FOREIGN AID AND PUBLIC EXPENDITURES

Relationships between foreign aid and Public expenditures

Relationships between foreign aid and the recipient's Public Expenditure

Introduction

There is growing international awareness that poverty anywhere is dangerous to prosperity everywhere and prosperity anywhere must be shared everywhere. Broadly speaking, foreign aid implies a transfer of resources from one country, referred to as the donor, for the benefit of another, called the recipient. This transfer can take place directly, through bilateral channels, or indirectly, through multilateral ones. The purpose of aid varies over space and time, ranging from military aid to humanitarian. In more strict definitions, the concept refers exclusively to official development aid, which should be distinguished from humanitarian or relief aid. The former aims at finding long-term solutions that allow recipient societies to meet and generate solutions to their needs, the latter at alleviating humane suffering in urgent situations.

The amount of foreign aid received by country and the trend has witnessed both increase and decrease in the past. For instance, there was a gradual reduction in the amount Nigeria received as an aid between 1970 and 1979 (from $590.47million to $28.92million), and it subsequently rose to $473.63million in 1989. Between 1990 and 2004, there was no specific direction in which the amount received as an aid by the country moves. By 2005, Nigeria experienced a sharp increase in the amount she received as aid. The value rose from $360.78million in 2004 $6799.81 million, in 2005. The following year (2006) also witnessed almost the double amount of the amount she received in 2005; it rose to $11781.51million but later fell to $1385.2million in 2007. Despite the increased foreign assistance to Nigeria, macroeconomic performance has remained weak (OECD2, 2007). The expectation is that aid should induce the growth of the recipient nation; however, it has been unrealistic. The explanation is that aid typically goes to consumption rather than productive activities which crowd-out domestic, savings and investment. For instance, the percentage of population that live on less than $1 stood at 70.8% as at 2008, (compared to 70.2% in 2000), the national poverty rate of the country is given as 34.1% as at 2000.

The study intends to analyze the impact of net disbursement of foreign aid, via the official development assistance to the country, on economic growth viz-a-viz the impact of government expenditure on the growth of the economy. The remaining part of this paper is structured into four sections. Section two presents some salient issues about foreign aid, public expenditure and economic growth in Nigeria. The empirical literature review is presented in section three while section four is on the methodology used in the study, sources of data, analysis and presentation of results. The conclusion is presented in the concluding section.

Some Stylized Facts about Foreign aid and Growth in Nigeria

Nigeria ranks first in Africa in terms of total aid received by countries over the years. Although, in per capita terms, it is not on the top of the list, and this could not be far-fetched from the fact that it has ...