Foreign aid and growth nexus: empirical evidence from South Asian countries

Abstract

PurposeThe purpose of this paper is to empirically examine the effectiveness of foreign aid in improving economic growth prospects in the South Asian region from 1996 to 2017.Design/methodology/approachA sample of eight South Asian countries for the period 1996–2017 is being considered for this study. This study uses various econometrics tools such as Pedroni and Johansen–Fisher panel cointegration test, panel fully modified ordinary least square and panel dynamic ordinary least square (PDOLS) to ascertain the long-run and short-run dynamics among the variables under consideration.FindingsThe empirical results found that long-run, as well as the short-run relationship, exist among foreign aid, economic growth, investment, financial deepening, price stability and trade openness of the South Asian economies. The authors also found unidirectional causality running from foreign aid to economic growth. Both the long-run relationship as well as short-run causality between foreign aid and economic growth is unequivocally positive.Originality/valueThis study uses a dynamic macroeconomic modeling framework to assess the impact of aid flows on economic growth in South Asian economies. Taking into account the diversity of level of growth experienced by the eight countries in the Asian region, this study uses an appropriate regression technique, i.e. PDOLS whose results are robust. Therefore, the policymakers in these countries are well-advised to implement suitable policy measures to ensure optimum utilization of foreign capital resources garnered by way of receipt of foreign aid and build on for stronger future economic growth.

Does Foreign Aid Have an Expected Role in the Economic Growth of Bangladesh? An Analysis in ARDL Approach

“…Their study also reveals that the combined effect of FA and institutions on economic growth is that it lessens the negative impact of FA on economic growth. Jena and Sethi (2020) revealed that FA has a significant long-run along with short-run association with investment, trade openness, financial deepening, economic growth, and price stability of the countries. In a detailed study Liu et al, (2020) revealed that financial deepening and Trade openness has a positive impact on attracting Foreign direct investment, which is another important element of the Economic growth of a country like FA.…”

“…FA, as well as Gross Capital Formation (GCF), Trade openness (TO), and Population Growth (PG) are the Independent variable. Following the study (Jena and Sethi, 2020;Kargbo, 2012;Orji et al, 2019), we are going to utilize the two-gap model for our study. The linear functional association between the Dependent variables and Independent variables stands:…”

“…The impact of FA on the economic growth of a country or region is still controversial. The detailed studies displayed that some countries have been capable of using FA effectively to enhance economic growth; on the other hand, some other countries failed (Jena and Sethi, 2020). In a study, Burnside and Dollar (2000) exhibited that the effect of FA widely depends on the recipient countries' governance.…”

Financial development and natural resources nexus in Egypt: the role of clean energy sources and foreign direct investment

“…Although studies that explore financial development-education nexus are scarce most scholars that explore this relationship confirm the importance of education/HC in the development of the financial system and they noted that education is considered crucial in the way that the better-educated population, the more access to information, the more saving behavior and the less-risk averse the investors will be and they can make initiatives and start their business (Outreville, 1999; Kendall, 2007; Sharma, 2016; Ibrahim and Sare, 2018; Ibrahim, 2018; Sethi et al , 2019).…”

“…As financial institutions are among the basic factors that affect the country's economic development, financial development is considered a fundamental contributor to economic growth and so, financial development-economic growth nexus was first investigated by Schumpeter (1949) then Mckinnon (1973) and Shaw (1973). Then, several researchers suggest that financial development fosters gross domestic product, for instance, King andLevine (1993), De Gregorio andGuidotti (1995), Levine et al (2000), Christopoulos and Tsionas (2004), Chang and Caudill (2005), Saci et al (2009), Hosny (2012), Uddin et al (2013), Durusu-Ciftci et al (2017, Bist (2018), Guru and Yadav (2019), Aluko and Ibrahim (2020), Sethi et al (2020), Sahoo and Sethi (2020), Jena and Sethi (2020) and Yakubu et al (2021).…”