Evaluating the Effect of Foreign Aid on Economic Growth of Rwanda

Abstract

This research analyses the effects of foreign aid on the economic growth of Rwanda. It uses annual data on a group of 29 donor countries of net bilateral aid flows. The sample countries cover Australia, Asia, Europe and America for the period from 1995 to 2013. The study uses the gross domestic product (GDP) in terms of real per capita for measuring economic growth; aid inflows and net Official Development Assistance (ODA) for capturing foreign aid. The two key variables allow focusing on the aid-growth relationship at the macro-level. The data was collected from the World Bank database has been analysed in order to evaluate the relationship between variables. Single developed estimated equation used an ordinary least squares (OLS) method is employed to cheek the robustness of estimator since the method possesses optimal properties in the form of linearity, minimum variance and being unbiased. The hypothesis is that there is no relationship between foreign aid and economic growth. The relationship is tested based on panel data series for foreign aid and growth by employing regression analysis using panel data methodology. The study reveals that foreign aid inflows are associated with economic growth rate and per capita growth rate in from of aid effectiveness. The study also shows that aid is positively associated with economic growth in a good policy environment and given aid flows investible in some developmental projects can boost the nations GDP and reduce the poverty level in the country. These results will be useful for macroeconomic policymakers considering allocation of resources to promote technology transfer and development, promoting saving and investment, and capital accumulation that enhance further economic growth.