Foreign Aid, Governance and Economic Growth in Sub-Saharan Africa: Does One Cap Fit All?

Sub-Saharan Africa (SSA) has been receiving foreign aid for many decades; nonetheless, it ranked among the poorest regions in the world. This study revisits the aid effectiveness debate quantitatively by investigating the relationship among foreign aid, governance and economic growth in SSA using more recent data from 1996 to 2012 and testing for heterogeneity in aid recipient countries. Fundamental questions raised in this study are: does aid work the same way in all regions and group of countries in SSA? Do governance and size of aid matter? Employing the system generalized methods of moments (system GMM) technique, results show that foreign aid has an insignificant negative relationship with economic growth in aggregate SSA. However, one cap does not fit all in SSA as heterogeneity across aid recipients has implications for aid effectiveness. Moreover, governance and size of aid complement each other to improve growth in SSA. This study has been able to show quantitatively that a general policy for countries in SSA is not good enough for aid effectiveness; donors should increase the size of aid, and governance in recipient countries must improve. In conclusion, heterogeneity, governance and size of aid matter for aid effectiveness in SSA.