Foreign Aid, Legal Origin, Economic Growth and Africa’s Least Developed Countries

The issue of foreign aid dependency in African countries remains controversial among policy makers. So far, there is no consensus on aid effectiveness and the resulting policy prescriptions have been conflicting. The Euro zone which provides the bulk of foreign aid to developing countries, is currently implementing fiscal consolidation and some austerity programs. It is against this background that this study raises the question: What effects will such fiscal consolidation have on foreign aid flows? Therefore, the value of this study is the investigation of what really matters: The quantity or quality of foreign aid to support economic growth? We assess these issues within the framework of a country’s legal origin. The quantity effects are proxied by the quadratic term on the aid variable. Source-based proxies are used to measure the quality of aid effects. Our findings suggest that both quality and quantity of aid matters and that these effects differ based on a country’s legal origin