Abstract
The main purpose of this dissertation is to re-examine the effects of foreign aid on economic growth in Gambia over the period 1964 to 2017. Gambia has been a major aid-recipient country since its independence in 1965, yet is still classified as a highly indebted poor country. The ambiguous nature of the aid–growth relationship in the cross-country literature makes it important to scrutinise country-specific cases, such as Gambia, in more detail. In addition, compared with the existing literature on Gambia, this study develops an improved empirical specification that may avoid spurious regression results. The main results show that foreign aid per capita (+), the physical capital stock per capita (+) and the government consumption ratio (-) are significant long-run (exogenous) determinants of per capita income in Gambia. The main implication of the long-run exogeneity tests is that foreign aid affects per capita income through its effect on total factor productivity (TFP), rather than physical capital accumulation. However, the physical capital stock is found to be the most important long-run determinant of per capita income in Gambia, with a coefficient estimate that is 6.6 times larger than the estimate on the foreign aid variable. The key policy implication is that more foreign aid should be channelled to physical capital accumulation in order to raise its effect on per capita income.
M.Phil. (Industrial Policy)