CHAPTER ONE:
INTRODUCTION

1.1         Background to the Study

The role of foreign aid in the growth process of developing countries has been an issue of intense debate. Foreign aid is an important issue given its implications for poverty reduction in developing countries. Previous empirical studies on foreign aid and economic growth generate mixed results. For example, Addison, Mavrotas and McGillivray (2005) find evidence for positive impact of foreign aid on growth; Abegaz (2005) find evidence for negative impact of foreign aid and growth, while AFDB (2005), AFDB (2004) find evidence to suggest that aid has no impact on growth. It should be noted that, although Adelman (2000) concluded that foreign aid has positive effects, this conclusion applies only to economies in which it is combined with good fiscal, monetary, and trade policies.

The main role of foreign aid in stimulating economic growth is to supplement domestic sources of finance such as savings, thus increasing the amount of investment and capital stock. As Adelman (2000) points out, there are a number of mechanisms through which aid can contribute to economic growth, including (a) aid increases investment, in physical and human capital; (b) aid increases the capacity to import capital goods or technology; (c) aid does not have indirect effects that reduce investment or savings rates; and aid is associated with technology transfer that increases the productivity of capital and promote endogenous technical change. According to Addison, Mavrotas  and  McGillivray (2005), four main alternative views on the effectiveness of aid have been suggested, namely, (i) aid has decreasing returns, (ii) aid effectiveness is influenced by external and climatic conditions, (iii) aid effectiveness is influenced by political conditions, and  (iv) aid effectiveness depends on institutional quality. It is interesting to note that in recent years there has been a significant increase in aid flows to developing countries although other types of flows such as foreign direct investment and other private flows are declining. For example, according to the Organization for Economic Corporation and Development (OECD, 2009), foreign direct investment and other private flows are on the decline, and remittances are expected to drop significantly in 2009. Budgets of many developing countries were hit hard by the rises in food and oil prices in the last two years. Many countries are not in a strong fiscal position to address the current financial crisis. According to the OECD (2009), in 2008, total net Official Development Assistance (ODA) from members of the OECD’s Development Assistance Committee (DAC) rose by 10.2% in real terms to  US$119.8 billion and is expected to rise to US$130 billion by 2010. Africa is the largest recipient of foreign aid. For example, net bilateral ODA from DAC donors to Africa in 2008 totaled US$26 billion, of which US$22.5 billion went to sub-Saharan Africa. Excluding volatile debt relief grants, bilateral aid to Africa and sub-Saharan Africa rose by 10.6% and 10% respectively in real terms.

Given the importance of foreign aid to the economies of developing countries, it is important to understand its contribution to economic growth of developing countries. Therefore, this study analyzes the effects of foreign aid on the economic growth of Nigeria.

1.2         Statement of the Problem

Does aid promote economic growth? Interest in this question has grown as large infusions of aid to developing countries have been recommended in recent years as a means of escaping poverty traps and promoting development (ActionAid, 2005). Major efforts have been underway to mobilize resources for increases in aid (e.g., through an International Financing Facility). In contrast, some have argued that aid has historically been ineffective in promoting growth (ActionAid, 2005) and large increases in aid are therefore undesirable. An intermediate position has been that more aid spurs growth under specific conditions, such as when countries have good macroeconomic policies (Abegaz, 2005). Despite the large literature on aid and growth, “the debate about aid effectiveness is one where little is “settled” (Rajan, 2005:54). Empirical evidence has been provided in favour of the argument that aid spurs economic growth unconditionally or in certain macroeconomic environments (Abegaz, 2005). It is against this backdrop that the study seeks to evaluate the impact of foreign aid on Nigeria’s economic development.

1.3         Research Questions

        i.            What is the nature of foreign aid that Nigeria is receiving?                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

     ii.            Has Nigeria derived any significant benefit from foreign aid?

   iii.            What is the challenges and prospect of foreign aid on Nigeria economic development?

   iv.            How can these challenges be ameliorated?

1.4         Objectives of the Study

The main objectives of the study are to examine the impact of foreign aid on Nigeria’s economy development. The specific objectives, however includes the followings:

1.      To examine the nature of foreign aid giving to Nigeria.

2.      To establish whether Nigeria has derived any significant benefit from foreign aid.

3.      To evaluate the challenges and prospect of foreign aid on Nigeria’s economic development.

4.      To proffer solutions to the identified challenges of foreign aid on Nigeria’s economic development.

1.5         Scope of the Study

Given the importance of foreign aid to the economies of developing countries, it is important to understand its contribution to economic growth of developing countries. This study analyzes the effects of foreign aid on the economic growth of Nigeria. This analysis will cover the nature, the benefits and other wise, the challenges and prospect of foreign aid on the Nigeria’s economy. In doing this, the study will focus on the time period 1999-2010.

1.6         Significance of the Study

The role of foreign aid in the growth process of developing countries has been a topic of intense debate. Foreign aid is an important topic given its implication for poverty reduction in developing countries. Previous empirical studies on foreign aid and economic growth generate mixed results. As such, the significance of the study will arise from the fact that it will highlight the nature, impact, challenges and prospect of foreign aid as it concern Nigeria. This is further in line with the fact that the findings will provide insight and data for policy makers and equally serve as a reference point for any future study. Above all, the study will add to existing stock of knowledge.

1.7         Research Methodology

Due to the nature of the research work, the study will adopt the historical method. This method involves a critical, but systematic analysis of secondary data extracted from textbooks, journals, seminar papers, internet printout amongst others. Data will also be obtained from official sources, both national and international, such as the Federal government and Central Bank of Nigeria (CBN) and the World Bank among others.

1.8         Limitations of the Study

There is no endeavour without constraints. Thus in the course of the study, the researcher was constrained by factors such as inadequate finance. This was due to the harsh economic situation in the country. The second factor is inadequate time which is a corollary to the first factor, since the researcher had to combine academic work with other economic endeavour. However, conscious efforts were made by the researcher to limit the effect of these factors on the content validity of the research work.

1.9         Definition of Terms

Due to the plethora of concepts within the social science discipline it becomes imperative to operationally define certain concepts within the context of its usage in the research work.

Thus, the following concepts will be defined.

i.                    Foreign aid: Foreign aid refers to transfer of real resources from one government or public institution of the richer countries to governments of less developed countries (LDCs) in the third world

ii.                 Globalization: This concepts within the context of it usage is defined as the process of the intensification of economic, political, social and cultural relations across international boundaries

iii.               Sovereignty: this simply means the ability of states to make its decisions and policies without an internal or external interference.

iv.               Economic sovereignty: This is the ability of a nation-state to determine the values, goals, targets, direction of its economic policies including its growth pattern without any external interference.