Is Foreign Aid Diminishing in Low Income Countries? Implications for COVID-19 era

Yara Elsehaimy () and Dina M. Yousri ()
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Yara Elsehaimy: Faculty of Management Technology, German University in Cairo
Dina M. Yousri: Faculty of Management Technology, German University in Cairo

No 55, Working Papers from The German University in Cairo, Faculty of Management Technology

Abstract: Foreign aid is one of the most controversial debates in development for decades. Economists examine the effectiveness and the efficiency of aid through studying its impact on economic growth. However, it has been observed that foreign aid exhibits diminishing returns on its productivity; due to the insufficient absorptive capacity of the recipient country. Despite the importance of analyzing the dimin-ishing feature of foreign aid, the majority of aid studies do not study or include the diminishing feature of aid. Thus, the study wants to answer the question of: is foreign aid diminishing in low income countries' class? The results of the study will give the researchers and policy makers in donor countries insights about whether to increase or decrease foreign aid; in order to fight the era of COVID-19. Study used time series data from 1960 till 2018 for close examination of di-minishing aid feature. Results show that Burkina Faso, Ethiopia, Mozambique, Si-erra Leone, and Uganda show significant diminishing aid feature, While, Central African Republic, Gambia, the, and Togo show significant non-diminishing aid feature. For the countries that have significant diminishing feature, donor coun-tries should not increase the inflow of aid greater than the calculated threshold; as it will lose its productivity. And the countries with non-diminishing significant feature, donor countries should inject more foreign aid greater than the calculat-ed threshold value; in order to improve the economy.

Keywords: Foreign aid; sustainability; economic growth; low income countries; Covid-19; economic stability (search for similar items in EconPapers)
JEL-codes: F35 F43 F63 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2022-01
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