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CHAPTER ONE

INTRODUCTION

1.0       Background of the Study

Developing countries are characterized by resource starved economies, specifically capital-related. Capital to boost economic growth and welfare is largely inadequate domestically, which consequently warrants the need for external capital. The only external capital readily available to support development undertakings have to come from foreign aid (Iyoha, 2005). Therefore, According to Kolawole (2013) Nigeria is a resource-rich country, with over thirty different minerals, including gold, iron ore, coal and limestone. After a robust economic growth in the average of 7.5 per cent growth experienced over the past decade, its economy slowed down in 2012. Despite the robust economic growth, unemployment rate in the country yet increased from 21 per cent in 2010 to 24 per cent in 2011. Also, poverty remains widespread, with a headcount that declined marginally from 48 per cent in 2004 to 46 per cent in 2010 (Kolawole, 2013). Furthermore, the existence of foreign assistance has been on the global scene as it has been in existence since the creation of national states and republics (Ouattara, 2006). The developed or rich countries have always assisted the developing or poor countries to achieve similar achievements to provide livelihoods for their citizens. There have been different views in terms of the effects of foreign aid on the recipient country (Ouattara, 2006). The history of foreign aid can be traced back to the 1940s following the destruction that was caused during the Second World War. Some of the post Second World War challenges were the collapse of the international economic systems characterized by shortage of capital required for infrastructure reconstruction (Ouattara, 2006). In the past four decades, however, there has been an increase in foreign aid towards developing countries (Ouattara, 2006). Meanwhile, four decades after Independence in 1960, Nigeria remains a poor country with a per capita income of US$260 in 2000. At the dawn of the Third Millennium, approximately 70% of the population still lived on less than US$1 a day (about 84 million people), an indication of extreme poverty (Ogundipe, 2013). Real GDP growth has remained sluggish, averaging 3.5% per annum since 2000. It requires an annual GDP growth rate of 7-8% in order to halve the number of people in poverty by 2015, and this translates to an investment rate of more than 30% per annum (Ogundipe, 2013). In addition, the country faces daunting challenges of re-building a country badly damaged by decades of military misrule and a fragile democracy. There is tremendous pressure on the government to deliver some ‘democracy dividends’. Furthermore, there are the threats of preventable diseases such as malaria, HIV/AIDS, and Tuberculosis (Iyoha, 2005). Nigeria is also a highly indebted country with total external debt exceeding US$32 billion in 2003. The debt service burden remains crushing (Iyoha, 2005). Available data from the Debt Management Office (DMO) shows that Nigeria’s total debt stock as at March 2017 stood at N19.16trn, representing an increase of 10.37% from the December 2016 figure of N17.36trn. This also represents growth of 153.63% from N7.55trn in 2012. A breakdown of the debt stock shows that external debt accounted for 22.08% (N4.23trn), while domestic debt stock accounted for 77.92% (N14.93trn). The increase in the total debt is attributable to the following factors: the need to fund infrastructure and to supplement the declining government revenue. Many analysts have argued that the increase in government’s appetite for borrowing has crowded out the private sector (Debt Management Office DMO, 2017). Clearly, Nigeria would find it difficult to attain the Millennium Development Goals without massive assistance from Development Partners in the areas of Aid, Trade and Debt relief (African Forum and Network on Debt and Development AFRODAD, 2005). Therefore, for Nigeria to benefit more from foreign assistance in the form of aid, the donor agency like World Health Organization (WHO) must be convinced of Nigeria’s effectiveness in management of the aid. This is important because much of the Official Development Assistance (ODA) inflows in Nigeria by-pass national budgets (Iyoha, 2003). In Nigeria, the aid fund or facilities goes directly to the Ministries, Department or Agency (MDA) that uses the fund or facilities. This is contrary to what happened in other Sub Sahara African Countries such as Kenya and Ghana in which foreign aid is treated as part of the budget (Eregha, 2009). In addition, the Senate (in Nigeria) has warned against the disbursement of foreign aid coming into the country without National Assembly's involvement. The lawmakers are now insisting that such funds must henceforth be captured in the nation’s budget process for the purpose of tracking its flow and disbursement into Nigeria’s critical sectors (Eregha, 2009). The idea is that by-passing budget will result in timely release of the aid to the critical sectors of the economy. This is envisaged to make aid effective (untimely release of foreign aid fund due to budget delay in developing countries can lead to the poor performance of the projects in which aid fund is designed (Njeru, 2003). Another reason for by-passing the budget is the fact that they want to ensure that aid money is not diverted to non-aided projects in the country (Njeru, 2003). Moreover, World Bank (2005) reports that Iraq was the top recipient of development aid in 2005 followed by Nigeria. However, this is due to the significant debt relief deals that were granted to these nations that year - when donor countries write off a portion of a recipient country's debt, it is counted as ODA from the donor country. This explains high proportion of aid that went to Nigeria in 2005; Nigeria was granted debt cancellation of about 19 billion US Dollars. This form of aid is expected to have developmental impacts in Nigeria as the money saved through the debt forgiveness was channeled into meeting MDGs in Nigeria (Alabi & Adam, 2011). So this fund is expected to have a higher impact on MDG focused sectors such as education, health and agriculture than other non-MDG focused sectors. Whether MDG focused sectors were more impacted by foreign aid or not needs be supported by evidence that will warrant a study of this nature (Alabi & Adam, 2011). Furthermore, the pre-colonial economy of Nigeria was highly diversified in nature. Apart from the people’s traditional economy which was agriculture and associated activities such as hunting and fruit gathering, trade and Commerce formed part of the nation’s means of livelihood (Erinosho & Osunkoya, 2013). However, transcending these economic activities were local crafts and industries like soap making, cloth weaving, blacksmithing and pottery production (Erinosho & Osunkoya, 2013). The period of hostilities also had a devastating blow on the economic production of Nigerians. According to Erinosho and Osunkoya (2013), the local producers and farmers were forced to stop production due to the incessant raids for slaves and foodstuffs. Nonetheless, the euphoria of independence that greeted Nigeria in 1960, call for a number of graduates to fill the vacuums created by the outgoing Colonial masters. So, immediately after 1960, the nation relies completely on education to move the nation forward. Hence, education has to be planned so as to meet the manpower need of the nation. Therefore, Manpower Requirement Approach (MPRA) was adopted and adapted to the Nigerian situation (Erinosho & Osunkoya, 2013). As a matter of fact, Socio-economic development is a compound word with three different important words. These include; Society, economy and Development. It is relevant to define what socio-economic development connotes, but before this is done it is important to define what economic development denotes. According to Sen (1983), economic development is a policy intervention endowed with aims economic and social well-being of people, economic growth is a phenomenon of market productivity and rise in GDP. According to Uju and Joy (2014), socio-economic development is the process of identifying both the social and economic needs within a community, and seeks to create strategies that will address various issues and needs in ways that would affect the society over a long period of time. Sen (1983) posits that Socio-economic development is the process of social and economic development in a society, any programme that creates sustainable access to the economy for its beneficiaries. Uju and Joy (2014) concluded that the definition given by Sen (1983) above, tries to emphasize that contributors should concentrate on providing sustainable benefits for her citizens within her ambits. Therefore, empirical evidence of impact of foreign aid in different sectors of economy in Nigeria that adopt different aid management (utilization) system will be of interest to donors and other aid recipient countries in Africa (Njeru, 2003). Consequently, According to Oshobugie et al (2011) Foreign aid means economic, technical, or military aid given by one nation to another for purposes of relief and rehabilitation, economic stabilization, healthcare or for mutual defense. Some experts charges that aid has enlarged government bureaucracies, perpetuated bad government, enriched the elite in poor countries, or just been wasted. Other argues that although aid has sometimes failed as alleged, but at the same time has supported poverty reduction and growth in some countries and prevented worse performance in other (Oshobugie, 2011). Therefore, Foreign aid can have positive effect on economic growth, through public expenditure if properly channeled to the productive sectors of the economy (Odusanya, Abidemi, Abidemi, Ibrahim, Olawale, Logile, Lateef, & Akanni, 2011). Also, Clemes and Gani (2003) argues that there was an effect of aid on human development, which was found in health and education and also showed a significant correlation in terms of human development among the lower-middle countries. The Gross Domestic Capital is mostly associated with economic growth and ignores several issues of development such as standard of living, levels of education and health (Clemes & Gani, 2003). Whitaker (2006) debate on the effectiveness of foreign aid on economic growth; he argues that aid has a positive effect on economic growth, with even more impact in countries with sound economic and trade policies. Thus, foreign aid causes corruption, encourages rent-seeking behavior, and erodes bureaucratic institutions. However, a renewed interest in explaining cross-country economic growth emerged in the early 1990s, with numerous studies attempting to answer the foreign aid question. To date, however, there is no consensus among scholars as to the actual effects of foreign aid on economic growth. There have been several prominent studies which find a causal link between foreign aid and economic growth, such as (Burnside & Dollar, 2004). They found that foreign aid enhances economic growth, so long as “good” fiscal policies are in place. These policies can include maintaining small budget deficits, controlling inflation, and being open to global trade (Burnside & Dollar, 2004).

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