Analysis of the Impact of Foreign Aid on Poverty Reduction in Nigeria, 1981-2017
Abstract
One of the major purposes of the demand for foreign aid is to alleviate poverty. What is not clear, however, is whether the substantial foreign aid inflow to Nigeria in recent times has yielded the desired goal of poverty reduction. This work examined the impact of foreign aid on poverty reduction in Nigeria for the period 1981 to 2017. The objectives are to determine the impact of foreign aid on poverty reduction in Nigeria and to ascertain the direction of causality relationship between foreign aid and poverty reduction in Nigeria over the period of the study. Annual time series secondary data on: Poverty Reduction, Foreign Aid, Foreign Remittances, Inflation and Trade Openness, sourced from Central Bank of Nigeria (CBN) Statistical Bulletin 2017 online edition and the World Bank Development Indicator (WDI), were the variables used. Poverty Reduction is the dependent variable; others are the independent variables in the model. The study employed standard econometric method, involving theoretical (apriori), statistical (first-order) and econometric (second order)criteria. Autoregressive Distributed Lag (ARDL) Model and Pairwise Granger Causality Test were used to investigate the long run linkage between foreign aid and poverty reduction, the short run dynamics, and the direction of causality relationship between poverty reduction and foreign aid in Nigeria respectively. The ARDL bounds test result revealed that long run correlation exists among variables in the model. The result of ARDL Error Correction Model indicated that foreign aid had statistically significant impact on poverty reduction in Nigeria over the studied period. However, the result of Pairwise Granger Causality test revealed that there is no directional causality relationship between poverty reduction and foreign aid in Nigeria over the period studied. The study recommends that foreign aid flow should be directed more to the poor and the middle class in Nigeria by the government.
