Does institutional quality play any moderating role on aid-growth nexus in Nigeria?
Afamefuna Angus Eze
Department of Economics, University of Nigeria, Nsukka, Nigeria.
https://orcid.org/0000-0003-1163-372X
Esther Chioma Anakwue
Airforce Institute of Technology, Kaduna, Nigeria.
Dung Felix Pam
Airforce Institute of Technology, Kaduna, Nigeria.
DOI: https://doi.org/10.20448/economy.v13i1.8695
Keywords: ARDL model, Economic growth, Foreign aid, Institutional quality, Long run, and Nigeria.
Abstract
This study investigates the moderating role of institutional quality in the relationship between foreign aid and economic growth in Nigeria. Despite substantial inflows of Official Development Assistance (ODA), Nigeria continues to experience poor macroeconomic performance, raising concerns about the effectiveness of aid in promoting growth. The study is anchored on the two-gap model, which posits that foreign aid can bridge savings and foreign exchange constraints in developing economies, while incorporating institutional quality as a conditioning factor. Using annual data from 1984 to 2024 sourced from the World Development Indicators (WDI) and World Governance Indicators (WGI), the study employs the Autoregressive Distributed Lag (ARDL) approach to examine both short-run and long-run dynamics. Empirical findings reveal that foreign aid exerts a positive but statistically insignificant contemporaneous effect on economic growth; however, its cumulative impact is negative and significant, indicating inefficiencies in utilization. Institutional quality also shows a negative and significant effect, reflecting weak governance structures. Crucially, the interaction between foreign aid and institutional quality is negative and significant, suggesting that poor institutional frameworks undermine the growth-enhancing potential of aid. It recommends strengthening governance, transparency, and accountability to ensure efficient utilization of aid and improved economic outcomes.