THE EFFECT OF POLITICAL INSTABILITY ON FOREIGN AID: THE CASE OF SUB-SAHARAN AFRICAN COUNTRIES

Abstract

Since the end of the Second World War Sub-Saharan Africa countries have been the recipients of significant amounts of foreign aid, provided mainly with the aim of reducing political stability easing poverty and promoting economic growth and development. Sub-Saharan Africa, a region of forty-eight countries with a combined population of over 1.1 billion as of 2021, has consistently been one of the largest recipients of foreign aid. For example, in 2021, the region received over 62 billion of total world aid. While foreign aid has many determinants, an important factor influencing aid allocation is the political stability in the aid receiving country. This paper uses panel approach to investigate empirically how different political instabilities in the aid receiving country influence aid allocation by donors. The paper specifies and estimates models using fixed effect, random effect and to capture their limitation Mundlak approach is used to explain the allocation of ODA among SSA Countries over the period 2012-2021. This paper utilizes the World Bank, World Development Indicators dataset, World Governance Indicators dataset to conduct an analysis of whether the instability in SSA countries results in more or less to greater flow of foreign aid, as measured by net Official Development Assistance (ODA). By doing so, the regressions result shows political instability does have a negative effect on the allocation of aid to SSA, as it is specified by its indicator political stability and absence of violence. Based on the models, ODA has a positive relationship with political stability, Inflation, Trade openness, and total population. GDP/Capita and unemployment shows insignificant effect on the flow of official development aid to SSA countries with a negative coefficient. As the result indicated, political stable sub-Saharan African countries have received more aid. However, GDP/Capita and unemployment do not have a significant effect on the allocation of ODA to SSA Countries. Thus, the paper argues that political stability in SSA is not only a worthy objective in itself, but also because stability promotes growth and augments the growth-promoting power of aid in a way that SSA country reduces the dependency on aid. Otherwise, countries would be in a vicious circle of dependency.