Abstract:
Despite several countries relying on foreign aid, there is a paradox as to whether aid
benefits each country in the same way or differently, raising critical questions about its
overall effectiveness in promoting sustainable development. This study examines the
effect of foreign aid on economic growth in Tanzania, one of Sub-Saharan Africa’s largest
recipients of aid. The study aimed to address three specific objectives: to explore the long term impact between foreign aid and economic growth, analyze the short-term impact of
aid on economic performance, and evaluate the causal impact between aid inflows and
economic growth. In this case the study employed quantitative approach to determine the
effect of foreign aids in Tanzania economic growth and determine the relevance of
Endogenous growth theory and Two Gap Model in Tanzania context. The study employed
time-series data from 1990 to 2023 and used the Vector Error Correction Model (VECM)
alongside Granger causality tests in estimating the effects. The findings reveal a negative
long-term impact of foreign aid on Tanzania’s economic growth, suggesting that aid
dependency may be undermining efforts toward sustainable development. In the short
term, aid showed a positive but statistically insignificant impact on growth, indicating that
while aid provides temporary relief, it does not significantly drive short-term economic
expansion. The Granger causality test revealed unidirectional causality from economic
growth to foreign aid, suggesting that donor countries increase aid in response to
Tanzania's economic performance, rather than aid serving as a driver of growth. Based on
these findings, the study recommends that the Tanzanian government focus on reducing
aid dependency by enhancing domestic resource mobilization and improving governance
to ensure aid is used productively. Additionally, aid should be more strategically allocated
to productive sectors like infrastructure to amplify its immediate economic benefits
