Is foreign aid's influence on economic growth of a country conditional on institutional quality? The case of Zimbabwe

Takawira, Caroline (2014-12)

Thesis (MDF)--Stellenbosch University, 2014.


ENGLISH ABSTRACT: Does foreign aid contribute to economic growth? Is the impact of foreign aid conditional on the presence of quality institutions? This issue has attracted much attention over the years from both the donor community and recipient countries given that despite several years of foreign aid flows the increasing high poverty levels raise questions about the effectiveness of foreign aid. Despite several years of study on the relationship between foreign aid and economic growth results have remained inconclusive. Conclusions from various studies on this issue are varied. The conclusions thus far can be summarised as follows: there is a positive relationship between aid and economic growth; there is no relationship between aid and growth; the presence of good governance and institutions is a precondition for aid to have a positive influence on economic growth; and the presence of good governance and institutions is not a precondition for aid to have positive influence on economic growth. The research assignment sought to determine if there is any relationship between foreign aid, economic growth and institutional quality in Zimbabwe for the period 1980 to 2010 using the autoregressive distributed lag approach. In order to determine this relationship, the assignment also examined economic growth theories that have evolved over the years and reviewed existing empirical literature on the subject. An analysis of the economic growth theory revealed a shift from foreign aid being merely assumed to supplement savings to a new approach looking at conditions necessary for it to be effective, with a special focus on institutional quality. To date there has not been any agreement on the definition and institutional characteristics that create an environment conducive for foreign aid. Studies still use indicators that group together a wide range of social structures affecting economic outcomes such as political system, property rights, contract enforcement, and investor protection as measures of institutional quality The research assignment used quality of governance, polity iv and economic freedom of the world index as measures of institutional quality. The empirical results revealed there that there was a positive relationship between foreign aid and economic growth and that all the measures of institutional quality perform best when all are included in the model. This suggests that the effectiveness of aid in Zimbabwe was strongly influenced by the quality of institutions. It is therefore important for the government of Zimbabwe to maintain the rule of law, political stability and economic freedom. This is likely to attract economic agents who can make meaningful investment and resuscitate the Zimbabwean economy.

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