Foreign Aid and the Human Development Indicators in Sub-Saharan Africa

Abstract

The recent literature on aid effectiveness suggests the presence of non-linear effects as well as other country-specific effects in the aid-growth relationship, which may explain the different findings in the empirical literature. We argue that even after correcting for the above, the focus must be on welfare effects of aid in recipient countries since other contemporaneous effects might be involved, that may not be captured in a traditional analysis of the aid-growth relationship. We present some new and exclusive evidence on the effect of aid on indicators of welfare in Sub-Saharan Africa, a region that is said to be the least probable to achieve the Millennium Development Goals (MDGs). Our findings suggest that aggregate bilateral aid does not show a significant effect on the human development indicators and other welfare variables. However, disaggregated aid in the form of sector specific and programme aid do show a significant effect on the HDIs. The article proposes that aid is scaled up but targeted at areas where these are most effective. Moreover, other innovative ways of aid delivery apart from the traditional project and programme assistance need to be considered.