Foreign assistance and economic growth in Sub-Saharan Africa.

The effectiveness of foreign aid on economic growth is a much debated topic on the field of Development Economics. As such, a huge body of literature is available with the vast majority concluding that aid contributes in increasing growth (Hansen and Tarp, 2000); although some scholars, amongst them Boone (1996), Osaka (2003), and Moyo (2009) hold a different and an opposite view. Aware of the fact that Sub-Saharan Africa is the poorest region in the world (Chen and Ravallion, 2012), (World Bank, 2012), and that Sub-Saharan Africa is the region which is the biggest beneficiary of aid (Lancaster, 1999), (OECD, 2010); but nevertheless aid in this region seems not to produce the expected results; this paper focuses, firstly, on whether foreign aid through savings and investment could contribute in enhancing economic growth in Sub-Saharan Africa countries. Secondly, diverging from the previous literature, we introduce democracy and corruption (corruption-control) as new control variables that might have an effect on the performance of foreign aid on economic growth in Africa, by questioning whether the impact of foreign aid on growth in Sub-Saharan Africa is a positive function of the environment (democratic and corruption free) where aid is delivered. Regarding the results, we find evidence which seems to suggest that aid can contribute in increasing economic growth in Africa by impacting positively on savings and investment. Further, the results show a mixed picture in as much as a democratic and a corruption free environment seems to positively determine the performance of foreign aid on economic growth in Sub-Saharan Africa through investment, whereas via savings the results do not appear to offer conclusive evidence one way or the other.