Foreign Aid And Economic Growth Nexus: Empirical Evidence From East African Community Countries

This study uses system generalized method of moments (GMM) to examine foreign aid and economic growth nexus in East African Community (EAC) countries for the period 1981 to 2014. It first investigates if foreign aid causes economic growth. It then assesses whether the level of investment in a country matters or not for foreign aid to lead to economic growth. Finally, it tests for the direction of the relationship between foreign aid and economic growth. The results reveal that foreign aid has a positive and significant effect on economic growth; however, this effect decreases in marginal economic growth and is a negative function of the level of investment. They also show that the relationship between foreign aid and economic growth is unidirectional. The above findings suggest that directing foreign aid to EAC countries with considerably lower investment levels will lead to economic growth. The study; therefore, recommends that in order to mitigate the decreasing effect of foreign aid on marginal economic growth, foreign aid should be invested in productive activities such as research and development, provision of new skills, and acquisition of relevant capital to improve both quantity and quality of domestic output.