Effect of aid in Sub Saharan Africa Meili Fortunee Tuyisenge Supervisor

Effect of aid in Sub Saharan Africa
Meili Fortunee Tuyisenge Supervisor :Dr Bhandhari RabindraAbstract
This research assesses the effect of foreign aid on factor of growth (Education and Infrastructure). We examine the effect of foreign assistant on human capital and capital investment. We evaluate the effect of aid to education on human capital and aid to infrastructure on capital investment. We use a panel of 36 countries of Sub Saharan Africa over the period of 25 years. Our regression result shows that there foreign assistant is positively and significantly in the sector of education, however the effect of aid for infrastructure has a less positive impact in countries that have had war than stable countries.

Table of Content
Introduction
4
Historically Background of foreign Aid in Sub Saharan Africa 5
Literature review
6
Methodology and model estimation 8-12
Discussion and Result 13-16
Conclusion 16
Appendix 19
Reference 19
Acknowledgments 20
Introduction
It has been five decades since the first official development assistance (ODA) was established, and the question of the effectiveness of foreign aid still an unresolved problem. According to the Economist Foreign aid can be defined as monetary transfer from one country to another. Normally, foreign aid can be loan or grant. When it is a loan, it can be in a form of soft loan or hard loan. Soft loan means that repayment requires local currency, while foreign currency requires hard loan.1There are many studies that have been conduct on the macroeconomics effectiveness on aid, but contrary results have been reported. These studies show only the negative effect of foreign aid in developing countries but the ignore the benefit of aid in countries that had civil war and famine (Easterly 2008, Dambisa Moyo 2009). (2)
In trying to answer the question about the effectiveness of aid in developing nations, most of researches put a lot emphasis on the impact of aid flows on poverty and growth. However, there is few empirical evidence of the effect of foreign assistance on factors of growth of developing countries. This paper seeks to analyses the ways in which foreign aid can be more effective in Sub Saharan Africa.

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Sub Saharan Africa has been the recipient of foreign aid in the last decades, yet it has displayed very poor economic performance. Different Factors that have contributed to this poor performance include corruption, lack of resources to finance investment and land reform (UNECA 2006).(3). Moreover, more than $2 trillions of foreign aid has been transferred from developed countries to developing countries over the past fifty years –Africa being the largest recipient. (Dambisa Mayo 2009).(4) The main objective of this research is to test whether if the increase in foreign assistance has improved the factors of the economics growth of Sub Saharan Africa. In order to answer this, we will test the hypothesis by taking into consideration the impact of aid on Education and Infrastructure The choice of these variables mainly due to the facts that education and infrastructure are two factors that contribute to the economic growth of country.

Our hypothesis of this research that foreign assistance would have a positive impact on Education and infrastructure in countries that have experience civil war. Our hypothesis come from the facts that some sub Saharan Africa countries that have experience wars had more challenges in these two sectors (Education and Infrastructure)
To test our hypothesis we have used 36 countries of Sub Saharan Africa countries over 25 years. We will use the data on aid from the World Bank to a) evaluate the effect of education aid on human capital and b) assess the effect infrastructure aid on capital investment. The paper is organized as follows: section 1 provide a Brief history of foreign aid in Sub- Saharan Countries, a brief literature review on the impact of foreign assistance on education and infrastructure, is considered in section 3 outlines methodology and model estimations, section 4 discuss the data. Conclusion in section 5
1. Historically Background of foreign Aid in Sub Saharan Africa.

The tale of foreign aid in Africa began in the 1960s. During this period $100billion in aid had been transferred to Africa. The Reason behind these funding was to develop industrial projects such as road and railways. The existing view was because these projects had a long term benefits (for instance financing infrastructure projects such as railways and roads), and they were unlikely to be finance by private sector.

By the end 1965, when a half of the Continent had independence, Africa had amassed around $950 millions of foreign aid. Ghana, which had independence from Britain in1957, had taken $90 million of aid inflow. Zambia, Kenya, and Malawi won independence in 1960 received roughly $315 millions of foreign assistant. The numbers of bridges, airports that foreign assistant help to construct remained unclear, because in 1970s there was not much infrastructure. In1980s, Both IMF, and World Bank set an aggressive aid to establish two initiatives; structural adjustment and Enhanced structural adjustment felicities are examples of these. As a result, developing countries received money in the form of budgetary support, and in return they agreed to accept the free market solutions to development. This would limit the role of state, and reduce service workforce. For instance six African countries- Benin, Mali, Uganda, Guinea, Madagascar, and Central Africa – Their civil service workforce went down to 10 percent.

In summary, donors and development agencies have continued to follow the aid-based model even when aid is not working on the continent. Given current economic status of Africa is hard to see how aid has been useful to in the continent.(Dambisa Moyo 2009).

2. Literature review
The literature review of the effectiveness of aid to education and infrastructure still very new. Due to the limited literature on infrastructure and education aid, foreign assistance may be viewed in two appositive perspectives: Those who analyze the economic outcome of aid as economic growth and those who treat education and infrastructure outcome as dependent variable. Hypothetically, to be counted effective education and infrastructure foreign aid must have positive impact on a country’s economy (Christensen 2016).

Those who view aid as an economic outcome of growth often use the increase in gross domestic product to measure the effectiveness of foreign assistant, this suggest that education and infrastructure foreign aid should increase the economic growth as it provide human and capital investment (Asieduand Nandwa 2007;Pritchett 2001).

Most recent researches have examine the impact of foreign aid on the education sector, these studies were done by looking at the effect of education on the GDP.Most often, school enrollment were dependent variable for these researches because they associated to the MDGs (Christensen et al .2010). The study that was done by Michealowa and Weber (2007,2008) and Dreher et al. (2008) find there was a positive correlation between foreign aid for education which suggest that foreign aid had a positive impact of primary school enrolment.

In addition, most research have also fund that there is a relationship between infrastructure and public investment. This study indicates that infrastructure aid increase public investment in recipient countries (Lensik and Morrissey 1999). For examples, empirical research of 39 developing countries shows that foreign assistance to recipient countries finance investment and that an increase in 0.1 % of aid to income ratio leads to 0.86% increase in investment ratio (Levy 1987). Moreover, a research that was conducted by Gyimay-Brempong and Racine (2010) to examine the effect of foreign assistant on physical investment in the third world nation prove that aid had a positive and significant effect on capital investment. Although, this positive relationship between aid and capital investments depends on policy environment and combination of aid measure.
However, there are a study that shows the existence of dissimilarity in the relationship between aid and public investment. For instance, Easterly (1999) point out that 88 countries that received aid, foreign assistance had a negative effect on public investment in 36 countries, a positive impact 23 countries and an insignificant effect on 29 countries. Nevertheless, these results are uncertain because Easterly used a simple model of ordinary least square (OLS) without permitting source of potential bias.

3.Methodology and model estimation
This section examines the effectiveness of aid in improving human and capital investment. We use a large sample of 36 sub Saharan African countries over the period of 25 years. The main source of the data was drawn from African development indicators of the World Bank. The first part of this section discusses the effect of education and infrastructure on economic development and provides graphical evidence on the relationship between aid and Capital investment and human Capital
3.1 The role of Education and Infrastructure on Economic Development.

Education and infrastructure are associated with the long-term economic performance of a country. According to Human Capital Approach, a good quality of education increases the overall skills and abilities of workforces. Moreover, Availability of good infrastructures has an influence on the development of country. Therefore increasing aid in the sector of education and infrastructure will boost the growth of Sub Saharan Countries.
3.1.1 A) Correlation between aid for infrastructure and Capital Investment.

In most Third nation countries, Infrastructure such as roads, airports, hydroelectric and so forth are founded by foreign assistance. In this developing countries, domestic saving is used to maintain infrastructure while new building is funded through foreign aid.(Rioja 2003). In figure 1 shows the correlation between infrastructure aid and capital investment (which is measure in gross capital formation). In the far -right are countries that receive more aid such as Guinea Bissau, Gabon, Senegal, Lesotho and etc. The figure shows is a positive relationship between foreign assistance for infrastructure and capital investment. Thus, with the exception Sudan that receives more foreign assistance for investment.
Figure 1: Gross capital formation and infrastructure aid

3.1.2 Correlation between aid for education and human Capital
In Sub Saharan Africa, Foreign Assistant that is assigned to promote universal education seems to be more successful with regards to the evolution of primary school completion rates. Figure 2 exhibit the relationship between primary school enrolment and aid to education. There is positive relationship between aid to education and primary school completion; this means that foreign assistant goes toward countries that have lower completion of primary school. This is accordant with MDG objective of achieving universal education.

Figure 2:Primary school enrolment and Education aid

3.2 Model estimation
This section assesses the impact of foreign assistant on factors of growth to see if they are significant.

3.2 A) Modeling the relationship between infrastructure aid and capital investment.

Our general model of aid effectiveness within the context of investment is as fallow:
(1)
Where invest refers to investment of countries, Mit is variables of interest (such infrastructure and gross capital formation), Xit present the other exogenous variables.

From general model above, the specific model we estimate is:

Where invest refers to the investment which is measured by the gross capital formation, aidifra is aid to infrastructure, GDP per capital (gdppc) and the saving rate (saving)are source of internal funding while (fdi) refers to foreign investment.(cor) capture the corruption, is counted in order to report the effect related to the quality of institution. Time effects (ti)are also considered in the regression to measure the factors that may change in all countries. The OLS estimator was used to estimate the above model.
3.2 B) Modeling the relationship between Education aid and human capital
The ordinary least squared is used to estimate the effectiveness of aid on human capital. Our model is as follow:

Where Edut refers he primary completion rate. Our explanatory variable include teacher- student ratio(ts), aid education(aidedu), GDP per capital(gdppc )and corruption (cor). While including the corruption, we also restraint the potential of foreign aid mismanagement and institutional quality. In the same way, we added the teacher – student ratio to restraint the potential effect of the class size on the completion of primary education. In fact, lower primary completion rate is caused by a low number of teachers per students. In order to compare countries that had civil wars and stable countries, we add to the regression a dummy conflict.
4 Discussions and Result
We start by presenting the mean which helps us to compare a) the amount of foreign assistance in countries that have civil wars and stable countries b) The level of endowment in terms of human capital and capital investment between countries that have had conflict and stable countries. Then, we show the direct effect of foreign assistant assigned for infrastructure on capital investment. Finally, we present the regression results of the direct effect of foreign assistant assigned for education on human capital.

The result that was drawn form table 2, indicate that infrastructure aid is mainly assigned to countries that have had wars while those countries indicate a poor performance in terns of human capital and capital investment. Furthermore, based on the T test, there is no significant difference between states that have had wars and stable countries in terms of the amount of foreign assistant received for investment and human capital.

Table 2 T- test of the sample mean between countries that have experience conflict and stable countries
Gross capital formation
Primary enrollment
Infrastructure Aid in GDP
Education Aid in GDP
Variables
Countries that have experience war Stable countries
Countries that have experience war
Stable countries
Countries that have experience war
Stable countries
Countries that have experience war
Stable countries
Mean 16.683 21.257 43.748 59.041 0.0248 0.0169 0.0141 0.0129
Difference 4.573 -0.0078 -0.0011 T-test 5.768 6.332 -2.558 -0.759 Source :Completion by stata plus
4.1 Direct effect of infrastructure aid on capital investment in Sub Saharan
Africa.

For many decades, many African countries have focused on the development of infrastructure as a priority. This is evident when we view at their development plans. However, funding infrastructure remains an unsolved issue. As a result of low domestic saving, foreign assistant helps to remunerate for the gap between investment and saving. Thus, with respect to the data of Sub Saharan Africa countries presented in this research, infrastructure aid does have a positive impact on capital investment. In other words a 10 percent in foreign assistant ameliorate the level of infrastructure by (0.54) ( Table 3 column 1).Furthermore, our result indicate that 10 percent increase in FDI raise the level of infrastructure by (0.25) percent. In the same way, there exist a negative correlation between investment in infrastructure and inflation. This results supports the finding of Jacquet and Charnoz (2003) that explain the fact that constructing infrastructure is a part of the reconstruction process. The goal of attracting private capital for financing infrastructure is essential with the respect to reconstruction. In this consideration, foreign aid and FDI assist to the restoration of public buildings, transport service, telecommunication infrastructure, and so forth.

When the political environment is taken into consideration, the estimates indicate that foreign assistant for infrastructure has a negative effect to infrastructure in countries that have had war, opposite to the stable state remarkably, 10 percent increase of foreign assistant leads 0.8 percent decrease in the level of infrastructure (Table3: column 3). In summary infrastructure aid has a positive impact on capital investment in Sub Saharan Africa. However, our result shows that this impact may change depending on political environment of a country.

Table 3 Foreign aid and Factors of growth

Source : Computation by Stat plus based on the data of the world Bank
4.2 Direct effect of infrastructure aid on capital investment in Sub Saharan Africa.

Table 3 (column 2) shows the results of the effects of foreign assistant to primary school education on human capital which is measured by primary school completion rate. The outcome indicate that there is a positive impact of foreign assistant for primary school education and primary completion rate. In other words, 10 percent increase of aid leads to 5.9 percent increase of primary school completion rate. However, we can see that there is not much difference between the primary completion rate in stable countries and countries that have experience war. Therefore the objective of aid education in countries that have had countries is to get students to return to school and teaching them basics things.

5. Conclusion
The problem of foreign aid has been a major concern in the development literature. Some researches have find that there is no correlation between aid and economic growth, others believes that foreign assistant can help to improve factors of growth in Sub Saharan Africa. This has leads to donors to allocate foreign assistance in the sector of education and infrastructure. However, a question that my occurs here, is whether the allocation of aid to the sector of education and infrastructure had the effect on wellbeing. The question becomes more frequent with Moyo’s (2009) argument that foreign assistant is ineffective, thus starting the debate on the issue, however, they are fewer studies that supports this view.

In this sense, this research examines the effectiveness of foreign assistant on factor of growth. We assess how aid for infrastructure and aid for education affect human capital and capital investment in Sub Saharan Africa. We have obtained three main outcomes from the study. First, infrastructure aid is positively and significantly impacts capital investment. Second education aid positively and significantly affects human capital. Finally, our result shows that aid to infrastructure is less effective in the countries that had conflict. Even though the results that we have obtain shows that aid is effective in sector of education and infrastructure in Sub Saharan Africa, these countries should find ways to reduce the dependency of foreign assistant because in the long run they could have the problem of debt accumulation.

Appendix
List of countries
Countries that had war Stable countries
Angola
BurindiChad
Central Africa Republic
Congo
Congo Dem Rep
Guinea-BisseauMali
Niger
Rwanda
Liberia
SundanUganda
Sierra LeonZimbabwe
Benin
BostwanaBurkina Faso
CamerromEthiopia
Gabon
Gambia
Ghana
Guinea
Kenya
Lesotho
Madagascar
Malawi
MaurataniaMozambique
Namibia
Nigeria
Senegal
Tanzania
Togo
Zambia
Reference
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Easterly, W. (1999). ‘The Ghost of the Financing Gap: Testing the Growth Model Used in the International Financial Institutions’. Journal of Development Economics, 60(2): 423–38.

Easterly, W. (2007). ‘Was Development Assistance a Mistake?’. American Economic Review, 97: 328–32.

Easterly, W. (2008). Reinventing Foreign Aid. Cambridge: MIT Press.

Jacquet, P., and O. Charnoz (2003). ‘Infrastructes, Croissane et Réduction de la Pauvreté’. Le Forum franco-vietnamien, 6-13 September.

Gyimah-Brempong, K., and J. S. Racine (2010). ‘Aid and Investment in LDCs: A Robust Approach’. The Journal of International Trade & Economic Development, 19(2): 319–49.

Michaelowa, K., and A. Weber (2004). ‘Aid Effectiveness Reconsidered – Panel Data
Evidence for the Education Sector’. HWWA Discussion Paper 264. Hamburg:
Hamburgisches Welt- Wirtschafts-Archiv.

Michaelowa, K., and A. Weber (2007). ‘Aid Effectiveness in the Education Sector: A
Dynamic Panel Analysis. In S. Lahiri (ed.). Theory and Practice of Foreign Aid,
Amsterdam: Elsevier, 357–85.

Michaelowa, K., and A. Weber (2008). ‘Aid Effectiveness in Primary, Secondary and Tertiary Education’. Paper commissioned for the EFA Global Monitoring Report 2008, Education for All by 2015: will We Make it?. Available at:
www.unesdoc.unesco.org/images/0015/001555/155559e.pdf
Moyo, D. (2009). Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa. London: Allen Lane
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UNECA (United Nations Economic Commission for Africa) (2005). ‘Economic Report on Africa, 2005. Addis Ababa: UNECA.

World Bank (n.d.). ‘World Development Indicator
Acknowledgment
I would like to express my appreciation and gratitude to my supervisor for making this research possible, it was honor to work with you. I would also like to express my special of thanks for family.