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FOREIGN AID AND IT IMPACT ON SOCIO ECONOMIC DEVELOPMENT IN NIGERIA'S FOURTH REPUBLIC

CHAPTER ONE

INTRODUCTION

1.1      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. It began in the late 1940‘s with the purpose of reconstructing the war-torn economy of Western Europe. African economies have received large inflow of foreign aid after 1950s. In Nigeria during the three five year plan period (1957-1973), 25 percent of the required total investment was covered by external public capital. Similarly, during the post revolution period, 37 percent of the total annual campaign of 1979-83 was financed by foreign aid (Tolessa 2001). Besides, foreign aid covered 23.2% of total revenue in 2010/11 fiscal year (National Bank of Ethiopia annual report, 2010/11).This shows that foreign aid has been playing the great role in Ethiopia‘s economy since 1950s. 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, the Nigerian 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. In addition, during the first, second and third quarters of 2012, Nigeria’s exports increased while its imports decreased, resulting in a 59 per cent improvement in its trade balance and foreign direct investment (FDI) of 24 per cent relative to 2011. Official Development Assistance (ODA) decreased from USD 2.0 billion in 2010 to USD 1.8 billion in 2011. Total FDI in 2011 was USD 8.9 billion, representing 20 per cent of the total FDI to Africa in 2011. However, these investments are mostly in the oil and gas sector. Essentially, Nigeria's problem of underdevelopment has, for a long time, been connected to the lack of infrastructural facilities, wrong policy frameworks, hostile environment, backwardness in technology, problem of unemployment and over-dependence on imported products amongst other constraints. Interestingly, National Economic Empowerment and Development Strategy (NEEDS) targeted minimum annual GDP growth rates of 5 per cent in 2004 but achieved 4.2 per cent, while 6 per cent growth rate was targeted in 2005 and 2006 but realized 4.5 per cent and 6.1 per cent growth rates respectively. Also, 7 per cent growth rate was targeted in 2007 but realized 7.4 per cent. On the whole, the remarkable growth narrative is evident in an average annual real growth rate of GDP of over 6 per cent between 2004 and 2012. These statistics actually depict an improvement in the economic output, but the question begging for an answer is to what extent does this statistics translate to better living standard for the people of Nigeria? Though much attention had been focused on domestic savings and export earnings from crude oil, the potency of these variables to affect economic growth in the country is far from reality. It is along this expectation that the 2-Gap growth model draws that foreign aid should be channeled to those countries that have a balance of payments constraint while foreign direct investment should be directed to augment the domestic savings. Foreign aid and foreign direct investment will therefore be reviewed to palliate the short comings of export earnings and domestic savings respectively. Although quite a number of studies have discussed the relationship that subsists between foreign assistance and economic growth, majority of such studies have focused on the link between foreign direct investments and growth on the one hand, and between foreign aid and growth on the other.

1.2      STATEMENT OF THE PROBLEM

As the government of Nigeria explores the avenues for foreign aid assistance from developed countries, bilateral and multilateral international organizations to develop the economy by providing infrastructures and other developmental projects, it is important to evaluate the extent to which growth could be propelled by filling the savings and foreign exchange gaps in Nigeria. Thus, despite the various economic growth models that have been adopted, the country desires a growth model that would mobilize domestic savings in order to reduce (if not eliminate) excessive foreign borrowing. this although has not yield stipulated result that is why the researcher intends to investigate the impact of foreign aids on the socio economic development in Nigeria.

1.3      OBJECTIVE OF THE STUDY

The main objective of this study is to evaluate the impact of foreign aid on the socio economic development of Nigeria. But for the successful completion of the study the researcher intends to achieve the following sub-objective;

i)             To ascertain the impact of foreign aid on the economic development of Nigeria.

ii)           To evaluate the relationship between foreign aid and economic growth in Nigeria

iii)          To evaluate the role of foreign aid on the socio economic development of Nigeria

iv)         To evaluate the effect of foreign aid on domestic investment

1.4 RESEARCH HYPOTHESES     

For the successful completion of the study; the following research hypotheses were formulated by the researcher;

H0: foreign aid has no significant impact on the socio economic development of Nigeria

H1: foreign aid has a significant impact on the socio economic development of Nigeria

H02: there is no significant relationship between foreign aid and economic growth

H2: there is a significant relationship between foreign aid and economic growth in Nigeria

1.5 SIGNIFICANCE OF THE STUDY

It is believed that at the completion of the study, the findings will be of great importance to the federal ministry of finance. Who are saddle with the responsibility of managing and maintaining the federal government account and the formulation of policy to provide enabling environment for foreign investments. The study will also be of great importance to investors and potential investors as the study seek to enumerate the impact of foreign aid; thereby pinpointing on the area of potential investment. The study will also be beneficial to researchers who intend to embark on study in similar topic as the study will serve as a guide to their study. Finally the study will be beneficial to academia’s students and the general public

1.6 SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers the foreign aid and it impact on socio economic development in Nigeria. But in the course of the study, the researcher encounters some constrain which limited the scope of the study

(a)Availability of research material: The research material available to the researcher is insufficient, thereby limiting the study.      

(b)Time: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study. 

(c)Finance: The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover

1.7 DEFINITION OF TERMS

Foreign aid

Foreign aid is money that one country voluntarily transfers to another, which can take the form of a gift, a grant or a loan. In the United States, the term usually refers only to military and economic assistance the federal government gives to other governments.

Economic development

From a policy perspective, economic development can be defined as efforts that seek to improve the economic well-being and quality of life for a community by creating and/or retaining jobs and supporting or growing incomes and the tax base.

Economic growth

Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP, usually in per capita terms

1.8 Organization of the study

This research work is organized in five chapters, for easy understanding, as follows Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlight the theoretical framework on which the study its based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion and also recommendations made of the study.

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