Impact of Foreign Aid on Economic Growth in Somalia: 1991-2020

Abstract

The fundamental aim of aid is to create a platform for socio-economic growth. However, foreign aid has been criticized for only creating a cycle of economic dependency among recipient countries with no meaningful economic growth. There is no consensus among empirical studies on whether foreign aid stimulates or deters the country's economic growth. Since the fall of the Somali Republic in 1991, Somalia has consistently relied on foreign aid to build social amenities and boost the country's economic growth. However, the foreign aid donated to Somalia seems not to translate to positive economic growth. This study determined if foreign aid impacts economic growth in Somalia. The data adopted in the inquiry was acquired from the Word Bank Development Index, MoPIED, and UN Development Programme (UNDP) reports for the period spanning from 1991 to 2020. Data were analyzed using Eviews Software. The particular statistics included descriptive and inferential statistics. The descriptive statistics entail means, standard deviation, minimums, maximums, Skewness, and Kurtosis. Inferential statistics included the feasible generalized least squares to establish how economic growth is affected by foreign aid. Additionally, the study adopted the vector error correction model to find out the adjustment speed concerning long-run equilibrium. A significance level of p of <0.05 was used. Foreign aid negatively affects economic growth (β=- 0.070731, p=0.0777>0.05). Capital formation substantially and positively inputs economic progress (β=0.237644, p=0.0353<0.05). Human Development Index has a positive but insignificant impact on economic advancement in Somalia (β=0.013362, p=0.7955>0.05). The effect of Labor Force Participation (LFP) on economic development is positive and noteworthy, as shown by (β=0.119616, p=0.0255<0.05). Physical capital positively and momentarily influences Somalia's economic growth (β=0.464702, p=0.0023<0.05). In contrast, technological growth positively affected economic growth, as shown by (β=1.953641, p=0.0066<0.05). The inquiry concludes that economic growth is insignificantly Influenced by foreign aid. Capital formation, physical capital, labor force participation, and technological growth have a weighty effect on Somalia's economic growth. In support of the international community, the Federal Government of Somalia (FGS) needs to refocus on other economic stimuli other than foreign aid. A favorable and peaceful environment is required for the growth of the Somali economy. Capital formation is intrinsically intertwined with the economic growth route of an emerging economy, including Somalia. It is recommended that the Somali government raises the extent of capital formation to attain an elevated level of economic growth. There is a need for FGS to support the skilful training of its labor force. Economic growth requires physical capital, including equipment, machines, and other tools for efficient good and service production. The FGS may need to invest in efficient physical capital for efficient good and service production in the economy. The government of Somalia to invest more in research and development while partnering with global technology leaders to support technological growth that remains lagging in the country.