The Effects of Foreign Aid on Human Development in Cameroon
Chapter One
Objective of the study
The objectives of the study are;
CHAPTER TWO
REVIEWED OF RELATED LITERATURE
Foreign aid and its impacts on economic growth
There are diverse views regarding the impact of foreign aid on economic growth by various researchers. While others hold the view that aid has a positive impact on growth, others see aid as having a negative impact and the last group of researchers argue that the effects could be positive or negative depending on several factors The Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD) defines foreign aid in terms of Official Development Assistance (ODA), as government aid to developing countries designed to promote the economic development and welfare of recipient countries. Loans and credits for military purposes are excluded. The aid may be provided bilaterally, from donor to recipient, or it may be channelled through a multilateral development agency such as the United Nations or the World Bank. Aid includes grants, “soft” loans, and the provision of technical assistance. Soft loans are those where the grant element is at least 25%. ODA is usually measured on a net basis, that is, after subtracting loan repayments from the gross aid flows. 12 Papanek (1973), in a cross-country regression analysis of 34 countries, treating foreign aid, foreign investment, other flows and domestic savings as explanatory variables, finds that foreign aid has a greater effect on growth than the other variables. He explains that “aid is supposed to be specifically designed to foster growth and, more importantly, is biased toward countries with a balance-of-payment constraint”. He also finds a strong negative correlation between foreign aid and domestic savings, which he believes co-contributed to the growth performance. Chenery and Carter (1973), following the previous two-gap derived model of Chenery and Strout (1966) and using data from 50 countries over the period 1960-1970, show that the effects of Official Development Assistance (ODA) on the development performance of countries under study are different among certain groups of countries. In five countries, namely Taiwan, Korea, Iran, Thailand and Kenya, foreign assistance accelerated economic growth whereas in six cases it retarded growth, that is, India, Colombia, Ghana, Tunisia, Ceylon and Chile. In a related study, (Singh, 1985) also finds that foreign aid has a strong positive impact on economic growth in less developed countries for the periods 1960-1970 and 1970-1980.He concludes that this is very possible when state intervention is not taken into account. When the state intervention variable is included in the regression, the effect of foreign aid gets statistically weak. Snyder (1993), taking country size into account, finds a positive and significant relationship between aid and economic growth. He emphasizes that, “Previous econometric analysis has not made allowance for the fact that larger countries grow faster, but receive less aid”. He also claims that donors favour small countries for a number of reasons. Based on the model developed by Papanek (1972, 1973) and then extended by Mosley (1980) and Mosley et al. (1987), Snyder analyzes the relation between foreign aid inflow and the growth rate of gross 13 domestic product in 69 developing countries over three periods (the 1960s, 1970s and 1980- 1987), incorporating country size (measured by gross domestic product) in the model. He argues that when country size is not included, the effects of aid are small and insignificant but when this factor is taken into account, the coefficient of aid becomes positive and significant. Fayissa and El-Kaissy (1999), came out with the same conclusion as (Chenery and Strout, 1966), that overseas development assistance accelerates economic growth by supplementing domestic capital formation (economic theory of foreign aid). They conducted a study of 77 countries over sub-periods 1971-1980, 1981-1990 and 1971-1990.The results showed that that foreign aid positively affects economic growth in developing countries. Using modern economic growth theories, they pointed out that foreign aid; domestic savings, human capital and export are positively correlated with economic growth in the studied countries. In general, aid is found to ha
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