An assessment of financing sources and their impact on social development in Africa

Abstract

This study assessed different types of financing sources and their impact on social development in Africa through a multi-model analysis. The study explored the nuanced relationships between foreign aid and government expenditure on social development while moderating for government effectiveness, using data for 54 African countries from 2013 to 2022. Furthermore, the study examined the impact of country specific aid on social development of African countries that are members of the Organization of Islamic Cooperation (OIC). African countries face diverse challenges in achieving social development, and understanding the dynamics of different types of financing sources and their impact on social development is crucial for formulating effective policies tailored to the unique context of the continent. The study utilized both 2-Step System Generalized Method of Moments (SGMM) and Difference Generalized Method of Moments (DGMM). Model 1 assessed the impact of foreign aid and government expenditure on HDI. The findings revealed that foreign aid and government expenditure negatively impact HDI. Model 2 investigated the moderating effect of government effectiveness on the relationship between foreign aid and HDI. The results showed a negative impact of foreign aid on HDI moderated by government effectiveness. Model 3 explored the moderating effect of government effectiveness on the relationship between government expenditure and HDI. The finding highlighted a negative association between government expenditure and HDI moderated by government effectiveness. Model 4 tested the non-linear relationship between foreign aid and HDI. The result revealed the existence of a non-linear relationship between foreign aid and HDI, suggesting that the impact of aid on HDI depended on a certain threshold. Model 5 examined the impact of country specific aid on HDI across African OIC member countries. The result showed a positive relationship between country specific aid and HDI. Furthermore, the study revealed that while aggregate aid does not positively impact HDI, country specific aid impact HDI positively. The study, therefore, recommended that policymakers should prioritize targeted foreign aid, efficient government expenditure and governance reforms to enhance the effectiveness of foreign aid and government expenditure for sustained social development in Africa.