Foreign aid and Socio-economic development in nigeria

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This study examined the relationship between foreign aid and socio economic developmentin Nigeria. The study seeks to examine the role of institutions in aid effectiveness and socio economic developmentin Nigeria. The study adopted a theoretical framework similar to the Endogenous or New Growth model, as well as; the system generalized method of moments (GMM) technique of estimation was adopted in order to overcome the challenge of endogeneity perceived in the institutions variables and Aid growth argument. It was observed that foreign aid significantly influence Real GDP Per Capita (the proxy for socio economic development) in Nigeria. Also, variables like gross fixed capital formation, rule of law, control of corruption (which are proxy for institutions) and Human capital had a significant effect on -socio economic developmentin Nigeria while labour had no significant effect on socio economic developmentin Nigeria.



1.1Background To Study

Most African countries are characterized by massive poverty, high death rate, slow GDP growth, high population growth rate and increased income inequality, increased absolute poverty rate, low educational standards, low human development index to mention a few. According to development statistics, in Africa, about 1.2 billion people live on less than $1 a day and another 2.8 billion people live on less than $2 a day. This is also a similar case in health as the mortality rate has sky rocketed over the years as declared according to the UNICEF who stated that more than 10 million children die each year from preventable disease such as malaria, polio to mention a few (Emmanuel, 2012; Ogundipe and Ogundipe, 2013). Another scenario in developing countries is that the child mortality rate remains more than 10 times higher than those found in the rich countries and this is as a result of diseases that can be treated easily like dehydration (Todaro and Smith, 2011).

In examining human capital development via education, Africa is in deteriorating conditions. The average child in Nigeria can expect to spend less than 5 years in school, without even considering absenteeism of teachers and lack of resources like books. This is in deep contrast with a child in Europe who is sure to get at least 12 years of schooling. Also, the education gender gap is especially great in developing countries in Africa, where female literacy rates can be less than half of men’s in countries such as Nigeria, Mali, Guinea, Benin to mention a few. Nigeria and even Africa as a whole have been seen to exhibit relatively low levels of income despite the fact that they are heavily populated. Nigeria received just two percent of total shares of Global income in the year 2008. According to Todaro (2011), In the case of income inequality and absolute poverty which is a major topic in development economics, the incidence of extreme poverty is very high as released by the World Bank’s estimate that the share of the population living on less than $1.25 per day is 41.1% in Nigeria. Population growth rate of developing countries especially in Africa continue to grow in leaps and bounds. From 1990 to 2008, population in the low income countries grew at an average of 2.2% per year. The main issue is that there has been a case of heavy debt servicing and it has been observed that most funds in Africa go into servicing debts. (Todaro and Smith, 2011)

Also, literature reviews have shown that during the 80s, averagely, in Nigeria, per capita income fell at an annual rate of 2.2 percent. According to Bakare (2011), Per capita private consumption also dropped by 14.8 percent, import volume rose at an annual rate of 4.3 percent with export volume remaining constant with terms of trade falling by 9.1 percent. Given the high population growth rate, annual real GDP per capita growth rate between 1981 and 1990 was –0.9% which was contrary to East Asia’s performance of GDP per capita growth rate of 6.3% during that period. Still the economic performance of Nigeria did not improve in the early 90s as confirmed that between 1991 and 1993, real per capita GDP was 2.3% annually. In 1994, it still remained negative at -0.7%. Luckily, in 1995, this became positive reaching 1.1% which was still lower than the 8.0% growth rate testified by East Asia. The World Bank classified 74% of the countries of SSA as low income economies while the United Nations Development Programme classified 79% of SSA as low human development countries. Lastly, according to World bank (1998), out of the 41 countries in the world classified as heavily indebted countries by the World Bank and international monetary fund, 80% are in Nigeria (SSA) ( Bakare A.S, 2011).

From the above illustrations, it has been obvious that Africa (more specifically, Nigeria) cannot develop on their own and they need all the help they can get. As a result, foreign aid comes to foreplay. Foreign aid can be defined as all resources- physical goods, skills, technical know-how, financial grants, or loans (at concessional rates) transferred by donors to recipients (Riddell 2007).

The World Bank reports in 2004 showed that there has been a reduction in the amount of foreign aid directed to developing countries on this measure, rich countries reduced their aid contributions from around 0.34% to 0.23% of their output between 1990 and 2002. The reason for this can be attributed to several reasons ranging from economic to political changes (Hopkins

2000, Robinson and trap 2000.). However, the main reason for this “aid-fatigue” can be attributed to the fact that aid has failed to some large extents as there have been reports of corruption and poor administration, with aid management tying up valuable resources in recipient countries (Kanbur, 2000). Some researchers have argued that a large portion of foreign aid flowing into the country is wasted on unproductive public consumption, corruption and inefficiencies and this is as a result of poor institutional quality and bad governance.

1.2 Statement of the Research Problem

Without a speck of doubt, it is seen that foreign aid has failed in Africa and Nigeria and this has been fully backed up by statistics. Despite the different forms of aid, most especially the ODA, Nigeria has not progressed to a meaningful stage of development. As home to a large proportion of the world’s “bottom billion,” Sub-Saharan Africa has attracted substantial amounts of foreign aid over the years. ODA flows to the continent currently stand at around $80 billion per annum and the figure is projected to reach $125 billion by 2015. Over the last five decades, foreign aid to governments in Sub-Saharan Africa amounted to $1 trillion. Ironically, at the same time period, growth of GDP per capita in Africa actually registered a marked decline and was for many years even negative.GDP per capita figures also declined across most of Sub- Saharan Africa asides a few countries. For example, World Bank calculations show that based on the predictions of theories, foreign aid transfers to Zambia, which began in the 1960s, would have by today pushed per-capita income to over $20,000. However, reverse is the case as Zambian income per capita has stagnated at around $600 for years (Farah Abuzeid). This provides a vivid illustration of the failures of foreign aid in Nigeria.

Over the years, according to World Development Indicator (WDI) data, ODA as a percentage of total world’s ODA for Nigeria has increased and yet economic growth rate has not increased. In 1980, 23.392% of total world ODA was pumped to SSA but the economic growth rate was just 1.135% in that year. The percentage increased to 28.577% in 1985 but economic growth rate declined to -1.157% in that same year depicting a negative growth rate. ODA further increased to 29.328% of total world percentage but there was still no positive growth rate as the economic growth rate still was at a negative of -1.565%. This is unlike the story of other countries on the table, say China whose total ODA as a percentage of the world’s total ODA was not as high as that of Nigeria and yet her economic growth rate was higher than that of Nigeria. In China, as the percentage of ODA (Official Development Assistance) increased from 0.190% in 1980 to 2.919% in 1985, economic growth rate increased from approximately 6% in 1980 to 12% in 1985 thus showing that as ODA doubled in its rate, the economic growth rate also reciprocated by doubling too implying that foreign aid in form of official development assistance was effective in accomplishing growth. The irony is that in Nigeria, when ODA reduced to 27.529% of total world percentage, economic growth rate became positive and grew to 1.091%. All these go further to interpret that the as the ODA pumped to Nigerian Countries increased, economic growth rate declined. This shows that aid has not been very effective, at least in Nigeria.

The topic of aid effectiveness has been a subject of debate to many economists and different reasons ranging from economic to social and even, political factors have been given as to the question of why aid has failed. The main or major reason accounted for has been attributed to poor institutional quality and bad governance. In fact, to show the importance of the role of institutions, Keefer end Knack, (1997) said that good governance in the form of institutions is crucial for sustained and rapid growth in per capita income of poor countries. Aid is thought to work best with high quality institution presumably as a part of a capable developmental state (Burnside and Dollar 2000, world bank 1998). According to Dalgaard, Hansen, and Tarp (2004), the deep determinants of a society might play a big role in aid effectiveness and this points to institutional quality. Therefore, we can conclude that institutions have an essential role to play especially in aid administration for socio economic developmentin Nigeria. In other words, good institutions should lead to a well ordered society which would lead to the effective use of foreign aid.

1.3 Research Objectives

The main objective of this research is to examine the relationship between aid and socio economic developmentin Nigeria. However, the other objectives will be listed in subsequent paragraphs below:

  • To examine the effect of foreign aid in Nigeria countries
  • To examine the Role of institutions the aid effectiveness.
  • To explain the effect of institutions on socio economic developmentin Nigeria.

1.4 Research Questions

The research objectives stated earlier necessitated the need for the research questions. Therefore, the research questions that need to be analyzed and answered to are as follows:

  • Does foreign aid have any significant relationship with socio economic developmentin Nigeria?
  • Do institutions have a role to play in aid effectiveness in Nigeria?
  • To what extent have institutions ensured socio economic developmentin Nigeria?

1.5 Research Hypothesis Hypothesis 1:

H0: there is no significant relationship between foreign aid and socio economic developmentin Nigeria

H1: there is a significant relationship between foreign aid and socio economic developmentin SSA.

Hypothesis 2:

H0: institutions would not help in ensuring aid effectiveness in Nigeria

H1: institutions would help in ensuring aid effectiveness in Nigeria.

Hypothesis 3:

H0: institutions have no significant effect on socio economic developmentin Nigeria.

H1: institutions have a significant effect on socio economic developmentin Nigeria.

1.6 Significance of the Study

Socio economic developmentis crucial for any viable country. In fact, the importance or substance of a country is measured by her level of socio economic development. For developing countries, foreign aid has been seen as needed to promote socio economic developmentfor such country. Nigeria is seen as the highest ODA recipient in Africa but the countries within this region are characterized by very low per capita GDP and real GDP growth. Also, the country faces several challenges of political instability and institutional failure. As a result of these challenges, it is seen that foreign aid cannot be very effective in ensuring socio economic development. Moreover, most researches concentrate majorly on foreign aid and socio economic developmentwithout looking at the roles that institutions and policies play in the administration of foreign aid for socio economic development.

Therefore, this study is aimed towards examining foreign aid and socio economic developmentas well as the role of institutions and how they impact foreign aid and socio economic development. This study is also significant in the sense that it would help to give policy recommendations on how foreign aid can be channeled effectively for socio economic developmentin Nigeria.

1.7Justification of Study

The justification for choosing to concentrate on SSA and the specific countries to be included into the sample is based on the conclusions of past studies on aid effectiveness (Wako, 2011). There have been different conclusions on the subject matter. Easterly (2003, 2005) point out that aid has been most ineffective in SSA based on the success of Asia and Latin America. Others, who advocate the (unconditional or conditional) success of foreign aid have also accepted that it has been less effective in SSA (Burnside and Dollar, 2000; World Bank, 1998). Other researchers like Riddell (1999) and Collier (2006) predict that the future playfield of aid is Africa. Kanbur (2000) also shares the idea that SSA is the region where the issues of aid and aid effectiveness remain unsettled yet

1.8 Scope of Study

To ensure proper representation of data, this study would be broadened to some selected countries in Nigeria base on the availability of data. The data gotten would cover a the jonathan administration which is a period of 5 years from 2010 to 2015. The data to be used in the course of this research would be gotten from world development indicators (WDI), Worldwide Governance indicators (WGI), OECD/DAC database.

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