ОБРАЗОВАНИЕ НАУКА И ИННОВАЦИОННЫЕ ИДЕИ В МИРЕ
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"THE IMPACT OF FOREIGN AID ON POVERTY REDUCTION IN
SUB-SAHARAN AFRICA: THE ROLE OF CORRUPTION AND ECONOMIC
GROWTH"
Nigina Shamsiddinova
– WIUT
niginashamsiddinova19@gmail.com
Sherzod Abidov
– WIUT
sherzodabidov@gmail.com
Abstract
This study examines the relationship between economic growth, corruption, and
foreign aid in Sub-Saharan Africa to answer the following research question: What is
the impact of foreign aid on poverty reduction in Sub-Saharan Africa? Panel data from
2010 to 2023 was chosen for the analysis and Ordinary Least Squares regression model
is employed. The independent variable is foreign aid, the dependent variable is poverty
headcount ratio, and the control variables are GDP per capita and the Corruption
Perceptions Index. The outcomes show that foreign aid falls short of its objective of
reducing poverty in Sub-Saharan Africa. Furthermore, reduced corruption decreases
the poverty rate, demonstrating its significance in the successful application of foreign
aid. Finally, it was demonstrated that GDP per capita alone had almost no impact. Three
policy recommendations were made: eliminate corruption, improve control over
finances, and put strategies for sustainable growth into practice.
Introduction
In Sub-Saharan Africa, foreign aid has long been regarded as a vital instrument
for reducing poverty and promoting economic growth. Billions of dollars have been
given to Sub-Saharan Africa to improve their living standards. However, there is
ongoing discussion regarding the impact of foreign aid, with some studies
demonstrating that it lowers poverty while others explain that its objectives are not met
due to corruption and mismanagement (Krasniqi and Demukaj, 2021). Aid money may
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be mismanaged or stolen off by corrupt authorities in many Sub-Saharan nations due
to weak institutions and bad governance (Bethencourt, 2024). Although some scholars
believe that economic growth is the main driver of poverty reduction, other studies
have demonstrated that growth is insufficient on its own (Mogess et al., 2023).
This study aims to investigate how economic growth, corruption, and foreign aid
contribute to the poverty reduction in Sub-Saharan Africa. Current research will use
Ordinary Least Squares (OLS) regression to examine the effects of foreign aid on
poverty reduction, using corruption and economic growth as control variables and will
answer the following research question: What is the impact of foreign aid on poverty
reduction in Sub-Saharan Africa?
Liteature Review
Foreign Aid and Poverty Reduction
This still remains a controversy whether foreign aid has a beneficial impact in
stimulating development. According to some research, aid boosts welfare and
economic growth, whereas other studies point out corruption-related inefficiencies. A
meta-analysis of aid-growth research was done by Mekasha and Tarp (2019), who
came to the conclusion that aid makes a modest yet beneficial impact on GDP growth,
which in turn lowers poverty. Sumner and Kirk (2014) discovered that when foreign
aid is directed towards economically viable sectors like infrastructure and agriculture,
it helps create additional job places in Sub-Saharan Africa. However, according to
Benziane (2023), aid only stimulates economic development when institutions are
robust, highlighting the significance of governance. Furthermore, Young and Sheehan
(2014) showed that, when institutional quality is taken into account, aid inflows do not
significantly correlate with growth. Ijaiya (2015) concludes that because of a high level
of corruption and inadequate resource management, foreign aid has little to no impact
on reducing poverty in Sub-Saharan Africa.
Corruption and Poverty Reduction
ОБРАЗОВАНИЕ НАУКА И ИННОВАЦИОННЫЕ ИДЕИ В МИРЕ
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According to Bethencourt (2024), aid improves governance in economies with
effective management but encourages corruption in environments with insufficient
institutional frameworks. Krasniqi and Demukaj (2021) highlight that foreign aid has
harmed developing nations more than it has helped them by decreasing the quality of
their institutions and their capacity to mobilize their own resources, as well as by
fostering corruption and rent-seeking behavior. Andersen et al. (2020) discover that
high levels of foreign assistance are associated with higher deposits stored in offshore
bank accounts, suggesting that aid may also result in elite capture. Moreover, De la
Croix and Delavallade (2014) state that it appears that more aid flows to more corrupt
countries rather than less corrupt ones. Finally, after analyzing aid inflows and
corruption levels in Sub-Saharan Africa, Handley et al. (2009) discovered that
increased corruption makes aid less effective and produces worse economic results.
Economic Growth (as GDP per Capita) and Poverty Reduction
According to Kouadio and Gakpa (2022), economic growth is regarded as one of
the primary forces behind the decrease of poverty and the enhancement of living
standards in emerging nations. Wu et al. (2024) found that restoring sustainable
economic growth is a top goal for Sub-Saharan Africa in order to reduce poverty and
enhance living conditions for its citizens. However, Abate (2022) argues that economic
growth is constrained by income inequality and ineffective redistribution measures and
has little immediate effect on reducing poverty. Furthermore, growth alone, according
to Mogess et al. (2023), is insufficient to reduce poverty and inequality in Africa
quickly enough because African economies' industrial bases must be strengthened and
efficient higher education institutions must be established that can meet the demands
of a developing continent. Saidi et al. (2023) conclude that if Sub-Saharan African
nations have stable governments and successful governance reforms, GDP growth may
be beneficial.
ОБРАЗОВАНИЕ НАУКА И ИННОВАЦИОННЫЕ ИДЕИ В МИРЕ
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Data and Variables
This study investigates how Foreign Aid and Corruption affect poverty reduction
in Sub-Saharan Africa. The research is based on panel data from nine Sub-Saharan
countries from 2010 to 2023. The data was acquired from the World Bank, OECD and
Transparency International to ensure accuracy and reliability. The data is formatted as
panel data, with observations made for each country over a fourteen-year period, for a
total of 126. This enables the analysis to account for both cross-country and time-series
variations in assessing the aid's impact.
Table 1. Definition of variables
Variable Name
Definition
Poverty
Headcount Ratio
% of population living below $2.15/day (2017
PPP), dependent variable
Foreign Aid
Net Official Development Assistance (ODA) as
% of national income, independent variable
Corruption
Perceptions
Index
(CPI)
Perceived corruption level (0 = high corruption,
100 = no corruption), control variable 1
GDP per Capita
Economic output per person (in USD), control
variable 2
Table 2. Descriptive statistics
Variable Name
O
bs
Mean
Std.
dev
Mi
n
Max
Poverty
Headcount Ratio
1
26
40.143
74
19.875
97
15.
4
80.227
78
ОБРАЗОВАНИЕ НАУКА И ИННОВАЦИОННЫЕ ИДЕИ В МИРЕ
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Foreign Aid
1
26
5.7638
81
5.3529
02
0.2
34
22.517
Corruption
Perceptions Index
(CPI)
1
26
38.285
71
12.849
81
18
65
GDP
per
Capita
1
26
5817.8
81
5524.8
63
1031
18846
In the case of Poverty Headcount Ratio, we can observe a high standard deviation
of 19.9, indicating that some countries are significantly poorer than others. It can also
be proven by wide range of 15.4 to 80.2. In addition, the mean value of this ratio is
40.1, which shows that 40% of population in Sub-Saharan Africa live below $2.15/day.
A large range and a high standard deviation of 5.4 are also present in the case of foreign
aid, indicating that some nations got significantly more aid than others. Additionally,
the Corruption Perceptions Index, which ranges from 18 to 65, shows various levels of
corruption. The average value across countries was 38.3, indicating a significant degree
of corruption. Values of GDP per capita range from 1031 USD to 18846 USD, with a
standard deviation of 5524.9 USD, demonstrating a significant disparity in the
countries' levels of economic development.
Econometric model
The study uses the OLS method to determine the impact of foreign aid and
corruption on poverty:
𝑃𝑜𝑣𝑒𝑟𝑡𝑦
𝑖,𝑡
= 𝛽
0
+ 𝛽
1
𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐴𝑖𝑑
𝑖,𝑡
+ 𝛽
2
𝐶𝑜𝑟𝑟𝑢𝑝𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑐𝑒𝑝𝑡𝑖𝑜𝑛𝑠 𝐼𝑛𝑑𝑒𝑥
𝑖,𝑡
+ 𝛽
3
GDP
per
Capita
𝑖,𝑡
i
: Country
t
: Year (2010-2023)
Poverty headcount ratio is a dependent variable that shows which percent of
population is living below $2.15/day at country
i
at time
t
. Foreign Aid is an
ОБРАЗОВАНИЕ НАУКА И ИННОВАЦИОННЫЕ ИДЕИ В МИРЕ
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independent variable thar demonstrates Net Official Development Assistance as % of
national income in country
i
at time
t
. Corruption Perceptions index is a control
variable that indicates the corruption level in country
i
at time t. GDP per Capita is
control variable that shows economic output per person in USD in country
i
at time
t
.
Results
Foreign aid has a significant coefficient of 2.91 in Model 1, meaning that for every
percentage increase in foreign aid, the poverty rate rises by 2.91, while other variables
remain constant. Following the addition of the control variables GDP per capita and
the Corruption Perceptions Index, the coefficient in Model 2 remained significant but
slightly declined to 2.83. These findings imply that foreign assistance is not decreasing
poverty but rather may be making it worse, which is entirely consistent with the
research conducted by Ijaiya (2015), who found that foreign aid has little to no effect
on improving poverty in Sub-Saharan Africa due to a high degree of corruption and
poor resource management. After adding control variables, the standard error increased
from 0.17 to 0.35, suggesting a little bit more variability in the estimate. This is
anticipated when additional variables are put into the model. A negative coefficient of
-0.64 for the Corruption Perceptions Index indicates that for every unit increase in the
CPI (which means less corruption), there is a 0.64 percent reduction in poverty, which
shows that lower corruption significantly reduces poverty. This is supported by the
study that was made by Handley et al. (2009), which found that greater corruption
reduces the effectiveness of aid and results in worse economic outcomes. Since the
standard error of 0.127 is low, the Corruption Perceptions Index estimate is accurate
and consistent across countries. In this model, GDP per capita has no noticeable effect
on poverty because its coefficient of 0.000155 is near to zero. This implies that poverty
reduction in Sub-Saharan Africa countries is not always a direct result of
solely economic growth. This is backed by earlier studies by Mogess et al. (2023),
which found that economic growth is not enough to decrease poverty and inequality in
Africa. Additionally, another study by Abate (2022) demonstrated that economic
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expansion has no immediate impact on poverty reduction and is limited by income
disparity and ineffective redistribution policies. Foreign aid alone accounts for 61.4%
of the variation in poverty, according to Model 1's R squared value of 0.6139. In Model
2 the R squared value is 0.7645, which shows that the addition of control variables in
Model 2 improves the model's ability to explain the variance in poverty ratio. Although
F-statistic in Model 2 is lower than in Model 1, indicating that the additional variables
make the model more complex, the model is still very significant. The decrease in F-
statistic reflects how complex poverty dynamics are.
Table 3. The estimated models
Variables
Model 1
Model 2
Foreign Aid
2.909241
2.834785
(0.17105)
(0.3543881)
Corruption
Perceptions
Index
(CPI)
-0.6404991
(0.1272752)
GDP per Capita
0.000155
(0.0003606)
constant
23.37522
47.42455
(1.249081)
(3.442229)
R
squared
0.6139
0.7645
F-statistic
289.28
186.56
N
126
126
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Conclusion
This study investigated the relationship between foreign aid, corruption, and
economic growth in Sub-Saharan Africa in order to address the following research
question using an Ordinary Least Squares regression model: What is the impact of
foreign aid on poverty reduction in Sub-Saharan Africa? The results demonstrated a
positive relationship between poverty and foreign aid, providing evidence that if
foreign aid is not well managed, it may not achieve its claimed goal of alleviating
poverty. In addition, the study found that poverty outcomes are significantly influenced
by corruption, which is a key factor that weakens aid effectiveness. This model also
found that GDP per capita had no statistically significant impact on poverty, which
suggests that economic growth alone is insufficient to reduce poverty in Sub-Saharan
Africa.
Policy Recommendations:
1)Aid-giving countries need to strengthen their control of the funds.
2)To make effective use of the aid, countries must lower their levels of corruption.
3)Strategies for sustainable growth that enhance social welfare and income
distribution should be the main emphasis of policymakers.
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