Abstract
This study examines the relationship between foreign aid, human development and institutional quality in Africa. Despite decades of substantial aid inflows, the developmental impact of foreign aid remains contested, particularly when measured by growth-centred indicators such as GDP per capita. To address this gap, the HDI is used as a more inclusive measure of wellbeing, capturing health, education and living standards. The analysis covers 54 African countries from 2000 to 2024, using data from the World Bank, OECD-DAC, UNDP and the WGI. Methodologically, the study employs the MMQR, which allows the investigation of how the influence of foreign aid on human development varies across different levels of HDI performance. Unlike traditional mean-based estimators, MMQR captures heterogeneous effects across the development distribution and accounts for unobserved individual heterogeneity. The model further incorporates interaction terms between foreign aid and institutional quality to determine whether institutions moderate the relationship between aid and development. Results indicate a nonlinear U-shaped relationship between aid and development: at lower levels, aid is ineffective or even harmful, but beyond a certain threshold, it significantly enhances HDI. Institutional quality consistently strengthens the relationship between aid and development outcomes, demonstrating that well-functioning governance systems are essential for translating aid into meaningful improvements in human development. The findings have two key policy implications.
Firstly, donors should reorient aid strategies away from purely growth-centric approaches and align more closely with reforms that enhance accountability and governance capacity.
Secondly, recipient countries must prioritise institutional strengthening to ensure that aid translates into sustained human development progress. Together, these efforts help move foreign aid beyond short-term interventions towards fostering inclusive and resilient development trajectories.