THE IMPACT OF FOREIGN AID ON THE ECONOMIC GROWTH OF CAMEROON.

Abstract

Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Many developing countries strive to attract investment in order to boost their economy. Since the independence of Cameroon in 1960, the inflow of foreign aid(FA) has accounted for a substantial part of the overall economy.

In spite of much foreign aid in the development of infrastructure in Cameroon over years, the effectiveness seems to be biased. This study explores foreign aid and its effect on the economic growth in Cameroon within the period 1980-2016.

It analyses indicators such as FD, Exchange rates, gross fixed capital formation and inflation rate which exert a strong influence towards economic growth in Cameroon. The outcome from the regression analysis showed that FD has a significant positive impact on economic growth.

CHAPTER ONE

INTRODUCTION.

1.1: BACKGROUND OF STUDY

The idea of foreign aid was established following the outcome of the second world war in the 1960s. The largest aid outcome in history, “The Marshal plan” was received by the western European countries during this time, which helped them to reconstruct their post devastated economically after the second world war(Ali al 1999).

The importance of aid was however regarded as purely for relief purposes and was meant for returning nations to their resilient position, but nowadays, this extended to include other variables such as developmental improving trade relationship and even cultural objectives. For example, America has been using aid to promote its culture in recipient nations.

As a result, the field of development corporation is today, dominated by bilateral and multilateral actors such as, SWEDEN, NORWAY, DENMARK, UNITED KINGDOM, GERMANY etc. and the European Commission, united nation agencies, the international development association(IDA) and the world bank respectively and is mostly sent in the form of official development assistance(ODA) more light shall be thrown on the full meaning of ODA in chapter 3.

Foreign aid played an important role in the development of many countries around the world and accounted for a significant part for developed countries in terms of growth of the economy. Therefore Cameroon as a developing country seeking to eliminate poverty attracts foreign investment in order to benefit advantages from this specific type of investment, in spite of the relative rise in the amount of investment, Cameroon still faces a continuous rate of unemployment and poverty, thereby benefits from foreign aid on the economic development of Cameroon has begun to be queried. It is admitted that foreign aid has an essential role in the economic growth of countries in all continents through, foreign ad increasingly comprises the technology transfer and the creation of employment Mohammad and Rizvi (2009). In 1960s many African countries gained their independence and began to organize their economies. For the case of Cameroon, during that period the government applied a 5-year plan that allowed to control and foster the creation of many public and private companies. To face this crisis, Cameroon adopted a new code of aid in 1990 and multinational enterprises (MNEs) started to be interested in re-investing in the country.

Given the fact that MNEs should bring technology transfer to the country, the enhancement of economic growth due to the presence of these big firms was expected. Nonetheless, FA continued to play a major role in the development of the country representing only 0.4percent of GDP in 1977. It increases to pick at 3.88percent in 1986 over the period of study, the average share of FA was around 1.15% of GDP; However, increase in the real growth of GDP with the same trend. Some progress appeared between 2003 and 2009 primarily as oil prices increased.

Cameroon’s real GDP growth rate move to 2.1% in 2009 but was among the lowest in Africa at that time compared to other sub-Saharan Africa (SSA) countries. Countries like Nigeria, Ghana and Liberia had experienced real GDP growth rates of 3%, 3.6%, and 4.7% respectively, in 2010. Fortunately, the attainment of the highly indebted poor countries (HIPC) decision point lead to the debt cancellation of Cameroon by many donors such as the member of Paris club, the reduction in debt service should allow for a significant reduction in the external debt burden of Cameroon towards the international Bank for reconstruction and development (IBRD) according to afforded (2010). However, Cameroon’s GDP growth in 2009 was negative with a value of 1.5% (UNCTAD, 2010).

Cameroon compared to some countries in the sub-Saharan area such as Ghana, Liberia, and Nigeria experienced less GDP. These countries in 2009 recorded GDP growth of 4.6%, 3.5%, and 2.9% respectively (Bonea, 2006). Cameroon being a bilingual country, its poor economic performance is difficult to justify because the country has the advantage of attracting FA from francophone and Anglophone industrialized nations (forgha,2009). In current years, Cameroon has fascinated additional FA this thanks to an improvement in the government policies, governance and other legitimate apparatuses. Nevertheless, poor economic growth still prevails. Therefore, this means that the motives for slow economics progress even with the increased FA are not yet recognized and deled with (Njong, 2009).

1.2: PROBLEM STATEMENT.

The available literature on the impact of foreign aid on growth provides contrasting results not only about the existence of a significant link between foreign aid and growth rates of the country but also about the signs of such relationships. For instance, in Bornschier (1978) and Dutt (1997), growth rates are negatively related to foreign capital stocks but in Dutt (1997), growth rate are negatively related to foreign capital stocks but in Dutt (1996) the same relationship turns out to be positive. Blomstom (1992) find no significant relationship; the coefficient of FA is significantly positive in Balasubramanyam, (1996) while in other papers such influence is positive or negative according to the level of development of the recipient country (Borensztein, 1998, and De Mello 1999).

The main problem that has induce this study therefore folloes that, Cameroon like many other countries continue to suffer from chronic economic hardship in addition to the scoring very low in its Human Development Ranking, despite huge amount of aid flow in to the country each year (although there could be so many factors to account for this, ranging from non-competitive production sector, high factor cost, weak government capacity, its ability in achieving its growth potential in the agricultural, forestry and mining sectors, and constraints in implementing public investment programmes through a stronger public expenditure capacity, attracting foreign direct investment (FDI) through improving the fiscal policy, the business regulatory framework and property right etc. (IMF, 2010). For example, according to the world bank (2015), the country by 2015 was ranked as a lower-middle-income country with a GDP per capia estimate to be $3,000, and with a human development index of ‘0.505’, placing it at 152^nd position out of 188 countries in 2014; (UNDP,2014).

1.3: OBJECTIVES OF STUDY AND RESEARCH QUESTIONS.

1.4: MAIN OBJECTIVE.

The main objective of this study is to investigate the impact of foreign aid on the economic growth of Cameroon.

1.4.1: SPECIFIC OBJECTIVES

To investigate the extent to which inflation affects Cameroon’s Gross Fix Capital Formation.

To evaluate the degree to which real exchange rates affects Cameroon’s GDP.

1.5:RESEARCH QUESTIONS.

• What is the impact of foreign aid on the economic growth of Cameroon?
• What is the extent to which inflation affects Cameroon’s Gross Fixed capital formation?
• What is the extent to which real exchange rates affects Cameroon GDP?

1.5.1: HYPOTHESIS OF THE STUDY.

H0: Foreign aid does not have an impact on Cameroon’s economic growth.

H1: Foreign aid has an impact on Cameroon’s economic growth.

1.6: SIGNIFICANCE OF THE STUDY.

This study would have the following important to policymakers, government, researchers and students.

This study would help as a guide to policymakers as well as the government of Cameroon in formulating policies that will attract investment so as to better the country’s economic growth.

The findings of this study will be of benefits in a way that it shall serve as a wakeup call to stakeholders involved in economic management as to whether or not to encourage foreign aid (FA) in Cameroon.

Finally, the study will be of immense importance in the sense that it will add more statistical data to prior research in this area. This will help to assist students, Academicians and other prospective researchers who desired to carry out further research on similar related topics.