The impact of foreign aid on investment, growth and the exchange rate in West Africa

Since the last two to three decades, the economic performance of the African countries has been the focus of global attention. While other developing countries that share similar characteristics are beginning to emerge, Africa is yet to 'take off'. At the regional level, the North and Southern regions have made some progress but West Africa in spite of its deep integration has barely managed to outperform the East and Central regions.

This thesis focuses on the investigation of the relationship between foreign aid and economic performance in West Africa. Using annual data from 1975 to 2005, it examines the impact of foreign aid on private investment, growth, the real effective exchange rate, as well as the nature of the relationship between external debt, private investment and growth in Nigeria.

The first of the main findings of the thesis is that the impact of foreign aid on private investment and growth in West Africa depends on the type of aid. Also, the effect of aid uncertainty on private investment cannot be attributed to aggregate aid, as multilateral aid does not appear to be volatile. Second, the thesis by splitting aid into multilateral and bilateral components, addresses a major issue in the aid-growth debate - the bi-directional causation between aid and growth. Third, based on two recent pooled estimation techniques - the pooled mean group estimator (PMG) and the dynamic fixed effects (DFE), the thesis examined the effect of foreign aid inflows on the real exchange rate - the so-called 'Dutch Disease' hypothesis, relying mainly on the floating aspect of the real effective exchange rate. Finally, using the ARDF approach, we find that official debt of around 40 percent of GDP is not inimical to growth for Nigeria.