The Effect of Foreign Aid in Promoting Economic Growth in Zambia (1986 - 2018)


Master's Thesis, 2019

85 Pages


Excerpt

Table of Contents

Declaration

The Dedication

Acknowledgement

Table of Contents

List of Tables

List of Figures

Abbreviations and acronyms

Abstract

1. CHAPTER ONE - INTRODUCTION
1.0 Background of the Study
1.2 Statement of the Problem
1.3 General Research Objective
1.3.1 Specific Research Objective
1.3.2 Research Questions
1.4 Hypothesis Testing
1.5 Significance of the Study
1.6 Limitations and Delimitations.
1.6.1 Limitations
1.6.2 Delimitations
1.7 Scope Study
1.8 Definition of Variable and Key Terms
1.8.1 Economic Growth
1.8.2 Foreign Aid
1.8.3 Effect
1.8.4 Gross Domestic Product
1.8.5 Population Growth (PG)
1.8.6 Investment (FDI)
1.8.7 Government Expenditure
1.8.8 Inflation
9.0 Organization of this Study

2. CHAPTER TWO - LITERATURE REVIEW
2.0 Introduction of the Literature Review
2.1 Theoretical Literature
2.2 Modernisation Theory
2.3 Theory of Economic Growth
2.4 Investment in Aid
2.4.1 Physical Capital
2.4.2 Heath
2.4.3 Education
2.4.4 Improved Institutions
2.5 Empirical Literature
2.6 Forms of Foreign Aid
2.7 Technical Assistance:
2.8 Programme Aid.
2.9 Humanitarian Aid
2.10 Food Aid:
2.11 Theoretical and Conceptual Framework
2.11.1 Critique of the Literature

3. CHAPTER THREE – METHODOLOGY.
3.0 Introduction
3.1 Model Construction
3.2 Research Design
3.3 Data type and collection procedure
3.3.1 Diagnostic Tests
3.3.2 Stationarity and Non- Stationarity
3.3.3 Unity Root Testing
3.3.4 Cointegration
3.3.5 Data Analysis Procedure

4. CHAPTER FOUR – PRESENTATION AND DATA ANALYSIS
4.0 Introduction
4.0.1 Descriptive Statistics
4.0.2 Test for Stationarity
4.0.3 The Autoregressive Distributive Lag Model
4.1 The Diagnostic Tests
4.2 The Bounds Test
4.3 Granger Causality Test

5. CHAPTER FIVE - DISCUSSION OF FINDINGS
5.0 Discussions

6. CHAPTER SIX - CONCLUSION AND RECOMMENDATION
6.0 Conclusion
6.1 Recommendation

7.0 References

8.0 APPENDICES

The Dedication

I would like to dedicate this dissertation to my wife Precious Tonga, my daughter Kimberly Tonga and all family members without whom this research paper would have not been possible. To all of you, I say thank you for your support!

ACKNOWLEDGEMENT

This dissertation would not have been possible without the wisdom and guidance of God Almighty. I would like to thank God for seeing me through this dissertation from the time I started writing through to the point of completion.

May I take this opportunity to express my heartfelt thanks and appreciation to Dr Gabriel Pollen, my supervisor who put in a lot towards the writing of this dissertation. He ensured that I was on time, the work was outstanding and according to required standards. My time spent with him on this work was not only intellectually stimulating but also allowed me to go beyond horizons to see more in academia.

My gratitude also goes to Mr. Maio Bulawayo and Alfred Zulu for their guidance and insights. I would also like to thank my parents and relatives for their support. It would be unfair not to express my appreciation and thanks to my wife Precious Tonga for her continued support, prayers and encouragement.

I’m grateful to University of Lusaka UNILUS management and staff for accepting me to pursue this programme. I would like to thank staff at UNILUS library too who were so helpful to me in terms of books.

It is in this vein, that I would like to thank my church and all the members for prayers, spiritual encouragement and support.

List of Tables

Table 1- Conceptual Framework of Foreign Aid and Economic Growth

Table 2- Data Variable

Table 3- Descriptive Statistics of the Variables

Table 4- Unit Root Test Results

Table 5- The Autoregressive Distributed Lag Model

Table 6 - The Bounds Test Result

Table 7 - Granger Causality Test

Table 8 - More Diagnostic Tests

List of Figures

Descriptive Statistics of the Variables

The Unit Root Test Results

Data Set

ABBREVIATIONS AND ACRONYMS

Abbildung in dieser Leseprobe nicht enthalten

Abstract

This research study has analyzed the effects of foreign aid in promoting economic growth in Zambia. The study used available data in Zambia from 1986 – 2018. The study adopted the ARDL model for investigating the short and long time relationship between foreign aid and Gross Domestic Product GDP. The hypothesis of foreign aid having an effect on economic growth was explored and examined. This study sought to archive the following objectives: To establish whether there is a connection between foreign aid and economic growth in Zambia and determine whether foreign aid significantly contributed to Zambia’s economic growth in the period under review.

For policy implications, this study also analyzed the determinant of economic growth in Zambia over the same period. The results clearly revealed a positive relationship between foreign aid and Zambia’s economic growth in a given period that was under investigation.

The findings in this study affirm that foreign aid may be important in promoting economic growth. This study also asserts that foreign aid may be effective in improving the quality and lives of people if used effectively. Thus, the outcome of this study recommends that foreign aid be directed towards the promotion of investment because its proper use can promote and boots the country’s economic growth.

For policy implications, this study also found that independent variables such as Foreign Direct Investment FDI, Population Growth, Government Expenditure and Consumer Price Index as important and determinants of economic growth in Zambia over the same period.

Thus, this study found that important drivers of economic growth included foreign aid inflow, population growth, investment whilst government expenditure and inflation affected GDP negatively, thus their impact was insignificant and negligible.

This study furthers found efficiency and effectiveness of programs by government supported by foreign aid being effective to promote growth, hence, the reason why it is important for traditional donors to support government in many sectors.

Keywords: Foreign Aid, Official Development Assistance, Economic Growth, Gross Domestic Product, Investment, Cointegration, Zambia

CHAPTER ONE - INTRODUCTION

1.0 Background of the Study

Economic growth and development are at the centre of international relations and policy development. Highly industrialized nations mainly Japan, United States of America USA, United Kingdom UK as well as other countries in European including multilateral institutions like the World Bank and International Monetary Fund IMF, attempt to help with economic growth of developing countries. In line with this, the United Nations UN in September 2000, adopted the Millennium Development Goals MDGs United Nations Report (2018). The adoption of Millennium Development Goals MDGs symbolize a partnership of developed and developing countries including poor countries in combating poverty, achieving of common goals and committing to increase overall living conditions of people in all nations. In most cases, when a country experiences economic growth, living conditions of people can improve. From the time the Millennium Development Goals MDGs were adopted, the main goal was to reduce by half by the year 2015 the number of the poor in the World according to (USAID, 2018). Poverty is measured by considering the size of the population living with an income below two dollars per day according to United Nations Report (2018). However, Millennium Development Goal MDGs are not only about reducing poverty in developing and poor nations, but the mandate also includes attaining goals that include gender equality, universal primary education, empowerment of women, reducing levels of child mortality by two thirds, maternal health, fighting disease, environmental sustainability as well as developing a global partnership for development, United Nations Report (2018). Based on the fact that poverty is one of the attributes of underdevelopment in all developing and poor nations, foreign aid commonly referred to as Official Development Assistance ODA is one way in which these goals could be achieved so as to ensure economic growth of developing nations, Zambia inclusive.

As part of United Nations, Zambia become part of Millennium Development Goal MDGs with same goals as the rest of other nations. However, this research notes that Zambia’s story of development and economic growth represents a paradox. Since the year 1964, when the country got its independence from its colonial masters, the country was categorized as a middle income country having income per capita of about USD $752. Today, after forty (40) years, Zambia is positioned among poorest nations around the world. According to the Human Development Index HDI, Zambia ranks 150 out of 169 countries in the world, and this is mostly because of lower life expectancy at birth according to World Bank (2018) and United Nations Development Program UNDP (2017). Taking into consideration the fact that development takes place in the context of political stability, Zambia’s record of development is essentially alarming. Looking back especially the period after 2000, Zambia seemed to have improved tremendously taking a very strong path to economic growth and development. A steady record of economic growth was recorded through high prices on the international markets of the country’s major export copper as well as the increase of Foreign Direct Investment FDI. In addition, due to Zambia’s good governance, the country has been offered substantial bilateral as well as multilateral debt relief from the year 2005. However, the "Zambian paradox" still exists today because the equal improvement in human development has not reached a record of economic growth. Nearly half of the people in Zambia still live in abject poverty with nearly 70 percent of the country’s population still living under the poverty line according to USAID (2017) and DFID (2018). Today, income distribution is slanted, and the distribution of wealth which is mostly uneven, is also determined by differences in region as well as the widening gap between urban and rural areas in the country.

In the past two decades, Zambia’s aid structure and its relationship with international foreign aid providers have changed significantly. Most importantly, as a result of collective effects of regarding debt relief and economic growth, the country has now changed from being a high donor dependent nation to a state where external assistance currently has become less important with regards to Gross Domestic Product GDP. Due to this, most of the country’s traditional and bilateral donors are now pulling out their official development assistance, notable of these countries include; Netherlands, Denmark and United Kingdom UK. In addition, others countries include Norway and Germany who are also considering aid exit from Zambia. Although traditional donors are considering exiting, especially non-traditional donors like China, Brazil and India are becoming more active and relevant, mainly not as a substitute for donors, but as Zambia’s reliable trading partners and investors. The low levels of aid dependency and the combined impact of new donors actually translate that the influence of aid as well as donor conditions is less effective in Zambia’s current public debate than few years ago.

For the past decade, Zambia as well as many developing countries around the world have made significant efforts to improve the conditions of lives of their populations. The world has achieved its primary Millennium Development Goal MDG target - halving poverty rate of 1990 by the year 2015 - five years ahead of 2010 according to World Bank (2015). However, latest estimates, of 2017, 17 percent of the people live for less than US $1.25 per day in developing countries. This implies that despite the progress that has been made in poverty alleviation, developing nations still need to take considerable steps and actions, to reduce

poverty in a generation to promote prosperity among all the countries in a manner that is sustainable according to Global Monitoring Report (2014). Department of International Development (DFID) notes that economic growth is an important tool for fighting poverty and reducing it might assist in improving the lives of people in all poor and developing nations. From a macroeconomic viewpoint, economic growth is measured mainly by considering Gross Domestic Product (GDP) growth. Therefore, GDP growth is related to and measured as a function of productivity, labour and capital generated by the economy of the country DFID (2015).

Today, developing countries rely on assistance commonly referred to as Official Development Assistance ODA which is foreign aid to support Balance of Payments BOP, provide extra finance to pay for fiscal deficits, investing in the country’s large projects and receiving of technical assistance to alleviate national debt. For countries that are mostly in conflict, natural calamities and war, external aid is offered in terms of food, peace-making efforts and emergency assistance Hamann and Bulir (2003).

Foreign aid comes in many forms. Researchers have classified foreign aid in different categories. Moyo (2009) describes foreign aid as falling in three categories: Foreign aid as a humanitarian emergency aid that is mobilised and given in response to disasters. Foreign aid as Charity aid that is given by charitable organisations to institutions and foreign aid as systematic aid payment made straight to government either through government - to - government transfers. This is bilateral aid offered through such institutions known as multilateral institutions.

Zambia as a developing country like any other country has for the past 31 years been relaying on foreign aid. Despite receiving this foreign aid, its population has continued to survive on less than a dollar per day. This brings doubts on foreign aid and its effectiveness. As far as Zambia is concerned, the country has been a recipient of more and more aid but for the past 31 years there is no empirical evidence that suggests and empirically shows how this foreign aid has positively contributed to the country’s economic growth. Again, more contradictions and inconsistencies arise today regarding foreign aid as to whether it has an effect on economic growth or not. Currently broad theoretical literature regarding foreign aid and economic growth in many different countries and regions have produced conflicting results. Thus, this research study seeks to empirically investigate the effect of foreign aid on economic growth. Therefore, this research centres on the effect of foreign aid on Zambia’s economic growth from the period 1986 up to 2018.

1.2 Statement of the Problem

Research done on foreign aid and its effects on promoting economic growth have revealed that foreign aid relates positively to economic growth. The argument has been repeatedly supported by research done by Papanek (1973), Singh (1985) and Levy (1988) who found similar results of foreign aid having a positive effect on economic growth. However, subsequent research studies done by Dalgaard et al. (2004) and Berthelmy (2006) found contrasting results of foreign aid having no effect on economic growth. Today, most empirical studies conducted have failed to settle this growing contradiction and inconsistent.

In an ideal situation, foreign aid is supposed to drive economic growth because it can help reduce poverty, unemployment, increase government’s revenue and ultimately increase a country’s Gross Domestic Product GDP.

However, in Zambia’s case foreign aid in 1986 was at ZMW K116.019 and GDP was at US $1.666 Billion but in the following year 1987 GDP grow to US$2,270 Billion when foreign aid reduced to ZMW K68, 000. In 2016, GDP reduced to US$20,940 Billion with foreign aid at ZMW K997.730 yet in following year, GDP grow to US25, 870 Billion when foreign aid increased at ZMW K102.3000. The country’s GDP in some years showed a downward trend by recording low growth when foreign aid was higher and vice versa. The problem that arises is, in certain years foreign aid in Zambia was higher which resulted in higher GDP yet this contradicts with certain years in which foreign aid was higher but GDP recorded slow growth. This presents a contradiction and inconsistency. Thus, this study attempts to examine Zambia’s changing foreign aid and its relationship to growth. Again, the issue of contention to which this study responds is not just to examine the relationship between foreign aid and economic growth, but also to establish the reasons for varied results and outcomes within this relationship. This requires interrogating the specific country-level circumstances which frame and underpin how foreign aid impacts upon economic growth.

1.3 General Research Objectives

In this research, the main objective is to determine empirically the effect of foreign aid on economic growth for the period 1986 – 2018 in Zambia.

1.3.1 Specific Research Objectives

1. To establish if at all there is a relationship between foreign aid and economic growth in Zambia between the period being investigated.
2. To examine the specific country circumstances which underpin and frame the relationship of foreign aid and economic growth.
3. To establish how aid is utilized in Zambia.

1.3.2 Research Questions

1. What is the relationship between foreign aid and economic growth in Zambia for the period 1986 - 2018?
2. What are the factors and country circumstances that underpin and frame the relationship between foreign aid and economic growth?
3. How is foreign aid utilized in Zambia?

1.4 Hypothesis Testing

- The Null hypothesis

Ho: Foreign AID has no effect on Real Gross Domestic Product growth in Zambia.

- The Alternative hypothesis

H1: Foreign AID has an effect on Real Gross Domestic Product growth in Zambia.

1.5 Significance of the Study

The research will make policy contributions to existing literature in economics as what determines economic growth. Several studies that have been done on foreign aid and economic growth in middle-income economies have been based on research findings in industrialized economies. Given that the economic structure of developing nations differs significantly from those of developed and industrialized countries, one cannot expect that findings on foreign aid such as the Marshal Plan, in industrialized countries would necessarily hold same for developing countries like Zambia. Therefore, this study adds to the existing economic literature by assessing the importance of aid and its relation to economic growth by taking into account the systematic drivers of the economic structure for Zambia.

The findings of this study could also help policy makers to understand which channel of foreign aid transmission is more effective today, and hence focus on this mechanism in order to boost economic activity and ensure that poverty is reduced. This is because, despite the Zambian government’s efforts to stabilize the economy, there is little work one can point to that has been done on foreign aid on its management and implementation to ensure growth and development.

This study will also help people to understand the essence of aid in as far as growth in concerned. Research findings will assist in guiding how the country should effectively utilize aid to ensure growth in aid dependent countries like Zambia.

1.6 Limitations and Delimitations

1.6.1 Limitations

The period of coverage and variables that are used in this empirical study are as a result of available data. Data and information was difficult to gather and access for other years and periods. Thus, this research only considers the period of only 31 years.

The period of study was from 1986 – 2018 and the data collected was recent, hence, this may not represent the genuine picture as compared to a longer period as a whole, therefore, if the period would be made longer, in this case, the research study might have presented different results.

The other limiting factor in this research was the challenge in methods of estimations and running of differential statistical data during the writing of this research study.

It must also be noted that the choice of variables was reliant on the available data, thus, not so many variables were included in this research. It would have been much better with many variables and quality data were included in the research.

1.6.2 Delimitations

This research study is confined only in the study of foreign aid and its impact of economic growth. Therefore, it defines what aid is as well as its effects on growth. Main focus in this research was Official Development Assistance and its effect on economic growth in Zambia. This is in order to understand if foreign aid had an impact on growth or not, specifically in the period under review.

1.7 Scope of Study

The research mostly attempts to determine the effectiveness of aid to economic growth in Zambia. The study considers Zambia as a developing economy. Though a large data sample size is acknowledged for econometric analysis, data before 1986 could not be used in order to avoid outliers, given that this is a period where economic growth and prices were affected by one party state and the economy did not perform freely.

1.8 Definition of Variable and Key Terms

1.8.1 Economic Growth

Todora (1995) citing Kuznets defines and describes economic growth as a rise in the capacity to supply increasing various goods to a country’s population, indicating that the growth capacity is normally based on development and advancement of technology as well as institutional, ideological changes that it demands. Alina-Petronela Haller (2012) defines economic growth as an increase of the national income per capital, and it also involves quantitative terms of the process with a focus on the functional relationship between endogenous variables.

Ahuja (2010) defines economic growth in two ways: first as sustained annual increase in an economy’s real national income. In other words, growth implies rising trends of net products in a country and prices. Secondly, it is as increase annually in per capital income of a country over a period of time.

Therefore, based on these definitions it can be said that economic growth is a process that involves increasing of economies especially the economic indicators such as (GDP) per capital that has a direct and positive effect on the economic –social sector of a country that also involves an increase in the standard of living of people.

1.8.2 Foreign Aid (FA)

This is often known as Official Development Assistance (ODA). This requires resource transfers from development partners like grants and loans to developing countries (WDI, 2015). Again, World Bank (2012) defines foreign aid as international aid, economic aid or development aid or assistance as resources given by one country to another. Therefore, it could be material, money, manpower or technical assistance given by governments or organizations to another government or organization between countries.

1.8.3 Effect

For the purpose of this study, effect refers to the results or consequence of something on a country. In this sense, whether the result or consequence is positive or negative with regard to foreign aid. In this case, this research focuses on foreign aid on economic growth in Zambia.

1.8.4 Gross Domestic Product (GDP)

This is the total value of goods and services produced in a country. In other words, GDP is means monetary value of goods and services produced within a country’s borders in a specified time period. In this case, this research looks at the total value of goods and services that have been produced in years considered in this research.

1.8.5 Population Growth (PG)

This is defined as an increase in the number of people that reside in a given country. In this research, the focus is in Zambia. Populations Growth can also be defined as change in the size of population.

1.8.6 Investment (FDI)

Investment is the production of goods that will be used to produce other goods. In other words, it means the allocation of resources in the expectation of some future benefits.

1.8.7 Government Expenditure (GEX)

This is referred to as purchase of goods and services. It includes public consumption, public investment and payments consisting of income and capital transfers.

1.8.8 Inflation (CPI)

Inflation (CPI) refers to the country’s increase in general price levels of goods and services over a given time period.

9.0 Organization of Study

Six chapters are contained in this research. First chapter in this study provides the introduction, background of what is being researched on. It also includes the statement of the problem, limitations and delimitations. The subsequent chapter is chapter two which is literature review. This chapter provides a detailed review of literature regarding the similar study. It includes theories that underpin the subject being investigated. In chapter three, there is the methodology used. It includes research data collection techniques as well as research design. It proceeds with diagnostic tests. Data presentation and analysis are discussed in the fourth Chapter. Discussions and findings are in Chapter five. The last chapter of this research is chapter six which consists of conclusion and recommendations.

CHAPTER TWO - LITERATURE REVIEW

2.0 Introduction of Literature Review

Literature review contains mainly published research regarding the subject study. It provides statements, literature and issues that are related. In line with objectives of this research study, this part of this thesis makes a detailed review of the available literature. This review is preceded by selected theories of economic growth and development, situating, the role of foreign aid within them.

2.1 Theoretical Literature

Today, a common standard of aid is known as Official Development Assistance (ODA). This ODA constitutes all transactions primarily intended to promote growth and development. It also includes improving welfare nations that are developing around the world as clearly defined by OECD - Development Assistance Committee Statistical Directive, including the preferential nature of delivering at least 25 grant elements. Grants refer to Official Development Assistance, including transfers, cash, goods or services, without repayment OECD (2007).

In order to fully determine if foreign aid has an effect on growth, so much literature and studies have been looked into to understand how aid and growth relate. Studies on the subject of aid on economic growth by Papanek (1973) found foreign aid positively impacting on economic growth. Similar research studies by Dalgaard (2004), Gomanee (2005) and Karras (2006) also found a positive relationship of foreign aid as having an impact on economic growth.

Nevertheless, these findings have been repeatedly challenged by subsequent research studies by Berthelmy (2006) and Dalgaard (2004) which sought to understand whether aid inflows relate with growth in developing countries. Their results differ significantly because they found no relationship Moreira (2005). Strengthening this argument Mosley et al. (1987) discovered that there was no relationship between foreign aid and economic growth. Therefore, it was insignificant. They concluded in their research that foreign aid had no impact on growth in any country.

In attempting to understand the connection regarding aid and growth this study considers theoretical models. Firstly, the theoretical ground of model of aid - growth linkage was first the Harrod - Domar growth model Strout and Chenery (1966). This theory postulates that an excess of labour, supply and growth could be prevented by available capital. In this model, three (3) gaps identified limiting trade and these include Trade Balance, Savings and Fiscal gaps. This theory argues that a country that is described as poor can have less savings and aid can add up on domestic saving and taken to investment. This is in a situation where foreign aid is allocated for investment purposes. This theory further goes on to assume that countries that are poor have insufficient export earnings, therefore, they need to import goods that are needed for investment. Bacha (1990) and Taylor (1990) modelled the fiscal gap and indicate the relative price of tradeable to non-tradeable goods and services, which is compatible with attainment of internal and external equilibria.

However, Easterly (2010), indicates that foreign aid lacks a clear theoretical model, and the relationship of aid and growth is hindered, therefore, aid has no impact on growth. Strout (1966) presented the gaps model used in many studies Easterly (2010), Amassoma (2014) Kolawole (2013), serves the foundation for theories of foreign aid growth research analysis. The theory of the gap models argues that Official Development Assistance ODA promotes economic growth by mainly supplementing domestic capital formation. In addition, the challenging argument in research of this theory or model is, developing nations are having restrictions on domestic savings to ensure they line up with investment opportunities or face foreign exchange shortages to pay the required capital and intermediate product imports. Foreign exchange and savings gaps are two independent as well as constraints to achieving targeted growth rate.

As stated, Harrod - Domar growth model bases its argument on savings gap method. According to this model, growth mostly hinges on the investments that are funded by savings in the country that is domestic plus foreign. Therefore, because of low per capita income, domestic savings are insufficient to meet capital accumulation or required investment of less developed nation. Therefore, foreign aid is needed.

So I - S = F .........(1)

In this case, I is investment, S is savings domestically, whilst foreign aid is represented by F.

Furthermore, regarding the exchange gap, researchers Strout and Chenery (2006) argue that another likely growth challenge for many countries that are not fully developed stem from the countries’ incapability to obtain foreign exchange by means of exports. Mbah and Amassoma (2014) indicated that this was due to the fact that the export levels were insufficient to meet import demand. Consequently, foreign aid is much required to fill the general gap of mainly exports that are low.

Therefore;

M - X = F-----------------------------------(2)

Here, M denotes imports, X denotes Exports, while F denotes foreign aid.

Kolawole (2013) came up with a two (2) gap models by showing equations (1) and (2) foreign aid substitutions in national income accounting status, using total expenditure equal to total output method,

This could be shown as,

E - Y equals I - S equals M - X equals F.

From the above equation, E implies expenditure of state, Y implies a country’s output and income, I implies investments, S implies savings, M imports, X exports. F implies net capital inflow in the form of foreign aid. If the total expenditure, E is greater than the total output Y, therefore, the a country requires capital inflows or foreign aid, and this means that F meets lack of income.

Easterly (2010) focuses savings constraints of Strout and Chenery (2006) to come up with what they call financing gap. Their model is centred on the premise that investment required for the country is the total of domestic savings as well as aid. Therefore, the equation of growth is shown as below,

GDP ( g) equals (I / Y) / u, (I / Y ) equals (A / Y) + (S / Y).

In the investment I need, Output is Y, the target Gross Domestic Product GDP growth is g, aid is A, and domestic savings is S. Additionally, U as a parameter is called the incremental capital output ratio. Therefore, Easterly (2010) in the model assumes an existence of a linear connection among these three variables that is investment, foreign aid and growth.

When Bacha (1990), came up with a three (3) gap model relationship between aid and Gross Domestic Product (GDP), he believes that many countries are extremely indebted especially those that are in the process of developing.

Therefore, Bacha (1990) showed capital stock of a country’s could easily be distributed in private investment as well as government. That is if private investment relate to government investment, and considering that the government bond market does not exist, in this case, foreign aid will most likely help fill the government deficit in the event that it arises, thereby, releasing investment and thus achieving growth. The main source of growth difficulties is government budgetary constraints, not the foreign exchange or overall savings limits proposed by Chenery and Strout (2006).

2.2 Modernisation Theory

Similar to other theories on foreign aid and economic growth is modernisation growth. To clearly understand how nations and some regions begun on their path to economic growth an American scholar Rostow’s coined modernisation theory. This theory assumes that third worlds countries need western donations in order for them to advance economically. Therefore, the role of foreign aid in a country is perceived as the means and ways to change and improve the conditions and standard of living in developed countries, is implied within this contemporary thinking. Under this modern thought, developed nations believe that they are morally obliged to help other countries to transition according to Keller (2006). This research considers this theory as underpinning this study as Zambia has been one of the recipients of foreign aid from the time that the country got its independence. Thus, this research considers the fact that foreign aid has been offered to Zambia for many years to support various sectors of economic growth and development. Therefore, modernisation theory is a theory that supports the need for countries to look to western nations for aid. As such, thinkers who are proponent of this theory support this idea that developing nations or third world nations should always look to western countries in order to grow economically and develop taking into consideration conditions that are sometimes attached to this foreign aid. In addition, Easterly (2006) asserts that foreign aid is perceived as a rescue package for nations to be free from hunger and poverty and promote growth for the good of the countries’ citizens. This theory is important in this study because at the core of this theory is the idea according to Clemes (2003) that economists agree that foreign aid is important because it helps to reduce levels of poverty in developing nations. Therefore, this study considers this theory as important in determining the role of foreign aid in Zambia and its effects on economic growth.

2.3 Theory of Economic Growth

Turning next to another argument of economic growth, there is another theory analysing the growth of nations suggested by Walt Whiteman Rostow’s. According to Rostow’s (1960) a country goes through growth in five stages in order to achieve growth and development. These in order include Ages of High Mass Consumption, Traditional Society, Take Off, The Pre - Condition for Take Off and Drive to Technical Maturity. Through this theory, Rostow’s suggests that Traditional Society as a first stage, a country is characterised mostly by agriculture based economy. Under this economy, the country has intensive labour, in addition there is low levels of productivity. Hence, there is low trading. He argues that in such a country, the population has no scientific view of technology as well as the whole globe. Pre - condition for Take Off as a second stage, he suggests that a country commences manufacturing at a more national and international levels as initially opposed to regional expansion. He further describes Take - Off as another stage, here, indicates a country’s in time of growth in which industrialisation will begin to follow such that employees including institutions are much found in new industries. Another stage Drive to maturity is where a country’s standards of living rise such that the use of technology is increased. At this level of growth, the economy including its Gross Domestic Product GDP begin to grow. The country also diversifies at this stage. Under Ages of High Mass Consumption, Rostows explains that at this level, a country occupies the last stage of development where its economy flourishes. This stage for a country is mostly characterised by mass production and consumerism, high standard of living and leisure.

In all, this stage theory, by Rostows strives to explain the transition of countries to development. Rostow’s growth phase has evolved into a major focus of transformation. The theory is centred on stages that are different for countries in order to achieve economic growth. Rostow emphasizes on understanding stages in which a country is found, and by understanding these stages to determine the process of development in order to prosper to the next stage, the road to development remains a simple path according to Todaro (2009).

Some research scholars argue Rostow’s theory in saying that it was modelled after western capitalist countries and is considered as tool that the author used to promote his development model as part of US foreign policy. Again, research considers that this theory is biased toward western modernisation but it also recognises that modernisation can be achieved in many different ways and different types of economies including communist countries. In addition, scholars stress that Rostow’s argument is based on the augment that assert US influence over communist states like China, Russia and others.

However, this theory assumes a linear framework for growth. It assumes the existence of similar and same conditions of growth for difference countries in the world. It fails to recognise dynamics, diversity and heterogeneity that shape countries to economic growth and development. In addition, the theory fails to recognise that countries have different histories and backgrounds and therefore, historical events such as Industrial Revolution, Slave trade and colonialism have shaped countries in terms of diversities and uniqueness. These historical events have an impact and influence on the ability of countries to achieve economic growth and development.

[...]

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Details

Title
The Effect of Foreign Aid in Promoting Economic Growth in Zambia (1986 - 2018)
College
University of Lusaka  (University of Lusaka UNILUS)
Course
Economics and Finance
Author
Year
2019
Pages
85
Catalog Number
V507871
ISBN (eBook)
9783346101976
ISBN (Book)
9783346101983
Language
English
Tags
Economics, Foreign Aid, Economic Growth, Zambia, Gross Domestic Product GDP, Foreign Direct Investment FDI, University of Lusaka UNILUS, Daniel Tonga, Business, World Bank, International Monetary Fund IMF, Lusaka, Trade, Regional Trade
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Daniel Tonga (Author), 2019, The Effect of Foreign Aid in Promoting Economic Growth in Zambia (1986 - 2018), Munich, GRIN Verlag, https://www.grin.com/document/507871

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Title: The Effect of Foreign Aid in Promoting Economic Growth in Zambia (1986 - 2018)



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