Abstract:

The major justification for foreign aid is its potential to accentuate the level of economic and human development but the experience of the developing countries has critically challenge the ability of foreign aid in achieving its goals. Economic theories hypothesized that foreign aid is necessary to fill the financing or investment gap in developing countries and hereby lift the countries out of poverty trap (Sachs 2005) but despite the large amount of time and resources devoted to development assistance, there still remains a lack of theoretical consensus surrounding the effectiveness of foreign aid. The nexus between foreign aid and growth have been widely discussed in the literature, though there have been mixed findings; while some authors found evidence supporting positive impact of foreign aid on growth (Papanek, 1973; Dowling and Hiemenz, 1982; Gupta and Islam, 1983; Hansen and Tarp, 2000; Burnside and Dollar, 2000; Gomanee et al 2003; Dalgaaar et al 2004; and Karras 2006). Several empirical works also found evidences showing negative impact of foreign aid on growth (Okon, 2012; Brantigam and Knack 2004). Moreso, the third strand of empirical literature found evidences suggesting the fact that aid has no impact on growth (Mosley, 1980; Svensson 1999, 2000; Knack 2001; Brumn 2003; Ovaska 2003; Easterly et al 2004; Djankov et al 2006). A major argument for the dismal performance of development assistance in developing economies is hinged on the claim that growth and development cannot take place in an institutional vacuum. That is, economic maturity and growth require a sound institutional framework; put differently, an inappropriate institutional arrangements and policies in a country can lead to sub-optimal economic performance (temple 1987).