Assessing sustained economic growth in Africa’s least developed countries to escape the poverty trap: a CS-ARDL approach
Magdalena Godek-Brunel, Souhir Chlibi, Rabeb Riahi, Dora TrikiPurpose
This study aims to investigate the determinants of sustained economic growth in Africa’s least developed countries (LDCs), which are striving to escape the poverty trap. The primary objective is to evaluate whether official development assistance (ODA), foreign direct investment (FDI), government effectiveness and corruption affect their economic growth.
Design/methodology/approach
This study analyzes data from 26 African LDCs between 2005 and 2021 using the CS-ARDL model. This method addresses key econometric challenges such as cross-sectional dependence and group heterogeneity while helping to mitigate potential endogeneity concerns.
Findings
Although FDI may incur minor short-term adjustment costs, such funding plays a positive role in promoting long-term economic growth. ODA, however, exhibits a negative long-term effect on sustained economic growth, highlighting governance challenges and structural vulnerabilities. While corruption generally hinders economic development, the results support the “grease the wheels” hypothesis, suggesting that corruption may, under certain conditions, be associated with higher long-term economic growth by temporarily accelerating bureaucratic processes. The effect of government effectiveness on growth is statistically insignificant.
Research limitations/implications
One major limitation of this study is the consideration of only a single informal institutional factor. Another limitation is the assumption of homogeneity in FDI flows. It would be beneficial to distinguish different types of FDI, providing sectoral analyses to identify the most strategic foreign investments. Despite the methodological rigor of this study, potential endogeneity cannot be fully ruled out.
Practical implications
The findings offer valuable insights for African LDCs in promoting sustained economic growth, which is crucial for poverty alleviation and economic prosperity. African LDCs must focus on strengthening ethical governance, reducing aid dependency and channeling FDI into productive sectors that foster innovation, industrialization and employment. To guarantee the funding of investments for sustained development, international donors should reconsider their foreign aid policies and traceability procedures. African governments must manage ODA effectively to avoid overreliance on loans, which could lead to unsustainable debt levels. Given that corruption discourages foreign donors from providing aid to the most corrupted LDCs, the governors should strengthen the institutional environment by prioritizing governance reforms and anti-corruption measures. ODA should be also directed toward investments with high returns in terms of growth and poverty reduction, ensuring that the debt is used productively. Finally, companies operating in LDCs should adopt a code of conduct and collaborate with local authorities to ensure their ethical engagement.
Social implications
This study highlights that poverty reduction can be achieved through sustained economic growth, which is in line with Sustainability Development Goal (SDG) 8.1 aiming for 8% annual GDP growth for the LDCs. Achieving this goal requires creating a favorable, ethical institutional environment to attract foreign investors and to mitigate the negative effects of ODA.
Originality/value
This paper offers a unique analysis centered on the UN classification of African LDCs. It contributes to policy formulation aimed at achieving SDGs by identifying key determinants of sustained economic growth in some of the world’s poorest nations. It uses analytical techniques to assess the long-term relationships while accommodating short-term fluctuations. It presents theoretically based explanations to foreign aid ineffectiveness and suggests recommendations to policymakers.