Impact of Foreign Aid on Economic Development and Poverty Alleviation in Sierra Leone

In capital-scarce low-income economies, the lack of attractiveness to private foreign investment implies that the only readily available source of external financing for economic development must come from foreign aid which normally comes with an altruistic motive. However, despite, the long history of aid-giving to low-income countries and especially in West Africa, evidence of donor aid effectiveness and assistance is debatable, particularly with the dominance of cross-country studies in such inquiry. With no existing country study for Sierra Leone, a typical donor aid-dependent country, this research investigates the relationship between donor intervention of the World Bank and IMF in their aid disbursement, and the development outcomes of economic growth and poverty reduction in Sierra Leone. In conducting the inquiry, the study proposed three objectives. The first objective examines the relationship between aid and economic growth. The second objective investigates the relationship between aid and poverty reduction considering two variants of poverty reduction: improvement of pro-poor growth and aggregate human welfare. The final objective assesses the effect of domestic politics on aid’s effectiveness in improving human welfare. Arising from a pluralistic analytical framework involving triangulation of econometric estimation approaches complemented with qualitative inquiry, the study finds that World Bank and IMF aid to Sierra Leone is significant in promoting economic growth in the country. In terms of the impact on poverty, the results show that World Bank and IMF aid to Sierra Leone has significantly improved long-run pro-poor growth in the country, but this impact could not be confirmed in the short run. With respect to other strands of poverty, the study finds that though World Bank and IMF aid may have not improved human well-being in Africa, it is found to significantly improve human development in Sierra Leone, though the evidence could not support its reduction of infant mortality rate as a second the indicator of human well-being. Finally, for the investigation of the link between World Bank and IMF aid, politics, and human development in Sierra Leone, the study finds that though aid from these two major donors in Sierra Leone is significant in directly improving human development in the country, yet pro-democratic politics (as against autocratic regimes) can also be a good policy option for aid‘s impact on human development in the country.