An Empirical Study of the Zimbabwean Case
FEATURED PAPER
By Tasiyana Siavhundu
Gweru, Zimbabwe
ABSTRACT
The foreign aid – economic growth controversy is antique and remains vague as contemporary empirics still give mixed conclusions. Being one of the perennial beneficiaries and dependants of foreign aid, Zimbabwe has a stake in the foreign aid – economic growth debate. Like many other developing countries, Zimbabwe has been receiving continuous flow of foreign aid. Ironically, the nation continues to struggle economically and there seems to be no clear evidence on whether or not such aid has been impacting on Zimbabwe positively. Employing the OLS methodology and using the 26-year annual time series data from 1991 to 2016, this study sought to empirically establish the specific relationship between foreign aid and economic growth in Zimbabwe. Results of the study revealed a significant negative impact of foreign aid on economic growth in the short-run. The study recommends, among other possible policy remedies to Zimbabwe, the establishment of strong institutions, avoiding dependency on foreign aid through well-structured domestic resource mobilization initiatives, proper engagement of the donor community as well as accurate channeling of foreign aid resources to productive and growth enhancing economic sectors.
Key Words: Cointegration, Economic Growth, Foreign Aid, OLS, Zimbabwe
Foreign aid, often referred to as Official Development Assistance (ODA) consists of resource transfers from the official sector, in the form of grants and loans at concessional financial terms, to developing countries (Moreira, 2005). Promotion of economic growth or development as well as welfare of developing countries has been defined as the prime objective of foreign aid (Moreira, 2005; McMillan, 2011; Mafuso and Moyo, 2017). Most orthodox growth theories in economics prove the importance of foreign aid in spurring economic growth although a few antagonistic theories are also available.
The relationship between foreign aid and economic growth has been explained with mixed assertions in both theoretical economic literature and empirical studies. McMillan (2011), for instance, identifies a three-fold taxonomy of the aid-growth nexus: positive aid-growth correlation, negative aid-growth correlation and conditional aid-growth correlation. Olaniyan (1996) suggest that foreign aid, in conjunction with foreign investment, the expansion of foreign trade as well as the application of technology are expected to play leading roles in the process of economic growth and this is consistent with McMillan’s positive aid-growth correlation. Negative aid-growth correlation, on the other hand, relates to the anti-aid philosophy where foreign aid is regarded as having no effect, if not even detrimental to economic growth. Conditional aid-growth correlation represents the school of thought where aid can be effective or ineffective depending on certain donor conditionalities and country circumstances (McMillan, 2011). For instance, despite foreign aid’s potential to positively contribute to economic growth of any country, the existence of a conducive business environment and favourable institutions mater.
The existence of foreign assistance has been on the global scene as it has been in existence since the creation of national states and republics (Abouraia, 2014). Nyoni and Bonga (2017) suggest that foreign aid is one of the most important sources of capital for most developing countries. World Bank, in various reports of Sub Saharan African economies from early 1980s up to 2000s, has emphasized the increase in foreign aid as an important tool in remediating poverty and ensuring economic prosperity in African countries (Albiman, 2016). However, Moyo and Mafuso (2017) are of the view that foreign aid to Africa has generally benefited the ruling elites, enabling and perpetuating corrupt governments’ hold on power, thereby entrenching the pervasive under-development that has ravaged the continent.
Zimbabwe is among many nations that have been priority areas for donors and whose dire need for aid persists. Attempts for Zimbabwe to exclusively achieve growth objectives through domestic resource mobilisation are currently impractical. Since its independence from the British colonial rule in 1980, net ODA received by Zimbabwe maintained an uptrend until 1992 when the trend reversed. Figure 1 below depicts net ODA received by Zimbabwe from its birth in 1980 to 2016.
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How to cite this paper: Siavhundu, T. (2020). Foreign Aid – Economic Growth Nexus: An Empirical Study of the Zimbabwean Case; PM World Journal, Vol. IX, Issue IV, April. Available online at https://pmworldlibrary.net/wp-content/uploads/2020/03/pmwj92-Apr2020-Siavhundu-foreign-aid-economic-growth-nexus.pdf
About the Author
Tasiyana Siavhundu
Gweru, Zimbabwe
Tasiyana Siavhundu is a member of Project Management Zimbabwe (PMZ) with vast qualifications and experience in Project Management, Economics, Taxation as well as Investments and Portfolio Management. He is a holder of a B.Sc. Honours Degree in Economics, Master of Commerce Degree in Economics, Post-Graduate Diploma in Project Management, Executive Certificate in Investments and Portfolio Management, Advanced Certificate in Taxation and many other qualifications.
Tasiyana has worked both in the private and public sectors in Zimbabwe. He is now employed as a Revenue Officer with the Zimbabwe Revenue Authority (ZIMRA). He is very passionate about research work and has interests in the fields of Economics (particularly Public Economics), Project Management and Taxation.
Tasiyana Siavhundu can be directly contacted by email address: tsiavhundu@gmail.com
