Foreign Aid and Economic Development in Sub-Saharan Africa: The Mediating Role of Governance Effectiveness

Abstract

This paper aims to analyse the effect of foreign aid, moderated by governance
effectiveness variables, on economic development in sub-Saharan
Africa. Data on foreign aid, GDPand governance variables were from the
World Bank governance archives covering five sub-Saharan African countries.
The paper applied the ols and fixed effect panelmultiple regression
analysis. From the first analysis, findings show a negative link between external
aid and GDP per capita in sub-Saharan Africa. In the second analysis
with governancemoderating variables, findings indicate a positive relationship
between foreign aid and GDP with rule of lawproviding a positive
boost toforeignaidand GDP growth, but corruption and governance have
a negative relationship with economic growth. The paper highlights policy
implications for the need to bridle corruption and to strengthen governance
institutions to enable foreign aid to function effectively toward economic
growth. The paper suggests an agenda for further research to apply
more governance institution variables in further analysis of aid effectiveness
in sub-Saharan Africa economic growth.