ABSTRACT
This study examined the effect of foreign aid on the economic development of Nigeria. The study adopted qualitative research method, using online website, Newspaper, Class notes etc. The result revealed that foreign aid does not contribute to economic growth in Nigeria in the long-run; the short-run results showed that foreign aid contributed to economic growth in Nigeria.
The study hereby conclude that the impact of foreign aid on Nigeria’s economic growth is contingent on the quality of macroeconomic policy environment. The study further recommends that; Government should not be deterred from seeking foreign aid assistance; so long as the national savings remains poor;The policymakers of the government should put in place a sound macroeconomic policy environment that is stable to stimulate domestic saving and ensure the effective utilization of foreign aid; The saving-investment gap is expected to be bridged by the domestic saving resulting in the financing of both private and public investments in the long-run; The government should provide incentives to private investors and a good enabling environment for the thriving of private businesses.
CHAPTER ONE
INTRODUCTION
1.1. Background of the Study
Since the start of universal recognition and development, nations have come to realized that for the betterment of their citizenry and nation-building, financial assistance from more developed and richer nations to smaller developing countries remain vital for achieving national goals and fulfillment, (Ugwuegbe, Okafor, and Akarogbe, 2016). Although, there have been a number of empirical studies on the effects of foreign aid on the economy development of countries, as a result, it is imperative to consider each country's endowments in assessing the need for foreign aid assistance, (Chenery and Carter, 2013). In the past, the advent of foreign aid could be traced back to the 1940s after the Second World War’s massive destruction. Foreign aid was introduced after the war to assist most affected countries in their reconstruction and rehabilitation efforts, following the collapse of the international economic system which was characterized by the absolute lack of capital required for such endeavours, (Abouraia, 2014).
Aid is a term used to represent financial transactions made or guaranteed by one government to another, foreign aid is therefore an international transfer of public funds in the form of loans or grants either directly from one government to another (bilateral assistance) or indirectly through the vehicle of a multilateral assistant agency such as World bank. Foreign aid signifies a crucial source of finance in most countries in Sub-Sahara Africa (SSA), including Nigeria, where it is expected to stimulate economic growth by supplementing domestic sources of finance such as savings; thereby increasing the amount of investment and capital stock in the country. Foreign aids are mostly said to be grants and loans that a donor country advance to another nation (recipient country) with the motive of accelerating economic welfare. These grants are taken by official sector. Economic theories show that capital formation has been the basic problem of developing countries with Africa being one of them and as such aid is important as it play a significant role in capital formation which is essential for economic growth and development.
Foreign aid signifies a crucial source of finance in Nigeria, where it is expected to stimulate economic growth by supplementing domestic sources of finance such as savings; thereby increasing the amount of investment and capital stock in the country, (Njeru, 2013). Aid could as well increase investment in physical and human capital, capacity to import capital goods or technology and it is further linked with technology transfer that increases productivity of capital and promotes endogenous technical change, (Njeru, 2013). A number of scholars argued that a large portion of foreign aid flowing from developed to developing countries may have been wasted and have only increased unproductive public consumption, (Dacy, 2015). Poor institutional development, corruption, inefficiencies and bureaucratic failures in the developing countries are often cited as possible reasons for these results. While other scholars argued that aid has enlarged government bureaucracies, perpetuated poor governance and enriched the elite few in poor countries, (Moore and Robinson, 2015). Alvi and Senbeta (2011) opined that, although aid has sometimes failed, but since they have supported poverty reduction, health initiatives and growth in some countries, they should still be encouraged.
Over the last five decades, the World Economic Forum (2015) estimates that western donors gave about $4.14 trillion-the equivalent of more than seven times the 2014 GDP of Nigeria, in aid to developing countries. These flows are topped up by support from non-governmental organizations and other private charities, and the so-called new donor countries. Yet, in many of the developing countries receiving the aid, poverty still looms large, and underdevelopment persists such as Nigeria, (Ugwuegbe, Okafor, & Akarogbe, 2016). Despite a large number of academic studies, researchers haven’t reached a consensus on whether aid helps or hinders economic growth in developing countries.
Foreign aids are mostly said to be grants and loans that a donor country advance to another nation (recipient country) with the motive of accelerating economic welfare. These grants are taken by official sector, (Njeru, 2013). Economic theories show that capital formation has been the basic problem of developing countries with Africa being one of them and as such aid is important as it play a significant role in capital formation which is essential for economic growth and development. Ravinder (2017) opined that as foreign aid remain a major source of income for many low-income countries in Africa, it is important to consider its implications for these countries efforts to foster economic growth. But unfortunately, in today's developing countries especially in Africa most of the rulers and the ruled alike see development as the result only of foreign aid and donor hand-outs, rather than peoples own efforts, (Tavares 2018). However, given its dismal development records, Africa falls short of being able to provide its people with adequate resources, to have even the basic capabilities to feed its population and prepare suitable ground for development, the need for foreign aid in these countries seems indisputable. Particularly, today, with soaring fuel and food prices, aid to Africa has even become more essential and timely, (Ravinder, 2017).
Furthermore, in Africa, there is a high degree of indebtedness, high unemployment and absolute poverty. Though foreign aid has continued to play a crucial role in developing countries, especially Sub-Saharan Africa, it is interesting to note that after half a century of channeling resources to the Third World, little development has taken place. Poor institutional development, corruption, inefficiencies and bureaucratic failures in the developing countries are often cited as reasons for the result, (Alesina and Dollar, 2016).
For countries like Nigeria foreign aid activities date back to the assistance of USAID since 1960, when Nigeria got her independence as the 26th African country. As a result, the U.S. Government awarded grants to four major U.S. state universities (Michigan State, Wisconsin State, Kansas State, and Colorado State) to build colleges of agriculture in four Nigerian Universities: the University of Ibadan, University of Nigeria-Nsukka, Ahmadu Bello University, Zaria, and the University of Ife (USAID, 2004). For quite some time now there has been a cascade by many developing nations for an increase in official development assistance (ODA) because of the need for these countries to alleviate the standard of living of their citizens. On the other hand, the developed nations, international organizations in conjunction with some philanthropists made a massive infusion of development aid to developing countries including Nigeria, (Okon, 2018).
According to Conchesta (2016), a country like Nigeria is known for low level of income, high level of unemployment, very low industrial capacity utilization, and high poverty level just to mention a few of the various economic problems these country is often faced with. Mostly, humanitarian aid has gone a long way to saving lives, provision of free health care services to the sick and deprived, medicines for those vulnerable to diseases in emergencies. More so, foreign aid are considered a necessity for the development of Africa as well as Nigeria since it is seen as a means of increasing capital for economic growth and investment, reducing poverty and raising the standard of living of persons, contributing to the transfer of skills, technologies and production methods, increasing product diversity and generates employment (Bakare, 2011).
1.2. Statement of Problem
A prevailing feature of the relationship between industrial and developing countries since the 1960s is foreign aid. Foreign aid has been a major source of external finance for the majority of countries in Africa including Nigeria since they gained independence.
Despite the importance of foreign aid to the development of developing economy's most of the research done in this field and related field have come up with varied findings and contradicting opinions. The result of the study carried out by Olofin (2013), Andrews (2013), Girma (2014), and UNDP (2000) all have similar assertion that even though aid has been given to most of the African countries there is no clear distinction between what the level of development was before the aid and after the aid.
Furthermore, a research on the foreign aids on the 25 sub-Saharan African countries for the period twenty seven years (27) proved that aid is ineffective meaning that it has no significant effect on the economic growth of sub-Saharan African countries. Similarly, United National Development Programme (2000) stated that growth may impact on national GDP but it does not imply development growth. Other studies agreed that if the impact of aid is looked at from a micro perceptive aid will be significant for the development and growth of an economy. However, if it is done at a macro level the result will be very clumsy and will not impact on growth, (Cassen, 2015).
The Gross Domestic Capital is mostly associated with economic growth and ignores several issues of development such as standard of living, levels of education and health. Fasanya and Onakoya (2015) also found out that, foreign aid has positive impact on economic growth in Nigeria. Ugwuanyi, Ezeaku, and Imo (2017) agreed that, foreign aid has an impact on Poverty using the ARDL and bound test approach.
However, a landmark of success is yet to be recorded or accounted for especially in the Nigerian economy. Therefore, in order to contribute to the existing research in this field, this study will bring to the fore the effect of foreign aid on economic development in Nigeria from independence to year 2020.
1.3. Research Objectives
The primary objective of this study is to assess the effect of foreign aid on economy development in Nigeria. However, the specific objectives will be to;
- examine foreign aid in Nigeria;
- identify specific aids received by government;
- assess the impact of foreign aid on Nigeria’s economic development; and
- analyze foreign aid in Nigeria to ascertain its positive and negative effects.
1.4. Research Questions
Based on the above objectives, the following research questions will be posed.
- What is the structure of foreign aid in Nigeria?
- What are the specific aids received by the Nigerian government?
- What is the impact of foreign aid to the economic development of Nigeria?
- What are the positive and negative effects of foreign aids in Nigeria?
1.5 Significance of the Study
The study is meant to assess the effect of foreign aid on the economic development of Nigeria, It is often advocated that foreign aid works well in an environment with good policy, in which case, a poor country with good policies should get more financial aid. Therefore, it is hoped that in the presence of good policy environment in Nigeria, aid has the potency for mobilizing savings for investment projects while on the contrary; aid enhances reforms through policy makers’ training and technology transfer.
It is believed that, the findings from this study will encourage government and policy makers to entrench policies and measures that can increase both domestic and foreign savings as a fundamental for capital accumulation. More so, it is expected that, the study will address what measures to adopt to ensure adequate utilization of accumulated capital in production process, hence, increase in output level.
Furthermore, the findings of this study will be beneficial to the government, as it will help motivate government and policy makers to revisit the economic objectives of foreign aid and an implementation committee set up to ensure effective utilization of aid resources, it will as well motivate government to critically analyse costs and benefits of any aid package to ensure that donor motives do not paralyze the expected economic motives for receiving foreign aid. Students and other researcher who come across this study will find it very beneficial as it will add to existing literature on the effect of foreign Aid in Nigeria.
1.6 Scope of the Study
This study aims to focus specifically on the effect of foreign aid on Nigeria's economic development, and will look take a historical look from Nigerian independence to the present time. Thus, the scope will cover the economic activities of the Nigerian state.
1.7 Methodology of the Study
The study will adopt the qualitative and historical research methodology, primary sources which include first-hand information. The secondary sources shall be through journals, reports, articles, newspapers, treaties, textbooks and other scholarly publications and tertiary sources like government reports, and other relevant information which will aid this study, will be accessed. The secondary sources shall be through journals, reports, articles, newspapers, treaties, textbooks and various statutes which would be obtained.
1.8. Operational Definition of Terms
Foreign Aid: are mostly said to be grants and loans that a donor country advance to another nation (recipient country) with the motive of accelerating economic welfare
Economy Development: refers to the process whereby simple, low-income national economies are transformed into modern industrial economies.
National Development: refers to the ability of a nation to improve the lives of its citizens. Some of the measures are increase in gross domestic product, improving literacy rates, improving medical facilities, and increase in infrastructural development and per-capital income.
Interest Rate: is percent of principal charged by the lender for the use of its money.
Gross Domestic Product: is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
1.9 Literature Review
This section attempts a review of works on the concept of foreign aids in Nigerian economy. The reviews are captured.
1.9.1 The Concept of Foreign Aid
The concept of foreign aid has been a very important concept among linguists for a while. To precisely conceptualize this concept, there is a need to examine the word ‘aid’ in isolation. According to the Oxford Advanced Learners Dictionary, aid means help that is to aid/help somebody to do something. Aid could come in terms of money or services. The dictionary also links the word to the developing countries. This is pronounced by Obijiaku (2015, 1) as follows:
Help: aids programmes, those designed to give help as to developing countries. He came to my aid , came to help me . What is the collection in aid of, what is the money to be used for?. Something that helped, visual aids, pictures, filling, fill in strips etc used in teaching, deaf aid, appliance that helps a deaf person to hear.
Having established that the word ‘aid’ means help, it is therefore pertinent to come to terms with the definition of ‘foreign aid’. Foreign aid could therefore be defined as any kind of economic, political or religious help that is rendered by foreign nations or organization to developing or under-developed countries around the world.
Uzonwanne and Uju (2015) establish that ‘foreign aid’ suggests various events which include humanitarian sustenance in the wake of natural catastrophes to military aid and arms contributions. It is a charitable transmission of possessions from one nation to another. It may serve one or more purposes such as being a signal of ambassadorial endorsement or firming up a military ally or gratifying a government for conduct desired by the donor or spreading the donor’s cultural effect or providing infrastructure required by the supporter for resources extraction from the beneficiary country or gaining other brands of marketable access. Hence, the role of foreign aid in the growth process of developing countries has been a topic of intense debate. The relevance of foreign aid cannot be understated given its implications for poverty reduction in developing countries.
Obijiaku (2015, 1) opines that in relation to economy, foreign aid extends beyond the dictionary connotation simply because contains bilateral and multilateral development assistance and private assistance provided by non-governmental organizations. Rostow (1990) submits that foreign aid is the imposition of the developed countries on the less developed as a requirement for economic expansion. However, Hayter, (1971) views foreign aid as a system of contemporary expansionism and may not lead to the estimated economic benefits creativities. This status quo has led to the recurrent incursion of money from developed countries to developing countries in an effort to lessen the gap while overwhelming their problems. Andrews (2009) argues that despite the fact that foreign aids has been in existence for several decades in African countries, there have been no substantial developments to their fortunes. Most of these nations continue to unveil slow enlargement rates.
According to Michael and Smith (2007) all governmental reserve relocations from one country to another should be encompassed in the definition of foreign aid. Nwankwo (1982) defined aid as support from foreign country. Aid then contains of loans, endowments, manufacturing equipment, and technical help among others. Smith and Michael’s (2007) perception about foreign aid raises a number of questions; his is because many resource transfers can take camouflaged procedures such as compromise of privileged charges by developed countries to less developed nations and transfers of factory-made goods. Also not all allocations of capital to developing countries predominantly the capital drifts from reserved foreign investors form aids because they are underscored by revenue purpose although same is favorable to the beneficiary country. The concept of foreign aid that is now extensively acknowledged and applicable is one that holds all authorized scholarships and concessional advances, which is capable of transporting possessions from industrialized countries to the evolving nations which could either be in kind or in currency.
According to Mohammed (2020), there has been wide-ranging stream of foreign aids to emerging nations and all-encompassing empirical work for decades on the aid-growth connection, the aid efficiency is still controversial hitherto. A vital goal of foreign aid to less developed countries is to increase their economic development and provide help for them in other pressing areas. Assessing the success of foreign aid system is more often measured by the influence that it has on economic growth. In spite of the decades of transfer of foreign capitals to the developing countries, there is indication from various studies that seek to unveil the connection between aid and economic growth (Durbarry, et al., 1998).
According to Tarp & Director (2009), aid is still a significant instrument for increasing the developmental viewpoint of poor countries. This contains the contact to such facilities as health and education and food security which are significant factors of the human capital that partakes in the economic growth of the country. Gani and Clemes (2003) also corroborate that there was an impact of aid on human growth and development, which was discovered in health and education and also displayed a momentous connection in terms of human expansion among the developed countries.
According to Tadess (2011), the generally accepted and used definition of foreign aid is one that encompasses all official grants and concessional loans, in currency or in kind, that are broadly aimed at transferring resources from developed to less developed nations on development and income redistribution grounds. United Nations (2009) has defined economic aid as an outright grants and long term loans for nonmilitary purposes by Governments and various international organizations. Mosley, Jane and John (1991) also stated that foreign aid is a transmission of real resource from one country to another that normally won't take place as a result of the operation of market forces or in absence of specific official action put in place to promote such transfer from the donor country. Therefore foreign aid includes direct government transfers as well as those promoted by special official action such as government guarantees. Masud and Yontcheva (2005) defined aid as Official Development Assistance (ODA) which qualifies on three criteria: first, it is to be undertaken by official agencies. Secondly, it is to have the main objectives of promoting economic development and welfare and thirdly, has to have a grant element of twenty five percent or more.
Aid is used to cover all financial transactions made or guaranteed by one government to another. Indeed, foreign aid has become a focus and locus in the Third World. It has assumed the status of foreign policy instrument by developed democracies to strengthen their relationship with, and consequently spread their influence on, the Third World. Aid has been defined by Ajayi (2000, 117) as a form of assistance by a government or financial institutions to other needy countries, which could be in cash or kind. Establishment of an aid system was one of the principles of the Breton Woods system in 1914. The system believes that there should be a free capital market, which allows an unrestricted inflow of foreign aid. Based on this principle, a Marshall Aid Assistance of about $17.5 billion was granted Western Europe to resuscitate her ruined economy due to the World War11. Since then, the aid system has remained a durable phenomenon of the international economic system (Todaro, 1992, 65).
Berthelemy and Jean-Claude (2006) opined that aid might bilateral or multilateral, but these two types of aids are not the same because the bilateral aid is a two-way stream meaning that it is sent from one government to the other. Bilateral aid is when the capital flows from a developed nation to a developing country. Strategic political considerations and humanitarian ones often direct Bilateral Aid. These are to assist in long-term projects to promote democracy, economic growth, stability, and development. Multilateral Aid is assistance provided by many governments who pool funds to international organizations like the World Bank, United Nations and International Monetary Fund that are then used to reduce poverty in developing nations. Though this sector constitutes a minority of the US's foreign aid, the nation's contributions make up (Anwar, 2000).
More so, Barret (1998) argued that foreign aid could be in the form Food aid which has to do with programs on food aid and humanitarian food aid. Such Programs is presumed to be a kind of relieve on the foreign exchange constraint to the import of the necessary intermediate inputs or by providing fiscal resources through counterpart funds generated by the local sale of programs food aid. These resources can be used by the recipient country to invest in agricultural research and extension and Improvement of rural infrastructure in particular. However, programs food aid may have Dutch disease effects on domestic food producers and thus hurting the food sector's competitiveness in the world markets. In addition to that Riddell (2007) acknowledged that another form of aid that developing nations usually benefit from is technical aid. Technical Assistance (TA) includes the provision of skills, knowledge know-how and advice. For many decades, technical assistance has also been provided in form of teaching staff mainly in primary and secondary education in developing countries. Furthermore, more specialized trainers have continually performed skills training functions to meet their needs and to achieve their immediate objectives.
Overseas Development Institute (ODI) has been running its fellowship scheme for graduate economists and placing them in key ministries in developing countries. Project Aid on the other hand has been a decline of ODA in form of project aid from the mid-1990s, ODA to specific projects still exist. Project aid is dominated by funds channeled to interventions in sectors such as health, education, rural development including agriculture, transport and power, housing, and water supply and sanitation. However, small amounts of project aid are channeled to industrial, mining, trade and cultural projects (Riddell, 2007). Many ODA funded development projects aim at achieving specific outputs by providing resources, skills and systems which the recipient country needs (Alesina & Dollar,2000).
