmonization, as well as the effects on economic growth of political stability, macro-economic stability and disaster proneness in the recipient country.

In testing the main hypothesis of the thesis, a panel data regression approach is utilised. A chapter is dedicated to explain the methodology, the regression model and the sources of data. In brief, the panel method uses information for each country and for each year covered, thereby obtaining a large number of data points and increasing the degrees of freedom. The software package used for this purpose is STATA14.

In order to delve deeper into the results produced by the regression analysis it was decided that some case studies be conducted on a sample of six SSA countries included in the regression. These were chosen to represent the lower end of the income per capita scale and the upper end, such as to determine commonalities and differences between them. Furthermore, to examine whether foreign aid has an adverse or positive impact on the capital accumulation determinants of growth and on per capita GDP growth, this chapter presents a descriptive and empirical assessment on 18 SSA countries, whereby a savings, investment and economic growth equation are carried out in order to assess the impact of ODA. In the economic growth equation, ODA has a positive and significant impact on ODA but with diminishing returns in the long-term. Meanwhile, in the savings equation, ODA has a negative impact on the savings ratio and in the investment equation ODA has a positive impact with a diminishing one in the long-term.

The main conclusions that can be derived from these case studies is that ODA does indeed have a positive impact on economic growth as hypothesized but there may be other factors impacting namely the political and macro-economic stability in the recipient country.