The impact of foreign aid on the South African economy (1980-2008

Abstract

The role of foreign aid in promoting economic growth and improving welfare has been the subject of much debate among development specialists, researchers, aid donors as well as recipients in general. Two very strong views have emerged in the literature; proponents of aid posit that foreign aid contributes to higher welfare levels and economic growth while also improving the socio economic conditions of the poor in the receiving countries. Detractors of the idea that foreign aid promotes growth have argued that aid is not the solution to deep rooted economic problems of recipient countries. According to the latter, aid does not breed an environment that allows nations to themselves develop local strategies to improve growth. The country selected for this study, South Africa, poses an interesting case study given the fact that while the country is not aid- dependent, it still receives a significant amount of official development assistance (ODA). In spite of the above fact and the perceived benefits of foreign aid for growth and development, there are few empirical studies that have investigated the nature of the relationship between foreign aid and economic growth in South Africa. The study found that while foreign aid has positively affected growth in South Africa, the impact is insignificant. Although such aids has ensured a good macroeconomic environment which have been growth- enhancing for the country.