Foreign Aid and Poverty Level: Does Public Investment Matter in Sub-Saharan African Countries?

Abstract

This paper aims to investigate the relationship between foreign aid and poverty level by considering the role of public investment in the aid-poverty nexus for 14 low, 7 Lower-middle and 5 upper income countries in SSA as classified using 2012 GNI per capita indices. The study is conducted over the 1990–2015periodusing the Pooled Mean Group (PMG) estimator on a dynamic panel ARDL model. The results reveal that foreign aid and public investment have negative impacts on poverty level in upper income countries whereas in low and lower-middle income countries, foreign aid and public investment have positive impact on poverty level but the interaction of foreign aid with public investment reduces poverty level in the three income groups. This finding suggests that foreign aid inflows to SSA countries is associated with lower levels of poverty when the aid inflow is channelled to public investment rather than consumption. Hence, in order to reduce poverty, foreign aid donors should give high priority to sectors that benefit the poor such as agriculture and infrastructure development in the developing countries to facilitate poverty reduction. By doing so, such countries have a better chance of achieving sustainable transition out of poverty while promoting growth in both short and long run.